Three things South Africa must get right

South Africa should use its coal reserve to ensure energy security, revise empowerment policies to avoid taxing capital on arrival, and completely concede ports and railways to private companies. 

This will result in economic growth of over 4% per year and enable the country to remain a unitary state governed from Pretoria. 

Faster economic growth will translate into lower unemployment and a significant reduction in violent process, tuning down the political tension in South Africa. 

In turn, this will bring its own benefits of enhanced stability and policy certainty and further boost investment confidence, creating a positive feedback loop. 

This is feedback from political analyst Frans Cronje, who outlined the relatively easy steps the government can take to significantly boost economic growth and enhance stability in South Africa. 

“If you want to run South Africa successfully as a unitary state governed from Pretoria, you need to increase the fixed investment rate from the current 15% of GDP to the emerging market average of 25% to 30%,” Cronje told the second annual BizNews Investment Conference. 

“That is something that will deliver the jobs South Africa needs and, on the record of the past twenty years, will bring down the political temperature and stabilise politics.” 

Cronje explained that it is relatively easy to do this with enough political will and, as difficult as President Cyril Ramaphosa makes it seem, can be done in short order. 

South Africa also has some advantages over its emerging market peers and a private sector that has a very strong balance sheet that can be leveraged to drive growth. 

The country has a functioning democracy, a free and open society, and a free market economy with deep and liquid capital markets. 

This, coupled with South Africa’s relatively impressive infrastructure compared to most emerging markets, implies that the country should easily match or outpace its peers in terms of economic growth.

Yet, South Africa has failed to do so, with GDP growth averaging 0.8% a year for the past decade, slower than the rate of population growth. 

Fixing South Africa’s economy

Cronje points to the decline in fixed investment in South Africa as the main reason for the collapse in economic growth, as companies and individuals have been unwilling to commit capital to South Africa. 

He said it is relatively easy to reverse this decline and put South Africa on a much better economic trajectory. 

The first thing the government should do is to burn the coal that South Africa already has to ensure energy security and remove a lack of electricity generation as a binding constraint on economic growth. 

“Peak hour of a peak day, we are producing around 25,000 MW of electricity. To grow the economy at over 4% a year over the next decade, we need to lift this to 40,000 MW,” Cronje said. 

“There are 20,000 MW worth of defunct coal-fired power plants lying around that can be refurbished relatively cheaply, and we can generate an electricity surplus within a few years.” 

This will remove a significant binding constraint on economic growth in South Africa, enabling the economy to grow and electricity prices to come down. 

The second thing to do is to stop taxing capital on arrival through misdirected empowerment scorecards and policies. 

“You should not even tax capital as it leaves your economy. We tax capital as it comes in through the door,” Cronje said. 

“If you wish to have the privilege of investing in our economy, you have to give up around 30% to a specific set of shareholders. This leaves very little left in terms of return for investors.” 

Relative to what is on offer in the rest of the world, this makes South Africa significantly less attractive as an investment destination. 

“It is this reason, as much as anything, that explains why the fixed investment rate is sitting at half of the emerging market average,” Cronje said. 

The third thing is to concede the railways and ports completely, which will result in them being privately operated. 

Cronje said it is not enough to concede certain corridors and terminals to private companies while the rest of the network deteriorates. 

This would make it significantly easier for companies to get their products to market, boosting exports and foreign exchange earnings.