BUSINESS BEYOND Covid-19
ROGER BAXTER: Crucial for SA to focus on leadership compact to effect structural reform
The time for polite conversations about the Covid-19 crisis is over: focus is needed on critical issues that will enable a turnaround in SA’s economy
In the Business Beyond Covid series, CEOs and other business leaders and experts in their sectors look to the future after Covid-19. What effect has the pandemic and resulting lockdown had on their industries and the SA economy as a whole? Which parts will bounce back first and which will never be the same again? Most importantly, they try to answer the question: where to from here?
In contemplating the future of SA and its mining industry after Covid-19, we must remember where we were before the pandemic hit the country and the world. The uncomfortable fact for us is that SA was already in an economic crisis before Covid-19 arrived. We need to stop having polite conversations about the crisis and rather focus on the critical issues that will enable a substantial turnaround in SA’s economic fortunes.
SA averaged 4.5% annual growth between 2001 and 2008, just before the global financial crisis struck. Subsequently, SA’s growth rate decoupled from other emerging markets and migrated to a lower level, less than half that of the developing world. An unsustainable fiscal trajectory combined with inefficient state-owned enterprises (SOEs), low levels of investment and weak economic growth have contributed to 10-million people not being employed in the economy. The consequence of this is an ongoing explosion in poverty and inequality, rising crime and social dislocation.
But why is inclusive growth important? The simple truth is that “a rising tide lifts all boats”, and at a 3% economic growth rate SA’s economy would double in size in 15 years. With a 5% growth rate the doubling is every 12 years. Higher inclusive growth would solve many problems, create millions of jobs, substantially reduce poverty and create a virtuous circle of higher investment, rising incomes and living standards and less inequality.
To grow an economy requires sustained levels of investment of about 25% of GDP. Our current investment level of 19% of GDP is simply too low. To attract investment requires competitive, stable and predictable policy and regulatory frameworks, and a conducive operating environment to be more internationally competitive.
Over the past decade SA has tumbled down the global competitiveness rankings from 45th in 2009 to 67th by 2018, before a slight recovery to 60th in 2019 in the World Economic Forum rankings. In the World Bank Doing Business Rankings, SA has fallen from 32nd place to 82nd place over the same period.
But investment is also attracted to countries that have contestable markets, characterised by real competition that spurs innovation in an ecosystem that encourages economic vibrancy and modernisation. Using the endogenous production function thinking, the potential growth of a country is a function of total factor productivity (TFP) growth, the accumulation of investment and human capital.
Using SA Reserve Bank data SA's total potential growth was a dismal 0.97% in 2018, made up of a weak 0.2% growth in TFP, 0.7% growth in investment and minuscule growth in human capital.
The question is why SA has so little productivity growth and such low investment levels. Total factor productivity (TFP) growth is weak because a significant share of the economy is not open to competition, and instead is controlled in monopolistic structures owned by the state. The government owns 41% of the fixed capital stock of the economy and these industries are closed to effective private-sector competition (rail, ports, water, electricity). None of the SOEs are subject to the country’s competition laws, and yet they are a drag on enabling real competition in the economy.
The return in 2018 of a more honest national government leadership was a necessary, but insufficient precondition for an economic recovery. The restoration of ethical leadership and governance to the boards of state-owned enterprises (SOEs), the removal of potentially corrupt ministers and officials, the material work of the Zondo commission and so on, have all been important reform steps. But the deep structural reforms needed to unleash the economy have yet to be undertaken.
That is why, before Covid-19 we were waiting with trepidation for Moody’s verdict on whether SA’s last investment-grade rating would be maintained, and not unexpectedly it downgraded us to junk status just as the lockdown started.
The starting point for any conversation about economic reform has to be about the political will to implement proper structural reforms and the critical need for a high-level leadership compact between government, labour and business to drive the reforms and focus on repositioning SA as a globally competitive destination for investment. While investment and job summits have played a constructive role, the critical focus on a leadership compact to properly implement structural reforms is a vital point.
The starting point in structural reform must be the size of government, which is too large, too cumbersome, and too inefficient, acts as a huge drag on the fiscus and detracts from the competitiveness of the country. Does SA really need three tiers of government? The 1.3-million public servants at provincial and national level account for 35%, or R675bn, of the national budget — and this excludes local government. Focusing on developing a smaller, more efficient and much more effective government that drives smart policy and competitiveness requires urgent attention.
Linked to creating a more efficient and less costly public service is critical reform to fiscal policy. The country has lived beyond its means for over a decade and public-sector debt has risen from 24% to 61% in the period 2008-2020. The growth in the public-sector wage bill and the huge resources paid out in bailouts to SOEs has meant excessive growth in expenditure, while tax revenue were constrained by high tax rates and low economic growth.
The fiscal crisis creates concerns about the future trajectory of tax rates, in a country already at the upper end of the corporate tax rate comparison group. SA needs to have a multiyear corporate income tax rate reduction programme, to make the country more tax competitive.
The next area is the criticality of introducing much more competition into the economy and into sectors currently dominated by SOEs. Electricity prices have more than quadrupled and energy availability has declined. Introducing much greater private-sector competition in electricity, rail, ports and pipelines would be a country game-changer in terms of increasing TFP and investment.
Allowing desperately needed investment in private power for self-use and in competition with Eskom would not only diversify supply but materially improve reliability and lower prices. Mining alone has plans for more than 2GW of renewables. Just allowing private competition on electricity, rail and ports would probably improve the potential growth rate by more than two percentage points.
Mining-related reform should centre on policy and regulatory certainty, stability and competitiveness. Like it or not, companies require these pillars to plan long-term investments. If the rules keep on being changed in a manner that affects the viability of mine projects, the investment hurdle rate rises and the project is unlikely to proceed. Investment in mining is on hold because of uncertainties such as the lack of recognition of the continuing consequences of prior BEE transactions.
The creation of a stable, competitive and predictable policy and regulatory regime, including security of tenure, the promotion of a greenfields exploration boom, proper incentives for greening production and competitive tax rates, would spur much greater investment in exploration and mining.
The next area that requires a concerted focus is the fight against crime in mining. The illegal mining of existing assets, armed attacks on precious metals facilities, product theft and so on, have a deleterious effect on the mining sector. The establishment of a mining police unit with the specialised capability to tackle this crime is crucial.
My penultimate proposal relates to the criticality of having stable employment and community relations. Partnership with the trade union movement to sustainably grow the sector and continue to improve health and safety are important. There has been significant progress in eliminating the hostel system, improving skills, investing in communities and improving the health and safety of people working in the mining sector and related communities. More needs to be done, but the industry has made significant progress.
My last point is the criticality of modernising the mining sector through serious research, development and innovation (RD&I) and skills development. While SA has several modern mechanised mining operations, the development of significant RD&I capability and ecosystems will help change the future. The Mandela Mining Precinct is an example of positive collaboration for modernisation.
Now more than ever, we must, at a collective leadership level, look for ways to advance the position of the SA mining industry. We have had significant engagement with mineral resources and energy minister Gwede Mantashe, and real progress is being made. While no industry will look the same when we come out of the pandemic, it is a great opportunity for us to reimagine the future.
• Baxter is Minerals Council SA CEO.