Category: public finance

Geopolitics of the energy transition: Part 1

At present, groups with strong vested interests are encouraging South Africa to make a fast and radical transition without explaining how the costs incurred in doing so will be paid and by whom. Worse, they want the country to do this in a way that would reduce the income it could earn to fund the transition.

One of my current areas of work is the energy transition in South Africa. In 2022 I co-authored two important pieces on this in the online publication New Frame. Unfortunately, New Frame has since shut down and those articles no longer appear in internet searches so I am republishing them here.

Who gets the ‘dirty’ profits while going for ‘clean’?

21 Apr 2022

In the first of two articles on the energy transition that must happen across the world, it’s clear that coal will be around for years to come. Less clear is who will benefit from it.

Current proposals for an energy transition in South Africa are wholly inadequate. The energy transition is a marathon that will be run for at least three decades and it needs a well-considered strategy to complete successfully. 

Countries that try to sprint from the start are likely to fall by the wayside. Yet the popular narrative promoted in South Africa doesn’t move beyond the cheap populism that simply asserts that Eskom and fossil fuel-based energy production are evils that need to be got rid of at the greatest possible speed.

The world must undoubtedly transition to a new energy system, but it will be a hugely complex and costly project. To make a successful transition, each country – and community – will have to address its specific challenges. 

For a country as unequal as South Africa, a primary concern will be to ensure a genuinely “just transition”. It should not impose unreasonable burdens on ordinary South Africans, particularly workers and the impoverished, through retrenchments, extra taxes, unreasonable energy price hikes or reduced public services. The transition strategy must consider the implications for public finances, therefore, and it must also consider the implications for national sovereignty and stability.

At present, groups with strong vested interests are encouraging South Africa to make a fast and radical transition without explaining how the costs incurred in doing so will be paid and by whom. Worse, they want the country to do this in a way that would reduce the income it could earn to fund the transition.

The current model for transition to green energy is through rapid privatisation. It amounts to a form of self-imposed structural adjustment that threatens to repeat the economic policy mistakes of the 1990s. These collapsed the manufacturing sector of the economy and closed many paths to a more inclusive and prosperous society.

Weaker and more dependent

Meanwhile, the wildly overhyped promised external support for a just transition in South Africa is limited. Close inspection of the “green financing” deal for the country, announced with much fanfare at the COP26 climate change conference held in Scotland in November last year, reveals unfavourable terms and little real financial support. 

Populist campaigns that push for the swiftest possible transition to privatised forms of green energy production are likely to contribute to turning an already difficult transition into a brutal one. Instead of ensuring that South Africa can design, fuel and fund its transition primarily from domestic resources, it will become even more dependent on energy imports and conditional external funding. 

This will reduce its ability to negotiate trade and finance deals, including for renewable energy investments, further undermining its economic sovereignty. It will weaken public finances and reduce the resources needed to address poverty and inequality in a sustainable way. And history shows that weakened sovereignty on these fronts can weaken political sovereignty as well.

While many domestic commentators like to frame South Africa as some kind of energy pariah, this does not hold up against a global perspective. Globally, South Africa is being outplayed by more powerful nations who seek to maximise their returns from their hydrocarbon resources while they still can.

Take Australia. Back in 1981, its national intelligence agency, the Office of National Assessments, warned then-prime minister Malcolm Fraser that by the middle of the 21st century, CO₂ emissions would cause climatic change that “would require major economic and social adjustments”.

The primary concern for Australia was not climate change. It was rather the “potentially adverse implication … for the security of Australia’s export markets for coal”. The country’s response was simple and is now a matter of public record. It ramped up coal production to maximise its carbon income before the fateful day arrived. It also encouraged the exploitation of its offshore gas fields. So today Australia is not only the world’s largest coal exporter, but also the largest exporter of liquefied natural gas (LNG) – although in total gas exports (LNG and pipeline) it is only fifth in the world.

Making hay while sun still shines

Other rich countries are following similar strategies to Australia’s. Canada has a relatively low-carbon domestic electricity system, thanks to extensive hydropower and nuclear generating capacity. But despite local opposition, Canada continues to exploit its huge reserves of dramatically dirty “tar sands” despite the extreme environmental and social damage. The aim is to produce oil for export, maximising its hydrocarbon income while it still can.

Canada’s big neighbour, the United States, is even more aggressive. In the 1970s, the US produced much of its electricity from local coal. For transport fuels, however, it depended  on oil imports from cheap but politically unstable, or destabilised, Middle East countries. 

Like Canada, the US has huge, potentially valuable reserves of gas and oil in shale rocks that are difficult to tap. Fracking technologies, developed with support from the government, have solved the technical problems and transformed the country’s energy sector. Expanded gas supplies are replacing coal for electricity generation, enabling a significant reduction in CO₂ emissions. This has turned the US into a net exporter, with both the Trump and Biden administrations aggressively promoting LNG exports.

As energy prices fluctuate dramatically worldwide, providing transitional solutions – dirty old coal – remains a highly profitable business. AGL Energy, which is responsible for 8% of Australia’s CO₂ emissions, rejected a bid from US private equity company Brookfield saying it was well below fair value. AGL Energy intends to continue using coal until 2045, which will help it to build a renewables business.  

In South Africa, the future value of a few decades of coal-fired business was demonstrated when Anglo American sold its local coal business to Thungela Resources, a black economic empowerment company, in June last year. Thungela’s share price has since gone up over 600%, with most of that rise happening even before the Ukraine crisis.

The importance of local mining production for public finances was demonstrated by the tax windfall from higher commodity prices that helped to relieve the post-Covid fiscal shock, just as it boosted public finances before the global financial crisis of 2007.

Worsening inequity

So whether one likes it or not, profits will continue to be made from fossil fuels during the energy transition. The question now is who will capture those profits and for whose benefit will they be used? A just transition would see the transitional profits go to the more impoverished countries that bear the heaviest burdens. That’s not currently happening and, if anything, the present trajectory suggests the inequity will worsen.

