SONA 2019

February 19, 2019

2019 State of the Nation Address (SONA)

Leading up to SONA there was a lot of concern surrounding corruption, especially the evidence that has been emerging from a judicial inquiry into the looting of state funds. There has also been considerable comment about the financial state of Eskom and other state owned enterprises that are also in a poor financial situation. Poor economic growth over recent years, including the technical recession of 2018, has highlighted the necessity of growth as an underpin to structural change and reform.

The expectation was that if these issues were not addressed in the SONA, it would be a non-starter. Fortunately, President Ramaphosa did address all of the above and more. Here are the main points that he covered.

  • “above everything else, we must get our economy working again”
  • Special unit set up to investigate serious corruption
  • Power utility Eskom to be split into three entities
  • Other state owned enterprises to be strengthened
  • Land and housing reform to be accelerated
  • Three year aim to reach 50’th spot in World Bank’s ease of doing business ranking (currently 82nd)
  • Education from pre-school to university to be boosted
  • Job creation to be concentrated on Agriculture, Tourism, Clothing & Textiles and the Ocean economy
  • Gas and oil find by Total off southern coast could be a “game changer for SA”

One must also bear in mind that the SONA had a strong political bias in light of the forthcoming General Election. In fact Ramaphosa announced the date of the election, 8th May, in his address. He is walking a very delicate line between taking the right action to combat corruption and turning Eskom around (which should involve staff reductions) and making the right political noises to achieve an ANC victory in the election and a strong mandate for himself.

The effects of a decade of endemic corruption in the ANC is starting to show. Correcting the corruption of parastatals will take a long time and will involve some difficult decisions and implicate some popular personalities.

For some time, the big elephant in the room has been Eskom. To mix the metaphors it’s also been a holy cow. Nobody has been willing to tackle Eskom at the risk of power outages or load-shedding. Politically, for the ANC to reduce staff it would alienate its labour ally and its voters. However, when you look at the vital statistics of Eskom over the past 9 years or more, it becomes obvious that the escalation in debt, increasing employee numbers and a growing wage bill has not resulted in the generation of more electricity. In fact, the lack of maintenance in earlier years and inadequate planning of new capacity to meet growing demand has led to interruptions in supply and rolling “load-shedding”.

Source: Eskom

Over the past nine years, Eskom’s revenue has grown by some 330%. Employee numbers have risen by 28% over this period, but electricity generating capacity has effectively remained unchanged. Unfortunately, accurate total wage costs over this period are not available, but it would appear that wage increases have exceeded the inflation rate and that the total wage bill has increased by at least 75% since 2009. The huge shock is that debt is up by 250% to R348 billion, equal to twice the revenue generated. In recent years, billions have been spent on two new power stations Medupi and Kusile, which are years behind schedule, have cost way over budget and the construction now appears to have design faults. In 2007 Eskom estimated that Medupi would cost R70 billion and Kusile R80 billion. Costs so far are R208b and R239b respectively and the projects are only due to be completed in 2021.

The  Government is planning to split Eskom into three units, Generation, Transmission and Distribution. Overseas experts are also being called in to assess the current situation and arrive at a turnaround plan for Eskom. However, the damage done over the past decade or more has been considerable.

The overall impact on economic growth of insufficient power generation is difficult to quantify. On the one hand, there has been the loss of production due to power outages and load-shedding, while on the other hand there has been the postponement and cancellation of projects due to insufficient electricity and the uncertainty of supply being disrupted in coming years. Certainly, foreign investment into new projects in SA has been impacted. It is very unfortunate that the former administration did not tackle the problem earlier. However, the current administration under Ramaphosa appears determined to sort out the problem.

Disclaimer: The views thoughts and opinions expressed within this article are those of the author and not those of any company within the Capital International Group (CIG) and as such are neither given nor endorsed by CIG. Information in this article does not constitute investment advice or an offer or an invitation by or on behalf of any company within the Capital International Group of companies to buy or sell any product or security.

Continue reading