Thabi Leoka | SONA: More questions than answers

Thabi Leoka
Thabi Leoka

The SONA2020 was a balancing act between political and economic demands. There were elements of the speech that were surprising as some previously discarded ideas were unearthed, but all in all, the speech left me with more questions than answers.

The president dealt with constrained energy supply and its impact on the economy with great assertion. He spoke about its debilitating effect on the country, severely setting back efforts to rebuild the economy and create jobs. He exemplified the extent to which rolling blackouts disrupt people’s lives and encourages hardship, but importantly he listed measures that will rapidly and significantly increase generation capacity outside of Eskom – something which energy experts had been requesting for some time.

The president has instructed the minister of mineral resources and energy to issue Section 34 of the Ministerial Determination, which will give effect to the integrated Resource Plan 2019 and enable the development of additional grid capacity from renewable energy, natural gas, hydro power, battery storage and coal.

Emergency power will be procured from projects that can deliver electricity into the grid within three to 12 months from approval. No license will be required for small scale generation under one megawatt. Commercial and Industrial users will be able to produce their own electricity for own use and there is now no limit to installed capacity above one megawatt. Bid window 5 of renewable energy Independent Power Producers (IPPs) will be open and the completion of window 4 projects will be accelerated. Municipalities with sound financials will now be allowed to procure their own electricity needs from IPPs.

All these initiatives are very promising, but they leave many questions unanswered. At the Africa Mining Indaba, Minister Gwede Mantashe surprised the audience when he announced that a second generating company outside of Eskom will be created with funding from investors. Miners, who have been hardest hit by load shedding, are also given the go-ahead to produce their own electricity. 13 percent of Eskom’s revenue comes from mining. The miners are also the third highest contributor of sales after municipalities at around 42 percent and industry, 23.4% percent.

What does this mean for Eskom, which was recently given equity support of R49 billion in 2020, R56 billion for 2021 and R33 billion for 2022? If industry and miners produce their own electricity and financially stable municipalities are choose their source of electricity, this means less revenues for Eskom. The pricing structure of Eskom is such that industry heavily subsidises households, therefore less revenues for Eskom could lead to increases in the price of electricity for households. And since some households are quickly getting off the grid, this could all lead to a utility death spiral.

Bid window 5 may not come on board due to challenges relating to Eskom's balance sheet, as the current buyer of power from IPP programs that would prevent it from opening; however, bid 3.5 and 4 projects will likely be completed. The question which arises is: will the risk of the new projects be shared since IPPs received the second largest guarantee after Eskom?

A baffling announcement made by the president at the SONA was the establishment of a state bank. The first time I heard about a state bank for South Africa was at a lunch held by Mr Tito Mboweni, who together with his brothers, ran an investment holding company called Mboweni Investment Holdings. At the lunch with a few financial analysts, Mr Mboweni bewailed about being declined a loan by South African banks, despite being the former Governor of the South African Reserve Bank. Because of this rejection, he said a state bank is needed to fund businesspeople like himself whose loan applications are unjustly rejected by the BIG 5. A few years later, Mr Mboweni tweeted about the need for a state bank, making public views he had only shared with a few analysts. That tweet has now come back to haunt him because as the Finance Minister, it is now his task to find capital within a constrained Budget, for the state bank. How will Finance Minister Tito Mboweni fulfil this onerous task whilst attempting to shrink the budget deficit, raise revenues, recapitalise SOEs and fend off rating agencies?

South African large banks have been too conservative to take the risk on young and new entrepreneurs and it does seem at times that they hide too much behind the Basel rules, whilst taking risks on the more established corporates. This has compelled entrepreneurs to seek funding from institutions such as the Public Investment Corporation, the Development Bank of Southern Africa, the National Employment Fund or the Industrial Development Corporation. Instead of creating another state financial institution, should we not reprioritise some of these institutions so that they play a more impactful role in changing the economy of South Africa?

The announcement of the establishment of the sovereign wealth fund was also puzzling since it requires an accumulation of funds. Indeed, the SARB can play a role in accumulating the funds in the course of its management of the country’s banking system, but typically sovereign wealth funds are a country’s savings and South Africa is an indebted country.

Fitch rating agency, whose sovereign rating for South Africa is BB+, released a statement after the SONA which essentially said the SONA was thin on specifics.

SONA 2020 seemed to be an attempt to politically appease whilst prioritising urgent economic requirements. Unfortunately, a side must be chosen in order to realise priorities.

* Thabi Leoka is an independent economist who has worked in financial services for over 17 years. She is interested in fiscal and monetary policy. This is also a member of the Presidential Economic Advisory Council. Views expressed are her own. 

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