As Mia Mottley, prime minister of Barbados, put it earlier in March, developing countries need “a way to finance our route to net zero”. And if the wealthy nations that “caused the problems” would not provide funding, these countries would need to find other ways to generate revenue, such as exporting fossil fuels. “There has to be equity,” she told a Financial Times climate conference. 

Historically, wealthy countries have been reluctant to really pay their share. In 2007, the then Ecuadorian president Rafael Correa proposed that wealthy countries pay Ecuador not to drill for oil in an Amazon rainforest reserve. In other words, he wanted them to compensate Ecuadoreans for the national revenue they would lose by keeping oil in the ground. Of the $3.6 billion proposed, only $13 million was forthcoming and the oil drilling in the Amazon went ahead. 

The question that motivated Correa was simple: why should poor countries sacrifice much-needed revenues from exploiting natural resources when rich countries that can better afford this sacrifice are often not doing so? This same question can be applied in South Africa and beyond to other Southern African Development Community countries that have strong incentives to “monetise” their hydrocarbon reserves to help fund the building of their domestic power systems and economies. 

The stated aim of virtually all campaigns in South Africa at present is to achieve a “just transition”. But analysis of South Africa’s options, supported by evidence from the rest of the world, suggests that their effect is more likely to impose an unnecessarily brutal transition on the majority of South Africans and a loss of energy and political sovereignty.

Séan Muller does not receive any funding, or have any other conflicts of interest, related to the subject of this article.

Mike Muller’s pension is invested in, among others, renewable and conventional energy and construction companies.

This article was first published by New Frame.

Eskom, electricity and energy in South Africa

Over the years I have ended-up doing a fair amount of work and commentary on the state-owned power utility Eskom and associated energy policy issues in South Africa, including recently with my collaborator Mike Muller. The intention of this page is to put all these contributions in one place. Loadshedding (power outages) and the broader state of electricity and energy are now arguably the most pressing policy issue in the country, exceeding even the severe state of unemployment.

The contributions are ordered from most recent to oldest and range from television interviews to some detailed pieces of policy research. (There will likely be some interviews missing initially but I will add these as I remember or come across them).

Interview with Newzroom Afrika on the announcements in the 2023 Budget pertaining to Eskom and the departure of the CEO Andre De Ruyter: https://www.youtube.com/watch?v=NK1V8zEGPng

Interview with Newzroom Afrika on crisis consultations in January 2023: https://www.youtube.com/watch?v=YRAyvJBQOPk

Interview with Newzroom Afrika in September 2022 on the new Eskom board, including concerns about conflicts of interest among some board members as well as more broadly in the energy policy space: https://www.youtube.com/watch?v=8XUDjoZI8Jc

Interview with the SABC in September 2022 on the energy crisis in South Africa: https://www.youtube.com/watch?v=K7jxKr6jnXk

Slides from a presentation at the TIPS Annual Forum: http://forum.tips.org.za/images/TIPS_Forum_2022_The_unjust_impact_of_domestic_political_economies_and_global_geopolitics_on_South_Africas_energy_transition.pdf

Video of the TIPS Forum presentation is here (00:02:30-00:20:30, and for Q&A from 01:06:20): https://www.youtube.com/watch?v=qStiHeLrjRs&t=1182s

Interview with Newzroom Afrika in August 2022 on proposed higher electricity connection fees: https://www.youtube.com/watch?v=dFBDgjCB9D4 (builds on article below)

Article for The Conversation in August 2022 arguing that higher electricity connection fees are actually a good thing because they make the wealthy pay more of their share and reduce/combat the utility ‘death spiral’: https://theconversation.com/higher-electricity-connection-fees-in-south-africa-a-good-and-necessary-next-step-188299 (we noted the need for such fees in a previous article – see below)

Two co-authored op-eds on geopolitics of the energy transition, reproduced here:

Geopolitics of the energy transition: Part 1

Geopolitics of the energy transition: Part 2

Proposed/claimed solutions to the electricity crisis would not work: https://theconversation.com/higher-electricity-connection-fees-in-south-africa-a-good-and-necessary-next-step-188299 (written in 2020 and the evidence since then supports these arguments)

Article for The Conversation in March 2019 explaining why the restructuring of Eskom would not resolve the loadshedding problem and could even make it worse: https://theconversation.com/why-restructuring-south-africas-power-utility-wont-end-the-blackouts-114333

Briefing (and accompanying slides) for the Parliament of South Africa on proposed special fiscal transfers to Eskom: https://pmg.org.za/committee-meeting/21099/

Lengthy and detailed report for the Parliament of South Africa in 2015 on the financing of state-owned enterprises: http://pmg-assets.s3-website-eu-west-1.amazonaws.com/150812report.pdf

Higher education funding in South Africa

Recently, student protests have again erupted at higher education institutions in South Africa. When the original #FeesMustFall protests began in 2015 I was working at the Parliamentary Budget Office and trying to advise members of the finance and appropriations committees as best I could on the proposals being hurriedly drafted by the government. Subsequently, after moving back into academia, I wrote a number of pieces on the issues raised both by the students, the associated public debate, and actual or proposed policy decisions:

“Free higher education in South Africa: cutting through the lies and statistics” https://theconversation.com/free-higher-education-in-south-africa-cutting-through-the-lies-and-statistics-90474

“Options on the table as South Africa wrestles with funding higher education” https://theconversation.com/options-on-the-table-as-south-africa-wrestles-with-funding-higher-education-87688

On the recent protests and apparent policy decisions, these two interviews (radio and television) provide my initial assessment:

Radio: https://iono.fm/e/1008788

Television: https://www.youtube.com/watch?v=CcoOAS03zuY

At present, I am conducting research on some related matters with colleagues from UCT and we hope through that to contribute to deeper understanding of the issues. Our report should be completed by the end of 2021.

