Unlocking the potential of the South African economy to create much needed employment and tax revenue is one of the urgent tasks identified in the recently delivered State of the Nation Address by President Cyril Ramaphosa. Growing the economy requires business investment. Unfortunately, business confidence has been very low in SA since the pre-COVID period due to failure to supply reliable electricity, water, telecommunications and transport logistics to move goods and people. These network industries are important in reducing the cost of doing business and living in South Africa by lowering production costs, thus making South Africa attractive for investment. 

The implementation of structural reforms to unleash the South African economic growth potential has been very slow. As a result, the government has put together Operation Vulindlela – a joint initiative of the National Treasury and Presidency to unlock economic growth and transformation. COVID-19 worsened the economic crisis, evident in the high levels of unemployment, poverty and impending fiscal crisis. This has potential to precipitate the implementation of structural reforms and transformation.   

Some reforms, such as the restructuring of Eskom, are progressing well and we are focusing our attention on those reforms that are progressing slowly or not at all. There are several reasons for the slow pace of implementation of reforms. The first is policy contention. While there is a widely held view that South Africa is good at developing policies but weak at implementing them, the reality is more complex and nuanced. Policies are often developed and approved at a high level, without deciding on the detail of exactly how they will be implemented. More detailed policy questions often arise during the course of implementation and when these are contentious and difficult to resolve, they can result in delays or even paralysis in implementation. 

For example, while the reform to increase the efficiency and competitiveness of ports is not contentious, the detailed actions required to implement this reform are contentious, particularly whether or not the Transnet National Ports Authority (TNPA) should be corporatized, as required by the National Ports Act of 2005. Contention as to whether corporatisation of the TNPA is necessary to improve the efficiency of the ports has resulted in this reform action not being implemented for more than 15 years. The debates are complex. 

There are concerns raised about the impact of corporatisation on Transnet’s balance sheet, its loan covenants and its ability to provide an integrated freight transport service, and how private sector concession can block access to new, particularly black exports on the one hand. On the other hand, there are concerns about Transnet’s conflict of interest in regulating port operations as the Ports Authority at the same time as being one of the port operators on the other hand. Whilst these discussions are underway, government is undertaking measures to make the SA ports contribute towards reducing the cost of doing business in South Africa. 

Similarly, while the reform to enable more private sector investment in embedded generation is not contentious, some of the detailed actions required to implement it are. There has been considerable debate about whether to raise the licensing threshold for embedded generation from 1 MW to 50 MW. Again, the debates are complex, with the need to reduce demand on the grid to address the immediate shortfall in electricity supply juxtaposed against concerns about the readiness of Eskom and municipalities to manage increased numbers of grid connections for small-scale generators. In the meantime, private sector investment in embedded generation remains far below its potential, and load shedding continues. 

Secondly, there is the perennial issue of ‘a lack of capacity’ in government. In fact, the current COVID-19 pandemic-worsened economic crisis will not automatically lead to structural reforms, but will also depend on the capacity of the state to undertake the reforms.  State ‘capacity’ has several dimensions, including skills, leadership, governance, institutional systems and processes, information management systems, and resources. There is a tendency to be fatalistic about this ‘lack of capacity’, as though we are powerless to change it. However, it is possible to address this challenge. There are examples of remarkable successful turnaround programmes in government, such as the turnaround of the management of tax returns by SARS and the turnaround of the issuing of IDs and passports by the Department of Home Affairs. 

While South Africa does have a skills shortage in general, the lack of capacity in government is usually due to weak leadership and governance resulting in inappropriate organisation design, poor recruitment practices and a lack of retention of skills. If there is a general lack of capacity in the country, why are we able to implement some things well and not others? It can also be argued that we should not be trying to implement programmes that we cannot afford, and therefore shortages of resources should not be a reason for a lack of implementation. The underlying problem is therefore generally weak leadership and governance, which in turn results in capacity constraints. Addressing leadership and governance weaknesses is ultimately a political issue. Furthermore, reforms must be properly sequenced. For example, auctioning a spectrum without digital migration is tantamount to stepping on the accelerator and the brake at the same time. 

Thirdly, there is sometimes resistance to change due to anti-growth economic interests centred around protection of turf. Some of which had to with the fact that certain firms have chosen a specific path and sunk costs in that path, and they have become dependent on that path for profit making.  Structural reform agenda is disrupting certain interests, hence the potential resistance. 

The current COVID-19 pandemic-worsened SA economic crisis requires all South Africans to take seriously the need to undertake structural reforms to put the economy on a sustainable growth path. Whilst a crisis can set the necessary conditions for reforms, it can also make the reforms more difficult because it may worsen the hardship of the beneficiaries of the status quo. It is not always the case that crises are blessings in disguise. Yes, in a moment of crisis everyone wants something to be done. But they may not agree on what needs to be done. In a moment of crisis, bargaining and rapprochement may also be more difficult leading to societal unrest[NM1] . In the final analysis, the resolutions of a crisis depend on the balance of power between reformers and anti-reformers. 

The economic reform in China under Deng Xiaoping was necessitated by a crisis of mass starvation associated with poor economic growth during Mao’s Great Leap Forward and Cultural Revolution. In 1980, China’s GDP per capita was lower than that of Malawi and Chad. The Chinese economic reforms were enabled by pro-growth forces. Today’s China has become the world’s second largest economy due to structural reforms since Deng Xiaoping.  

Operation Vulindlela on its own cannot overcome the deep seated anti-sustainable growth economic class interests. This requires an organised sustainable growth path coalition around the minimum program of structural reform composed of labour, business, state and progressive civil society. The Vulindlela Operation is already positioning the state to play a critical role in crafting economic growth and transformation centered around these structural reforms. However, managing the Vulindlela Operation or any state-led reform is not like like steering a ship in calm waters towards a particular goal. Our experience of the operation so far is more like trying to keep a compass heading against quells and rough waves and counter currents.

Some of the rough waves are related to the perennial problem of coalition building, which is a bargaining problem to resolve the questions of how to compensate losers who have already sunk costs in certain industries to be disrupted by the reform agenda. The opposition to the reform agenda also come from the state itself, including state owned companies. 

The SABC has sunk its capital into analogue infrastructure. Therefore, the transition to new Digital Television Broadcast network where the technology is different, means that SABC costs are going to increase since the public broadcaster will have to pay Sentech significantly higher fees for delivering broadcast service. Surely, these are transitional costs that have to be agreed upon amongst the reforms-affected economic actors. In the energy sector, coal-mine owners supplying Eskom power stations are likely to be displaced by independent power producers.  However, government has found a formula to address losses by the incumbents in the sector based on the principle of just transition. Similarly, these transitional losses must be negotiated with each industry and economic actors.   

The combination of corporatist NEDLAC dialogue combined with popular struggles from below can make a significant difference in tackling the anti-growth reform agenda. Operation Vulindlela should be used as our SA Deng Xiaoping moment, albeit within our SA Constitutional democratic order, to drive economic growth and transformation. 

Masondo is the Deputy Minister of Finance and political head of Operation Vulindlela