How does South Africa’s energy crisis really impact investment?

Just over a year into Cyril Ramaphosa’s presidency but only a month away from the country’s next elections, South Africa’s onlookers are split on whether the country will clear the hurdles yet to come. With President Ramaphosa, a strong tactician, at the helm, together with a surprisingly resilient economy, hope of a slow yet steady recovery persists. Yet, amidst a backdrop of increasingly familiar global themes – residual but deep-rooted corruption, decreased business confidence, and uncertainty leading into national elections – looms perhaps the greatest threat to South Africa’s development: the unfolding implosion of Eskom, the state power utility.

Eskom’s fortunes and fate have dominated headlines, reaching crisis coverage levels in recent weeks when it implemented Stage 4 load-shedding, or rolling blackouts. These shutdowns are the result of an antiquated infrastructure that simply can’t keep up with South Africa’s growing population. Meanwhile, plans that were meant to have provided relief for this very issue have not been operationalised despite being years behind schedule and massively over budget as the result of nearly two decades of state capture, corruption, and the unrelenting pursuance of a Putin-backed nuclear deal under Zuma.

“Meanwhile, plans that were meant to have provided relief for this very issue have not been operationalised despite being years behind schedule and massively over budget as the result of nearly two decades of state capture, corruption…”

In his State of the Nation Address earlier this year, President Ramaphosa formally announced Eskom’s unbundling into three vertical units: generation, transmission and distribution. The unbundling debate is not a new one – the idea first arose in 1998 when the ANC transitioned to power, but immediately encountered massive political resistance, and so was shelved. The President’s recent announcement has therefore unsurprisingly reignited these flames of fierce backlash from those concerned over potential privatization and job loss. Now, however, the plan faces further obstructions from those that benefited from the systematic looting of the utility and potentially lucrative nuclear deal during the Zuma era. While reports are giving due focus to Eskom’s condition and the feasibility of unbundling an entrenched giant, they also do not provide much if anything else – there has been little meaningful discussion around what this unbundling process might realistically look like and its implications for the wider investment community.

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The reality is that South Africa is so far away from even a partial privatization of Eskom, that investors would be hard pressed to find substantial opportunities there. The decision to unbundle stems from a Presidential mandate to examine the security of electricity supply, Eskom’s financial sustainability, and, importantly, how to put Eskom on a path that responds to the energy transition that is happening globally. A key component to this plan is to add new capacity to the system, significantly through renewables. If nothing else, Ramaphosa is a pragmatist – he will not put all his eggs in one basket. He, rather, envisions a complementary energy supply: if independent power production can take large industry off the national grid, that will help to alleviate the pressure placed on the state-run utilities that consumers depend on. This is where the more interesting question for investors lies: what opportunities will emerge as both a solution and an alternative to Eskom?

The fifth round of auctions for South Africa’s so-far highly successful Independent Power Producer (IPP) programme will be announced in the coming months, opening the opportunity for a new wave of renewables investments. At the same time, there is a growing interest in off-the-grid solar production. In neighbouring Namibia, for example, recent tenders from industrial and commercial customers have seen prices for rooftop solar plus batteries that are now competitive with grid supply from the national utility Nampower, providing a secure and uninterrupted power source to commercial entities. What’s more, they have been able to sell power back to businesses at a lower cost than those businesses are able to buy from Nampower. As a result, the Commercial and Industrial (C&I) rooftop solar market in Namibia has reached near market saturation, with businesses now looking to South Africa and other African countries as the next markets in which to expand. It is likely that the small-scale generation market will be liberalised soon with licensing and registration rules relaxed. This would free up a huge pipeline of investments in innovative small projects, both for own-use and wheeling across the grid.

It is also important to note that despite the dire tone of most reporting, South Africa’s economy is far more resilient than most analysts give it credit for. For the past few weeks, rumors that Moody’s would downgrade the country’s investment grade rating abounded. Last week, however, the agency announced it would maintain South Africa’s status as investment-grade, crediting a diversified economy, sound macroeconomic policy framework, and a large network of domestic investors thanks to the country’s well-developed financial sector. As the region’s most industrialized nation, it is understandable that more weight is placed on issues – a downgrade to junk status would have been disastrous: no African nation has ever recovered from such a ruling. At the same time, however, there is often a tendency for investors to place developed economy expectations on South Africa, forgetting that as a BRICS member, it is still an emerging market, albeit a major one. Taking into account regional trends, South Africa comes across much more favorably than when examining its issues in a vacuum – whereas Nigeria experienced a swathe of major divestments in 2018, multinationals are for the most part staying put in South Africa. Furthermore, the country is beginning to emerge from an unprecedented period of economic stagnation. Foreign direct investment levels reached a five-year high in 2018, with inflows more than doubling from 2017, according to the South African Reserve Bank. A recent UNCTAD report revealed that in 2018, multiple African states experienced double-digit declines in FDI, but on the back of South Africa and Egypt’s increase in FDI inflows, the continent registered a net 6% growth in FDI.

This can largely be accredited to President Ramaphosa’s steadfast determination to prioritize foreign investment – his reputation within the domestic and global business community cannot be overstated. Investors knew, even before Ramaphosa gained victory on the promise of a “New Dawn” for South Africa, that changes would not happen overnight. It is understandable that South Africans and investors alike are weary and growing impatient for more tangible results – history is full of leaders who, no matter how promising, are forced to back down and compromise on their tenets when faced with mounting social pressure. As the unfolding Eskom debacle makes clear, however, even within an apparent crisis the President and his advisors have stayed the course, consistent in their prioritization of economic growth through sustainable policy and structural reform. The investment community can arguably afford to be more patient with him than they would be for any other first term incumbent leader.

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