The problem with IEJ

Since early 2018, I have expressed – mostly privately and sometimes publicly – criticisms of and reservations about the newly established Institute for Economic Justice (IEJ). Some people appear to be under the impression, so they’ve told me, that this is ‘personal’. Not at all; no more than it would be ‘personal’ if I was critical of Person W because as a bystander I saw them pickpocket Person B. But these and other reactions/narratives indicate that I should clearly state what I believe the problem with IEJ is; that is the purpose of this piece. The purpose is not to persuade anyone either way but simply to put across my experiences and reasons for my position. If I get around to it, I may say more at a later date about what I think the IEJ reveals about parts of South African ‘left-wing’ civil society more broadly.

Background: the problematic dominance of conservative economic analysis

In the last couple of decades, the South African economic analysis and policy space has largely been dominated by conservatives, who have consequently also gotten away with low quality analysis and dubious policy proposals. Much of this has happened under the banner of shallow rhetoric and tired tropes. Many individuals (including myself) and some organisations, with varying political views, have criticised examples of this bad conservative analysis year in and year out. But it has persisted and for whatever reasons, institutions that ought to have provided credible, consistent alternative analysis and commentary of better quality have failed to do so, or failed to gain traction. The result being a tedious succession of exchanges between arrogantly mediocre conservative economists, strongly aided and abetted by the business and mainstream press, and loud but equally empty rhetoric from left-wing organisations such as trade unions and political parties. Key public institutions like the National Treasury and Reserve Bank have developed post-apartheid institutional cultures most closely aligned to the conservative end of the spectrum. Resulting in a neat conflation of conservativeness with credible economic policy by these institutions and most of the media – who at best do not know enough to judge either way, and at worst suffer from the arrogant conservatism of the poorly trained and poorly informed.

For these and other reasons, there has been a long-standing need for some kind(s) of counterweight to this problematic culture that enables what are arguably sub-optimal economic, and other, policies. What has been evident to me at least since my undergraduate studies in economics in the early 2000s is that a shift requires left-wing analysis and research that can match, or exceed, the quantitative sophistication of the analyses produced by SARB, Treasury and their stablemates in academia. For that reason, in the past I encouraged a number of my left-wing students and ‘activists’ I came across not to turn their backs on quantitative methods; if they had the intention of further study in economics, I recommended getting some substantive training in these methods – whatever those methods’ actual usefulness for answering economic questions.

An introduction to the IEJ

With this background, it should not be surprising that when I was told about the idea of a research institute aimed at providing relatively sophisticated research and analysis in support of left-wing/progressive agendas, I welcomed it. That was the case when, by a chance meeting via a mutual acquaintance, I spent a few hours (in 2017 as I recall) with one of the initiators of the Institute for Economic Justice (IEJ). And in that discussion, I was forthcoming in sharing a number of ideas I’d had over the years for a range of specific initiatives required. In doing so, I made – with hindsight – a number of mistakes:

  1. I assumed that the initiative, and its initiators, had a certain respect for the intellectual separation between academic work/research and advocacy
  2. I assumed that the initiators recognised the importance of what’s often referred to as ‘positionality’ – in general and especially in an area which ultimately concerns policymaking in the interests of the majority of South Africans who are black and women
  3. I assumed that the white male initiators were doing this as a part-time or extramural activity, that a much broader, demographically representative group would be involved, and that the initiators would not be the final directors of the organisation
  4. And finally, I assumed that the institution would play a supporting role to actual civil society organisations that could lay some credible claim to representing at least a subset of black South Africans who would speak for themselves.

These assumptions were based on my own views about how it might be appropriate to work in this kind of area, but it was naïve at best to assume these views were shared. Such assumptions partly followed from a deliberate decision to give the founders the benefit of the doubt, despite some reservations about their respective familial and professional associations with men in civil society who had been involved in some arguably rather revealing scandals. It seemed unfair to damn the IEJ founders by association…and perhaps that remains true even if it turns out, after the fact, that it would have been the right decision.

 

Existing civil society spaces

I continued with this approach of giving the founders of IEJ the benefit of the doubt as they began to involve themselves in long-standing civil society spaces I was working in – most particularly, the public finance space. The main such space had evolved in name, participation and structure, but in recent times was largely the initiative of a number of (mostly black) women who had been working in related spaces (public finance and civil society) for some time. It is now called the Budget Justice Coalition. There were very clear statements about what the purpose of the space was and how it operated:

  • The purpose was to build capacity amongst CSOs on public finance oversight and thereby also develop the basis for collaborations to lobby and influence policymakers
  • Conduct needed to be respectful, non-hierarchical and democratic, aware of positionality and ultimately in line with the purpose of the spaces created.

You can find a full statement of these principles at the bottom of this webpage: https://budgetjusticesa.org/about/.

These fundamental principles aligned nicely with my own view of an appropriate role for myself in these spaces: sharing the academic and policy expertise I had (from my training, government experience and recent work at the Parliamentary Budget Office) to the extent that it was useful for the people and organisations involved. I had/have clear views on many public finance issues in terms of what I think is likely to be in the interest of South Africans at large, but it was absolutely clear to me that these should not be imposed on these spaces, nor should I seek greater influence or authority for my views from getting endorsements.

Indeed, there were a number of occasions where I had to state explicitly that it would not be appropriate for me to take leadership positions in advocacy, nor would it be appropriate to have my individual submissions (e.g. to Parliament) endorsed by CSOs – as much as I welcomed the implicit support the desire to do so implied. I should perhaps have paid more attention to the fact that this was more often interpreted as rebuffing attempts for collaboration, than it was seen as being in keeping with the principles stated above.

Anyway, it was in this space that it became evident how inaccurate, and far too generous, my assumptions about the IEJ founders were.

