In this newsletter we review select areas of policy and governance that enjoyed prominence in the President’s State of the Nation Address (SONA), which have subsequently been reflected in the Budget presented by the Minister of Finance, Tito Mboweni. This is a very important case study of what can happen when a state is ‘captured’. But equally important is what we learn from what is now described as South Africa’s ‘lost decade’.

The most important election since South Africa’s democratic transition in 1994 will take place this year. There is no doubt that the ruling party, the African National Congress (ANC), will win the election. But what matters much more, since there is effectively no alternative to the ANC, is what happens within the ANC. Cyril Ramaphosa won the ANC leadership battle in December 2017, by a very slim majority, edging out his rival Nkosazana Dlamini-Zuma (Jacob Zuma’s preferred candidate). He became President of South Africa in February 2018, after Jacob Zuma’s ignominious departure from office. Zuma had presided over the systematic decimation of many areas of governance and government (including state-owned enterprises). The full extent of this governance and development travesty is incrementally being uncovered through various commissions of enquiry into state capture and related matters, and other processes. The media has and is playing a very important role in providing access to information on these matters. But no one has yet been prosecuted – the wheels of justice do grind slowly, but they are grinding.

The mantle of power rests uneasily on the shoulders of President Ramaphosa. His support within the ANC is fragile. Since coming to office, he has tip-toed cautiously in some areas. But he has delivered a clear message, perhaps most notably to the international community, and has started to address the litany of challenges. A notable example is his firing of Tom Moyane, Commissioner of the South African Revenue Service (SARS), on 1 November 2018. During Moyane’s tenure, SARS had become a key cog in the wheels of state capture, and its capacity to collect revenue was effectively demolished. The process of rebuilding what was once a model institution has begun, but the devastating effects are clear in the 2019 Budget. The Minister of Finance had to revise the estimate of revenue collection that he had presented in his mid-term budget statement in October 2018, downward by ZAR15.4 billion. Fixing SARS is definitely a priority.

Hopefully, the May 8 election will deliver a stronger mandate for him to do what needs to be done to bring what he is referring to as ‘a new dawn’ for South Africa.

It has been noted that South Africa’s electricity utility (Eskom) poses perhaps the most significant threat to the South African fiscus. The Minister has allocated ZAR 23 billion per year for three years to assist with its debt service, but did emphasise that the government will not take over its debt. The cash support will be accompanied by a restructuring of the utility into three entities – for generation, transmission and distribution. An important question is how Eskom’s debt will be apportioned among these three areas. The saga of Eskom raises broader questions that must take note of technology as well as market developments, and the implications of economic models for reliable, competitively-priced energy in an environmentally responsible manner in the 21st century. The traditional economic model of a natural monopoly is archaic. Issues of economies of scale that motivated strongly for a monopoly utility have been overtaken by technology and the economics of renewable energy generation.

The issue of state-owned enterprises is a complex one. An important issue is perhaps not who runs energy companies, but how they are run. This is where regulation matters – and this is an area where regulatory reform has lagged way behind technology and market developments. In addition to regulation, there is the bigger issue of governance. Energy security – reliable supply at competitive prices – is a concern for all. It is a fundamental governance and development issue in that a child’s capacity to learn is severely compromised if her household does not have a reliable, cost effective supply of energy. For investors, load shedding (Eskom’s management of energy supply deficit, by selectively cutting supply to specific geographic areas at specific times) demonstrates a massive failure to manage basic infrastructure service supply for an economy that really does need foreign direct investment to create jobs, diversify the economy and develop its industrial base. The knock-on effects are clear: South Africa’s industrial policy has to compensate for significant cost disadvantages that firms face in the country. And trade policy (most likely tariff-related instruments) may well be invoked as a shield to import competition from more competitive producers, which most likely do not face the same cost disadvantages. And energy is also an important issue on the trade in services agenda – South Africa does supply energy to several neighbouring countries. But South Africa does not yet have a trade in services strategy.

In addition to the series of Blogs, we also review South Africa’s recent trade performance and trade relationships with key partners – our traditional trade partners (European Union, United States), our BRICS partners (in particular China) as well as partners across the African continent. President Ramaphosa has not devoted a great deal of time to talking about trade policy matters, but in SONA he did make some remarks that are important for shaping a trade policy debate for the ‘new dawn’. He specifically mentioned trade in services. This is very welcome, because the current trade policy (the latest update is from 2014) does not articulate a strategy for trade in services. Given that about two-thirds of South Africa’s gross domestic product is accounted for by services, this is an important policy lacuna. This broader policy area also includes issues such as e-commerce, which are deserving of serious policy enquiry and debate. He noted that South Africa should increase its exports; he did mention reducing imports. Read in isolation, this sounds very much like a very old-style mercantilist strategy. A smart import strategy, recognising the importance of competitive imports to support South African producers, as well as to provide variety and choice at competitive prices, is also important.

The President made mention of the African Continental Free Trade Area (AfCFTA), and South Africa’s trade with the rest of Africa. But he has yet to present a clear statement of South Africa’s strategy for Africa. The Department of Trade and Industry on 27 February presented an overview and update on South Africa’s trade policy and trade relations to the Parliamentary Portfolio Committee for Trade and Industry. The update included the confirmation that a review of SACU (Southern African Customs Union) was underway – focusing on specific issues, including

• Review of the architecture on tariff setting and administration
• Identification of public policy interventions to promote regional value chains
• Review of the revenue sharing arrangement

There is a great deal to learn from SACU, for South Africa’s trade and integration agenda with rest of the continent. It presents, for example, a highly integrated commercial space, with well-integrated services sectors, despite the fact that the SACU Agreement does not cover services. Regional stability is also an important consideration that must be factored into the political economy discourse and the review of SACU.

A brief review of South Africa’s trade performance is a clear reminder of the importance of its closest neighbours as export destinations. Namibia and Botswana are amongst South Africa’s most important global trading partners. When looking at intra-Africa trade, it is notable that more than 50% of that intra-trade takes place within SACU, and more than 60% takes place among the member states of the Southern African Development Community (SADC). South Africa is a clear driver of intra-Africa trade. What is our strategy to engage our partners beyond these two regional economic arrangements? Over the past two decades, an important structural shift in South Africa’s trade relations has taken place – China has come into the picture as (now) South Africa’s most important export destination and import source (looking at individual countries rather than trade blocs such as the European Union, which remains most important). And we do not have a preferential trade agreement with China – will this be on our new trade policy agenda?

tralac will be hosting its 2019 Annual Conference in Nairobi, Kenya, 21-22 March, and a Workshop focusing on Kenya’s trade agenda on 20 March.

We look forward to hearing from you and to meeting many of you in Nairobi.