14 February 2008

Mediocracy in South Africa

Here is an illustration of what happens when considerations of ideology are allowed to trump those of efficiency. From Martin Spring's On Target newsletter of 9 February. Mr Spring is a former South African resident, so has an insider's perspective on the situation there. For those unfamiliar with the background, the Financial Times has the basic facts.

South Africa’s Energy Crisis

One of the dangers of putting inexperienced people in charge is that they don’t understand the long-term consequences of their actions — or inactions. South Africa has drifted into a serious power-supply crisis because of decisions taken after the 1994 political transition.

Gold and platinum mines were forced to shut down production because the national electricity supply authority, Eskom, said it could only provide about half the power they need. Companies are shelving plans to build or expand power-hungry plants such as aluminium smelters. City vehicle flows are seizing up because of traffic lights out of action — Johannesburg is thinking of fitting expensive solar generators to each set of lights.

It will take years to overcome the electricity supply crisis as the first of three planned large new power stations will only come on stream in 2013. When Eskom, which is state-owned, asked the Cabinet in the 90s for permission to go ahead with expansion of generating capacity, it was vetoed.

But the power crisis is not just about failure to provide for the future — it’s also about gross incompetence in the management of a massively-important, technologically-sophisticated industry. After the political transition, virtually all the experienced managers and engineers running Eskom were driven out and replaced by officials with the right skin colour — but little or no experience. Staff numbers were later cut savagely to produce massive profits and yield fat bonuses for top management.

Failure to spend enough on maintenance of equipment and access routes is now having predictable consequences. Not enough coal is reaching the generating plants; powerlines and transformers are failing. Because so much capacity is out-of-action for various reasons, Eskom was recently only able to generate 27,000 megawatts, compared to 32,000 a year ago. Far from failing to keep up with “unexpected” economic growth, as apologists argue, Eskom is not even able to maintain past production levels.

To address the crisis, plants closed in the past because of obsolescence are being reopened, and rationing is being introduced, shutting off power to businesses and homes for several hours a day. The mining industry, so critical to the South African economy, is being promised 90 per cent of the power it wants (to be provided by imposing rationing — black-outs — on households and small businesses).

It’s reckoned it will take another five years to revert to the situation of abundant cheap power that the ANC government inherited when it first took over. In the meantime the impact on economic growth, and on the profits of mining and other power-hungry companies, is likely to be significant. One estimate is that a fall in production of 5 to 10 per cent would knock 1 to 2 percentage points off economic growth, which has been averaging about 4 per cent.