 

Revealing true colours

At the beginning of 2018, which seems something of an age ago now, a number of CSOs involved in the initiative mentioned above organised pre-Budget workshops to prepare representatives of various left-wing CSOs for analysis of the forthcoming national Budget. I was involved in the organising, partly based on prior participation in such efforts and partly through a new, formalised project funded by the EU to improve CSO engagement with legislatures. IEJ were the newest on the scene but it made obvious sense (including to me) to have them involved in some way.

It is worth noting, though, that as I remember it their participation was proposed by an individual at another CSO – let’s call him ‘John’. Neither at that time, nor later, did John indicate that he had any personal relationship with the founders of IEJ.

Let me fast forward here to save some time. Overall the workshops went well, but afterwards I was sufficiently bothered about something I had seen that I sent a message to the IEJ co-founder I’d originally spoken to, confronting him about his conduct, that of his co-founder and John. Specifically, prior to a consultative session in which the group was intending to make decisions about the way forward, this individual surreptitiously called his co-founder and John outside to have a strategic discussion – unaware that I had noticed them doing this. (Bear in mind the background to this CSO group above and the fact that these three were all white men). On returning to the session, they began to raise points from the floor.

The principle for making contributions in that concluding session was that only one representative from each organisation could speak for a fixed period of time. The first dishonesty was that the two IEJ co-founders insisted on being allowed to speak separately on the grounds that IEJ, supposedly, was not up and running (contradicting statements made elsewhere).

The second, was that – with the benefit of what I had seen – all three made contributions that pushed in one particular direction but while giving the impression that they were independent. That direction, I suddenly realised, resonated closely with what one of these IEJ co-founders had told me individually: their first priority was to elevate IEJ’s profile in order to secure its status and more donor funding. After the workshops a similar dynamic emerged in email exchanges. The IEJ had no interest in the slow, painstaking process of putting together a group submission and instead went ahead and drafted its own (which really meant one person’s document) which it then put to the group. And John was the first to enthusiastically endorse the IEJ submission and role. These were additional dishonesties, because the IEJ representatives said nothing about the desire to use this pre-existing initiative and substantive public interest issues to raise their profile, and John neglected to mention – as I later discovered – that he was the best friend of the person whose organisation and submission he kept endorsing.

Given the heavy workloads and limited time of the organisers, the prospect of someone taking responsibility for the submission was gladly accepted with an apparently naïve good faith. (I cannot be too harsh here because after all I was also guilty of giving the relevant individuals the benefit of the doubt at the outset). So it was that one, not especially well-qualified or experienced individual in the public finance-legislature space, made himself the figurehead for left-wing civil society opposition to the government’s proposed VAT increase in 2018. Not only did he draft the submission with little input, but also presented it to Parliament on behalf of these CSOs – clearly with no qualms about his own positionality despite ‘wearing multiple hats’ (as he acknowledged in the relevant presentation to Parliament) and being a white man from a privileged background who had no legitimate claim to represent any South African besides himself.

Because of my original lengthy conversation with him about the IEJ and what I had seen, I decided – as mentioned already – to confront him privately rather than publicly after the workshops. He all but admitted the self-interested agenda I put to him, but aggressively denied that issues of positionality in this carefully created space should impede him and the ambitions of his two collaborators. The conduct I observed violated many principles of the space in which these individuals were operating. Among those one can find on the BJC site are those requiring that participants “are open and honest with each other”, “are characterised by integrity”, “are committed to emulating equality and inclusion in our processes”, “have humility”, “respect the multiplicity of organisational approaches to achieving social change”, and so on.

There are two other instances of problematic conduct by the IEJ founders that I have heard about from others. One concerned using contacts in civil society to pre-emptively attempt to discredit individuals making allegations of sexual harassment. Another concerned rude and abrasive behaviour in a civil society workshop to the point that the professional facilitator complained about the conduct. Reportedly, the culpable individuals were taken to task by their peers on both. Yet that appears to have done little to materially affect their power or status in the organisation or the organisation’s credibility. It is unclear whether the Board was ever informed about such matters.

Avoiding IEJ and initiatives it controls or has significant weight in

Having confirmed my own suspicions by engaging directly with one of the individuals concerned, I have since sought to avoid any interaction with IEJ, initiatives it controls or initiatives where it has any significant weight. Sadly, that means I had to largely sever any involvement with the Budget Justice Coalition. There is an obvious irony in this, but personally the only consequence of no longer being involved is: less work on public interest issues and more time for my career-enhancing academic work.

I summarised my stance as follows when I was approached more than 12 months later (in early 2019) to be involved in one aspect of the Rethinking Economics for Africa (REFA) initiative:

I am not really comfortable with IEJ as an organisation. I know there are good people internally and on the board, but in my view (and that of others) it replicates a problematic CSO model in South Africa that should be left in the past. Some categories of problems were exposed with the Equal Education saga last year. Given this, while I think initiatives like IEJ and REFA are needed in SA, I do not want to be involved with IEJ as it is currently led.

I should add that I also don’t really think it’s appropriate for REFA to be controlled by one institution, not least a problematic one. There is also the matter of how the REFA festival was handled last year, with the effect that a very clear message was sent (in my view) by the way involvement appeared to be determined – reflecting the interests, cliques, positioning and prejudices of the organisers; not primarily expertise on the supposed issues at hand.

While I appreciate that none of the issues I raise (past or present) may be within your control, they are important. To put it bluntly: I can’t involve myself even with ostensibly worthwhile initiatives and good people if I know that ultimately the final strings can still be pulled by people who I believe to be problematic. If/when the top leadership of the IEJ changes, feel free to get in touch again.

REFA, as part of the broader Rethinking Economics movement, is also a great idea in principle. But the fact that it is ultimately controlled by the same people controlling IEJ is deeply problematic.

