Take up arms and play a role in South Africa’s turnaround story

At the height of the battle of Trafalgar (21 October 1805), Lord Horatio Nelson sent a simple message from his flagship, the HMS Victory… England expects that every man will do his duty. England famously won the Battle which turned the tide in the Napoleonic Wars.

President Cyril Ramaphosa is positioning himself to make a similar call to arms for South Africa. The President is aware of the economic crisis that the country is facing and that the time for small talk is over. At a recent media briefing (in anticipation of tomorrows Budget Speech), Alexander Forbes Chief Economist – Isaah Mhlanga – pointed out that the President’s rhetoric is shifting.

“Ramaphosa is aware of the challenges he faces and acknowledges the important role that the private sector can play in the future. In the past, South African growth was driven by State Owned Enterprises and every policy reflected that. Ramaphosa has begun to acknowledge the challenges that these institutions face and has called on the private sector to take up arms and play a role in South Africa’s turnaround story.”

Significant challenges
As pointed out in yesterday’s editorial, South Africa faces significant challenges.

  • Ramaphosa is battling to dismantle the institutionalised corruption that the country faces. This is a legacy from the Zuma Dispensation and the resistance is coming from a faction in the ANC still loyal to Zuma;
  • The ANC has missed the implementation of key interventions promised at the 2021 SONA and will likely miss those scheduled for this year;
  • South Africa’s population growth chart means that we will have to grow our economy by between 4% and 5% every year between now and 2050 to make a significant dent in our unemployment crisis. The International Monetary fund predicts that our economy may grow by 3% this year.
André de Ruyter needs to change his mind about privatisation
Photo By: Eskom

Eskom’s changing view
While 2021 was a challenging year for South Africa, it was also significant.

The country’s energy crisis worsened and bordered on shambolic with the sorry state of our power stations being highlighted. Eskom CEO André de Ruyter pointing towards the alleged sabotage and a blame culture within the utility as key challenges for the entity.

It was also a year that South Africa participated in the Cop-26 meeting in Glasgow, Scotland. The rallying call of the conference was the move towards a Net Zero economy with pressure on South Africa – often seen as a trend setter on the African continent – to make significant commitments towards this.

Given these two factors, President Ramaphosa was left with little choice but to look towards the private sector for help. Government has made allowances for businesses and the public to produce up to 100MW of electricity without needing a licence. This electricity will also be sold back to Eskom to replace emergency reserves as the utility carries out key maintenance on its power plants.

The unbundling of Eskom into three separate units (generation, transmission and distribution) will go a long way in identifying bottlenecks and resolving challenges (inefficiencies) within the utility.

Coming to the end of the line
While South Africa is a key emerging economy when it comes to the world’s movement towards Net Zero, the truth of the matter is that not every economy will be able to achieve this with any amount of ease. Coal will still be an important global commodity moving forward.

Indonesia was the world’s largest coal exporter, and until the country can resolve its own energy crisis, coal exports from the Asian giant have been banned. This could present a unique window of opportunity for South Africa to grow its economy.

However, bottle necks and capacity issues on the Transnet freight rail line have all but prevented this from taking place. “The good news is that Government has recognised this and has identified the improvement of our port efficiencies as well as the participation of private companies on our freight rail network as key interventions that need to take place,” said Mhlanga.

Transnet faces its own capacity issues
Photo By: Transnet

The hydrogen saviour
The main question is: how will South Africa live up to the commitments it made at Cop-26? As pointed out in a previous editorial, the country’s focus on the hydrogen economy is both timeous and significant.

A report by the Department of Science and Innovation (DSI) points out that hydrogen demand in the Valley could reach up to 185 kt H2 by 2030, or 40% (low demand case) to 80% (high case) of demand in the national hydrogen roadmap.

On the supply side, the report points out that by 2030, green H2 LCOH is expected to be about $4 per kg H21 across hubs, still more expensive than gray hydrogen, with a green premium of $2-$2.5 per kg.

The report points out that the H2 Valley could potentially add $3.9-8.8 bn to GDP (direct and indirect contributions) by 2050, while also creating 14 000 – 30 000 direct and indirect jobs per year. If the hydrogen valley is in place by 2030 (eight years from now), this means that between 280 000 and 600 000 jobs will be added to the economy between 2030 and 2050.

This goes a long way in reducing the 1,4 million job benchmark that Mhlanga feels that the ANC should be aiming for.

About turn
It seems as if President Ramaphosa has made an about turn on the country’s traditional view of using SOE’s to grow the economy. Behind closed doors, it is clear that he has sat down with the leaders of these entities and has had a serious chat with them. The kind that a parent would have with a disobedient child.

Both De Ruyter and Portia Derby (the current Group Chief Executive of Transnet) have voiced their concerns about privatisation in the past. It seems that they have seen the light and the benefits that privatisation can offer. Just look at SAA and Telkom.

If the private sector is going to play an increased role in the economy, they will need to adjust their business models to do so. Similarly, SOEs will need to adjust theirs to accommodate this. This means that the role of business rescue and turnaround professionals will only increase in the future.