Recent developments and (non-)prospects for change

As far as I can see, the founders of the IEJ have continued in precisely the vein they started in: pathological self-promotion that seeks to take over other initiatives and control people who’ve been involved in such work for longer periods, under the justification of promoting ‘economic justice’. And one must give them credit: they have been very successful. Helped to no small degree, like similar predecessors in South African civil society, by the power that accrues in resource-starved spaces from donor money. Unlike in the United States where one might need to pretend to be a black woman in order to profit from work supposedly of benefit to marginalised communities, in South African left-wing civil society it turns out that it’s entirely possible for a few, not especially accomplished or insightful, white men to make a comfortable living and dramatically increase their professional profiles by anointing themselves representatives of the pursuit of economic justice for black South Africans. And then receive significant donor funds, along with endorsements from supposedly credible individuals and organisations, for this act of non-benevolence.

In the last year or so there appears to have been a slight shift in strategy by IEJ, with the problematic individuals reducing their self-promotion a little and putting others in public fora. I suspect this is in response to awareness of the above concerns from a number of individuals. They nevertheless appear to retain final control of all aspects, directly or indirectly, of IEJ. And REFA is correspondingly still controlled by these individuals. For myself, I have no interest in any association with people of this kind or those who endorse them.

An obvious source for change ought to be the IEJ board, the members of which purportedly subscribe to progressive notions of leadership elsewhere. To my knowledge, however, the board was created by the founders rather than the founders being appointed by the board. Furthermore, some board members have long-standing reciprocal/mutually beneficial relationships with the founders and therefore do not have an interest in appointing individuals to manage the organisation who would be more consistent with the principles they espouse.

More broadly, there are certain power-brokers in civil society who have for a long time participated in such dynamics themselves and work hard to use their roles – including in the media – to secure the legitimacy of such individuals. Ironically, the author of the article linked to calls for ‘economic democracy’ but fails to mention that the initiatives he endorses are led by unelected white men; what kind of economic democracy is that, one might ask? Furthermore, though he bemoans alleged dismissive treatment of those he endorses by the business press this is largely false: whereas the media almost entirely ignored the black women-led initiative that preceded the IEJ by many years, within the 18months of IEJ’s launch, one of its co-founders was widely personally profiled in the business press, invited to participate in policy discussions led by conservative organisations, and both co-founders were widely cited and invited to speak as authorities on left-wing positions on economic matters. In an astounding case, one columnist and former editor of Business Day represented a document by one of the IEJ co-founders as representing the views of left-wing civil society as a whole. (I might note that the document contained a few glaring technical errors: confirming that the author’s status cannot be justified even putting positionality issues aside). The claim thus holds little water. Indeed, if one looks at the evidence it is hard to separate these individuals’ self-interest from their purported activism…

As I have alluded to above, it seems this kind of conduct – hypocritical as it is – has become normalised in left-wing South African civil society. Almost thirty years into the country’s democracy, the position of those who have endorsed IEJ is implicitly that black South Africans need to be led to economic justice by white men substituting an actual mandate with merely their unapologetic self-promotion. This is grossly hypocritical. I do not hold the view that white people – men or otherwise – should not have any involvement in these discussions. Evidently not, since I remain actively engaged with these areas myself.  But I really cannot see any defensible basis for white people of any background leading these initiatives and even less so when on multiple occasions they have violated basic principles of conduct on which such activity is supposedly premised. And I have little tolerance for those who endorse or enable this and yet still want to shout about representation or demographic injustice issues in other parts of society.

Update (22 March 2021):
#1 Since the original post was written, the IEJ has changed its Board (or at least changed the details of Board members provided on the website) – only 2 members of the original board seem to remain but despite that the issue of beneficially reciprocal relations does too. How Board members are appointed, and by whom, remains unclear. One of the co-directors is now referred to as a ‘senior policy specialist’ – leaving it unclear who the other ‘co-director’ now is.
#2 I notice that the IEJ website claims that “The IEJ was launched…in September 2018”. It is easy to find public information indicating that the IEJ was operating long before that, as per my remarks in the post. For example, see these minutes from a presentation to Parliament in February 2018: https://pmg.org.za/committee-meeting/25892/

The PBO Director shortlist

The post of Director of the South African Parliamentary Budget Office (PBO) has now been vacant for almost two years after the previous Director resigned under a cloud.[1] That means two Parliaments (the 5th and 6th) have been in violation of their own legislation – the Money Bills Amendment Procedure and Related Matters Act (2009, amended 2018).[2]

I worked for two years at the PBO, leading some of its most important projects at the time, and have written at length in the past about its failures (e.g. on nuclear procurement), its importance, why the filling of the Director position is crucial and my own role in trying to remedy the institutional rot/dysfunction. Some of that accountability work is ongoing.

It took over a year for MPs to agree that the post should be advertised and almost a year has elapsed since then before the shortlisted candidates were finally decided on in a meeting on 4 September 2020. While it is possible that the Covid-19 pandemic delayed the process, it was already glacial prior to that and there was little impediment to finalising the list via a virtual meeting of the kind that eventually took place. The previous meeting of the committee took place in December 2019.

Given the broader political dynamics in the country, it seems likely that the delay has been the result of:

  1. Political lobbying as to who should be deployed to this post (paid at the level of a Director General but with only a small staff complement)
  2. Lack of prioritisation of the issue given widespread institutional challenges across all three arms of state and the relative disregard of the role of legislatures.

As reflected in the minutes of the Parliamentary Monitoring Group, there are 9 candidates on the shortlist. These include: the current chairperson of the Financial and Fiscal Commission (FFC), a former CEO and acting chairperson of the FFC, the current acting deputy director general of the Budget Office in the National Treasury, and all three current deputy directors of the PBO. Originally the committee staff had shortlisted 8 candidates but one further candidate (the Treasury official) was added during the meeting. The minutes of the meeting suggest some inconsistency in the application of the experience requirement, with candidates having 10 – 12 years experience being shortlisted and others with more years not being shortlisted. (This may be because of different notions of what constitutes experience for this purpose but it is not clear).

Candidates will need to go through a clearance process by the State Security Agency at the highest clearance category (‘Top Secret’). The discussion in the committee reflected the lack of knowledge of the PBO’s functioning among both the Parliament officials informing the process and MPs themselves. All parties appeared to be of the view that a PBO Director likely would not need to handle classified information. As the first staff member of the PBO to have received classified information through formal channels on behalf of the Office, I can attest to the fact that this is incorrect. What role the SSA should play in relation to this kind of process is of course another matter, since in principle it presents an opportunity for the Executive to interfere in an undesirable fashion (albeit that seems less likely under the current administration).

In principle, candidates should also meet the requirement of being ‘fit and proper persons’. [Declaration: this requirement followed from an amendment to section 15 of the Act which I proposed as part of a public submission in 2018 and was accepted by MPs]. In practice it is unclear at this point how this requirement will be checked. And whether information from the public will be solicited for this purpose. My view is that it should be: if you have any such information on any of the candidates, I suggest sending it to the secretary of the committee.

The nature of PBOs is such that it should be protected from political influence and partisanship of all kinds, not least in the appointment of its staff. Furthermore, whoever is appointed should be able to put whatever personal and institutional views they may hold, or have held, aside and conduct their analysis and research in a competent, fully public interested, non-ideological and non-partisan way. Unfortunately, this seems highly unlikely in the South African case. Instead, what is likely to happen is that the appointed candidate will be the one who is seen as most amenable to whatever the agenda is of the grouping(s) that holds the greatest sway over the appointment.

 A faction within the governing ANC along with some opposition MPs and civil society organisations will favour a ‘Treasury-aligned candidate’. (Note: this need not necessarily by a candidate from Treasury, though such candidates may well fit the bill). An alternative faction in the ANC along with other opposition MPs and different civil society groupings may favour a more ‘anti-Treasury’ view. There are 4-5 candidates who, in my view, can be reasonably located in one of these two categories. But one should also not rule out the possibility of an opportunist whose objective is really just to secure the post and sells themselves to one or both parties as necessary. As the reader will see, I am not convinced that any candidate is likely to be appointed who is squarely committed to what the role truly requires.

I will refrain from publicly speculating about how I think the process will, or should, play out in terms of the candidate who is ultimately selected. However, in the past I have indicated that given the historical dysfunction of, and misconduct in, the institution an outside candidate is likely to be preferable. And I continue to hold that view. Parliament partially sabotaged any such candidate by allowing staff renewals and appointments under a brief reappointment by the previous Director, thereby leaving any new Director with some staff who may be a liability. However, a suitably motivated and strategic new Director should be able to improve conduct and culture – as well as remove staff who resist that process.

The PBO is an institution with great potential to serve the public good. One can only hope that the current Parliament makes an appointment that puts it back on the right path, rather than consigning it to further stagnation and membership of a list of institutions with highly paid staff that do little for the public good. It is welcome that much/all of the process will be in the public domain. But as we saw with the appointment of the current Public Protector, transparency of that sort does not mean substantive transparency or guarantee a good outcome.

Note: I did not apply for the position in question and have no material or other interest in the outcome except to the extent that I am invested in the public interest role the PBO is supposed to play.

[1] This article incorrectly says one year.

[2] For those who don’t know: most legislation is introduced by the Executive and then approved by Parliament, but in special cases Parliament may draft legislation itself – most notably in relation to the conduct of its own affairs. The Money Bills Act is one of the few such pieces of legislation.

Commentary on VAT zero-rating

Since early 2017 I have been engaging with, and advising, some South African civil society organisations on public finance matters. While I naturally have my own views about many issues, the purpose of this engagement is really to help individuals in these organisations understand the issues well enough to make up their own minds. (Some other economists have the more specific agenda of influencing civil society organisations to support their – the economists’ – positions; an approach which I think is evidently dubious).

One important issue that arose with the tabling of the 2018 Budget was the increase in value-added tax (VAT) by one percentage point to 15%. My view on this matter was that there were major procedural and legal problems with how the increase has been brought into effect and that the National Treasury could have done more to protect poor South Africans from the incidence of new revenue measures. The position of civil society has subsequently honed in on the prospect of expanding VAT zero-rating and increasing various forms of social expenditure.

Some of the demands relating to social expenditure that I have seen seem loosely related to the actual VAT incidence claimed by Treasury, but that is a separate issue. More specifically, I recently argued -in an op-ed in Daily Maverick – that zero-rating itself could be of limited value or even counterproductive. A version of that piece with hyperlinks is provided below for anyone interested in reading some of the background references.

Unfortunately, it appears that no-one currently has the appetite to challenge/query the constitutionality of the VAT Act.

Continue reading “Commentary on VAT zero-rating”

Submission to Parliament on Money Bills Act amendments

The Money Bills Act is the legislation that guides Parliament’s oversight of South Africa’s budget and related legislation. I have written previously on that process. The Act has been up for review for some time, and the finance and appropriations committees have had a number of meetings recently to finalise that process. The result is a draft amendment Bill, which I have attempted to explain in an accessible way.

Further to that article, I submitted written comments and made a presentation based on those this week. The audio, relevant documents and meeting report will appear on the relevant Parliamentary Monitoring Group (PMG) website in due course. Access is restricted though, so here are the slides and written submission.

Unfortunately the very limited time available between the call for comments and the deadline for submission (two weeks) also placed some limits on the depth of the analysis. One issue I neglected to address, which was raised by the opposition in the meeting, is that the current Act emphasises – in clause 15(2) – that the PBO should take its work from committees. That is potentially problematic where committee decisions are ultimately determined by a majority party.

Unfortunately, this point became politicised due to disagreements about whether the current committees had allowed partisan considerations to determine what work requests were sent to the PBO. My view is that regardless of what one thinks about the current situation, it is certainly not hard to envisage a situation in which a hypothetical majority party uses its weight on committees to ensure that potentially inconvenient work is not sent the PBO’s way. That could significantly reduce the usefulness of the Office. The broad point I made in my presentation is that our institutions should be designed to be robust to such scenarios. It is for that reason that I agreed with the suggestion that this clause should be amended, or that the clause allowing work to be taken from individual MPs “subject to capacity” – clause 15(3) – be amended to allow the Director discretion based on importance of the request.

It will be interesting to see the final conclusions reached by MPs in relation to these issues and proposals. Given the calibre of MPs on both the majority party and opposition benches on these committees, I am cautiously optimistic that decisions will be taken in the long-term national interest.

Phase II of pro-nuclear arguments: notes from Nuclear Power Africa 2017

On the 18th of May I attended Nuclear Power Africa, a full day programme on nuclear energy within the broader African Utility Week. I was a little surprised to be invited as a panelist given what I had written previously (here and here) and because I anticipated that an industry conference would be heavily pro-nuclear. As it turned out, I may have been the only panelist who did not have some kind of, direct or indirect, interest in large-scale nuclear procurement proceeding in South Africa. Unsurprisingly, I was also the only panelist arguing that the current case for nuclear is flawed in various respects.

Summary of my argument

I provided my graphical, one-page summary in a previous post. The basic argument is as captured in my previous articles, but let me briefly repeat it.

South Africa’s public finances are precarious, with stubbornly low economic growth, under-collection of tax revenue alongside additional tax measures, rapid growth in net liabilities (national debt and contingent liabilities such as debt guarantees to Eskom) and of course the recent downgrades – with the possibility of a potentially very damaging downgrade of local currency debt still looming on the horizon.

Liabilities_v3_blog

Meanwhile, electricity demand has not just failed to keep-up with the forecasts from the 2010 Integrated Resource Plan (IRP) on which the need for 9.6GW of nuclear was originally based, it has actually fallen. The following graph is striking:

Demand_IRPs&actual

The red dotted line is the original IRP 2010 baseline forecast, the blue dotted line represents a scenario in the IRP 2010 update (from 2013, but controversially never finalised) entitled ‘Adrift in troubled waters’, and the black line represents actual electricity distributed (based on StatsSA data).

There are, furthermore, various ‘qualitative’ concerns about the programme. Among these:

  • Nuclear power projects are particularly prone to many of the ills of ‘mega projects, including cost overruns
  • This concern is compounded by the fact that in the South African case the urgency behind the project appears to be due to rent-seeking behaviour (corruption) at the highest political levels
  • There is a danger of being locked-in to non-competitive markets (e.g. for nuclear fuel) and increasingly outdated technologies.

There is no chance that a nuclear programme will be financed without government guarantees, whether direct, through Eskom or through power-purchase agreements. This means that ultimately government will carry the associated risks. Combine that fact with the above context and I suggest the conclusion is obvious: there is no case for investing in nuclear now. At best, we could revisit the question in 3 – 5 years’ time depending on trends in economic growth and electricity demand.

Notable pro-nuclear arguments and associated debates

Given the above, it was interesting to hear what proponents of nuclear were using to bolster their position.

The arguments for the urgency of nuclear procurement keep evolving, which is a bad sign: it suggests that a decision has already been taken (for other reasons) and attempts are being made to manufacture substantive arguments after the fact. So even while we engage with these arguments, the issue of motive should not be forgotten.

There are two particularly notable issues that came up at Nuclear Power Africa: the argument that policy models which fail to recommend nuclear are flawed; and, the claim that nuclear procurement will be good for the economy and an important part of industrial policy. Despite somewhat more sophistication on some dimensions, I want to suggest that these new arguments are unconvincing, the case for nuclear remains weak and therefore motivations for advocating it appear dubious.

Are planning models for electricity generation capacity wrong?

One of the most damning arguments against the plan to procure 9.6GW of nuclear energy for South Africa is that the models used to plan energy supply no longer recommend nuclear. The notion that 9.6GW of nuclear was needed came from the Department of Energy’s 2010 Integrated Resource Plan (IRP). That was based on the assumption of significant growth in energy demand, which has not happened – as shown by the second graph above. Furthermore, the cost of renewable energy in South Africa – as established by recent rounds of competitive bidding – has fallen significantly since then. When these factors are taken into account, the base model used for the IRP and similar models used by the Council for Scientific and Industrial Research (CSIR) and Energy Research Centre (ERC) do not recommend nuclear. It has been argued (by Anton Eberhard who participated in the Eskom ‘War Room’) that artificial constraints had to be placed on the model used for the draft 2016 IRP in order to produce an outcome in which nuclear is recommended.

The response to this at Nuclear Power Africa, from engineers and economists aligned to institutions pushing for nuclear, was to rubbish the models. This is evidently problematic. If you think a model of this kind has important flaws, then the correct approach is to have a debate about the model structure and parameters. Running the model then rubbishing it because the outcome doesn’t suit your pre-existing conclusion is misguided or disingenuous.

Relatedly, it is concerning that there continues to be a remarkable level of disagreement on even fairly basic technical claims. In a separate session on renewable energy, Tobias Bischoff-Niemz of the CSIR argued that their model accounts for issues like the variable availability of renewables; in the nuclear power session, Eskom’s Chief Nuclear Engineer argued the opposite. And while pro-nuclear speakers cited the example of Germany’s expensive electricity as an illustration of what would happen if South Africa increased its reliance on renewables, Bischoff-Niemz had argued that this was due to Germany investing heavily in renewables at a time when they were much more expensive. It should not be hard to objectively assess these claims.

Economic growth, economic impact and industrial policy

On the economic front, two economists who were in favour of nuclear argued that energy investment must be based on the energy demand associated with the desired level of economic growth. By contrast, I argue that building energy capacity on the basis of wishful thinking could have severe negative consequences for public finances. Rates of growth in economic activity and energy demand are far below what was used to inform the 2010 IRP. It is very unlikely that economic growth will reach the 6% annual growth aimed for in the National Development Plan (NDP) any time soon, if at all. Even the 4% Eskom assumed in its last major tariff application seems improbably optimistic. At best, if economic growth is supposed to be the basis for nuclear procurement, then we should wait a few years in order to get a better sense of the trajectory of growth and how new technologies are affecting the link between growth and the need for electricity from the national grid.

A second set of arguments was put forward by an economist for the Coega Industrial Development Zone, near to where the first nuclear plant might be located. She argued that nuclear procurement would have a significant positive impact on the economy and that even if there was over-investment in energy generation capacity this would be good for industrial development because of low electricity prices.

The economic impact argument is entirely unconvincing. If government indirectly borrows a trillion Rand, either from current or future generations, to invest in anything now that will have an initially large, positive impact on the economy. To paraphrase the famous economist John Maynard Keynes: even if the government just buried that money in the ground and let people dig it up, that would have a large positive impact. The more important question, then, is whether the expenditure is worthwhile: will it provide better social and economic value than alternative investments, and will the debt that future generations have to pay be worth it? At present the answer to both these questions for nuclear is ‘no’. And that also means that this proposal would be bad for the stability and sustainability of public finances.

The argument relating to industrial development is similarly problematic. The positive view that once existed of the extremely low electricity prices South Africa had in the 1990s has been revised. Those low prices were the result of poor management of infrastructure investment: overinvestment in earlier periods followed by a failure of tariffs to include the costs of future investment requirements. But worse still, there is little evidence that the resultant low cost of electricity had any sustainably positive effect on industrial development. The energy-intensive industries that benefitted most are not the most employment-intensive, and have become less so since then. Diverting scarce resources to such industries through an inefficient energy subsidy is a poor argument for nuclear and a bad strategy for Eskom as a state-owned enterprise.

Overall, then, while the arguments for nuclear may be becoming marginally more diverse and sophisticated, but they remain profoundly unconvincing.

The issue of energy generation and industrial policy is, however, a very interesting one on its own regardless of the nuclear debate. Somewhat serendipitously, the Trade and Industrial Policy Strategies (TIPS) Annual Forum happening this week, on the 13th and 14th of June, is on the related topic of “Industrialisation and sustainable growth“.

(unrequited) SARS data request

Earlier this year I wrote about undercollection by the South African Revenue Service (SARS) and the controversy over SARS refunds. This was also discussed during the presentation to Parliament mentioned here. The issue has been bubbling-along for some time – as indicated by this report from SAICA.

The information in the public domain, whether from SARS tax statistics, the SAICA report, or replies to Parliamentary questions, is only suggestive and inadequate for a thorough assessment of whether these concerns have substance or not.

As a result, I decided to follow-up with SARS and request information at the minimum level of detail I believe is required to enable this kind of analysis. I emailed Mr Randall Carolissen – Group Executive, Revenue Analysis, Planning and Reporting and, incidentally, also the Chair of Council at the University of the Witwatersrand – with the request on the 3rd of April. (See the proposed data table here: SARS_statistics_request_table).

Having received no reply, I followed-up on the 22nd of May. To date I have still received no reply. The information requested is at a sufficient level of aggregation that I can’t see any legitimate reason for not making it available. And one might have expected that SARS would be keen for independent researchers to verify their assertions that there has been nothing untoward taking place with refunds.

Recent commentary and analysis: nuclear, Eskom and Molefe

I’ve recently provided commentary and analysis on the somewhat related issues of Brian Molefe’s reappointment as CEO of (South Africa’s national power utility) Eskom, as well as the case against procurement of nuclear energy. An argument that has emerged from Molefe’s backers is that he ‘turned-around’ Eskom during his tenure, while allegations against him remain unproven. Leaving aside the latter claim, in a recent op-ed I argue the credit given to Molefe for the end of load shedding and improvements in certain financial ratios is misplaced. A number of analysts had noted the role of falling demand in ending load shedding, but less attention has been given to the scale and significance of the financial support Eskom received from national government in 2015.

While my preference is to focus on the public finance and public economics dimensions, in the current context one cannot ignore political economy issues. I note here that Molefe’s reappointment is not just concerning for given his alleged improprieties, but more so because of what it implies about the failure of a much wider range of accountability mechanisms that should be keeping dysfunction at Eskom in check.

The failure of those mechanisms has been linked to various vested interests and the push to procure a fleet of nuclear power stations. I’ve previously written on why the current case for nuclear procurement is weak, as are previous, vague claims from Eskom that it can finance the project itself. So I was glad to be invited to debate some of these issues at the recent Nuclear Power Africa stream at Africa Utility Week. (Unfortunately, at the last minute Molefe and Minister Lynne Brown cancelled their scheduled attendance at the conference). As far as I could tell, I was the only panel member who argued that the case for nuclear was weak; given that I was also one of the few who did not have a direct vested interest in nuclear procurement proceeding, this is perhaps not surprising. The range of vested interests – some explicit, others concealed – keeps growing, and that presents its own challenges.

This is the one-page summary I used for my presentation:

Nuclear_AUW2017_SMM(There’s some fun to be had adding more arrows, linking the various issues).

What was clear from the sessions across the day is that, as captured by one report, after a number of setbacks the various nuclear interests (politicians, bureaucrats, academics, utilities and consultants) are ‘regrouping’. The dominant tenor of the talks was that ‘we need to get the broader public to understand why nuclear is good for them’, and that critics – whether energy experts or economists – are simply misguided.

Suffice to say that while the various arguments for immediate nuclear procurement continue to shift and evolve, having listened carefully to them my own view is that they remain unconvincing. I’ll summarise some of the more important areas of contention in my next post, along with some interesting new arguments and why they are flawed.