The inevitable collapse

As the pending economic catastrophe continues to build, the Deputy President has joined the bandwagon, admitting that numerous mistakes have been made by ‘previous administrations’, and promising that the current bunch will do better.  Thinking South Africans will be excused for saying that they have heard it all before.  They did not believe it then, and they believe it even less now.  Perhaps the Honourable Deputy President should learn that the ANC of five, ten, fifteen or twenty years ago is the same ANC that continues to mismanage the once-strong South African economy.  The truth is that the ANC has demonstrated clearly that it has no ability to ensure the provision of the fundamentals necessary to build the country, but has chosen to use the country as a resource to build their personal wealth, in a fashion typical of numerous other African banana republics.

 

What are the fundamentals of a strong economy?

The first fundamental is an education system that produces children who are capable of working productively in the economy.  No-one, apart from the ANC, can claim that South Africa has that system.  The ‘improvements’ in the Matric pass rate have been achieved by reducing the pass rate to 30%!  Can you imagine driving over a bridge designed by an engineer who achieved 30% in Maths?  Can you imagine a coal storage bunker to hold 10 000 tons of material being designed by such a man, or a shopping mall?  Oops!  We have those examples!

The second fundamental is a civil service that is both competent and honest.  No-one, apart from the ANC, can claim that South Africa has that civil service.  The Deputy President has claimed proudly that nearly 30% of the municipalities have achieved a clean audit report!  Isn’t it remarkable that the pass rate on audit reports is the same as that required for a Matric?  In any civilized society, a government that achieves less than 100% clean audits for its activities would be thrown out at the next election, or, more likely, would take the honourable route of resigning and handing over the reins of government to a competent group of people.  Unfortunately, honour is a concept that is foreign to the ANC, as has been shown so clearly by the shenanigans of the State President.

The third fundamental is a government that the people trust, headed by a man of impeccable credentials.  The laws governing banks and insurance companies require that every senior officer and Director of such institutions should be a ‘fit and proper person’.  The standards used to determine this quality include history of conduct, relevant education, current competence and other similar factors.  On that basis, very few of our numerous Ministers and Deputy Ministers, not to mention the senior civil servants, would qualify.  Does that mean that the management of the country requires a lower standard of competence and integrity than the management of a bank or insurance company?

The fourth fundamental is that the government recognizes the needs for infrastructure investment and ensures that the requirements of the developing economy are met before they become bottlenecks.  Things like roads, rail systems, electricity supply, telephone and internet systems, postal service, are all essential elements of a modern economy.  Not one of those elements is met to anywhere near the level required by South Africa.  However, this cannot surprise anyone who understands that the State President was not aware of the R246 000 000 being spent on his personal estate!

The fifth fundamental is that the people of the country have a Government that they can, and do, trust.  South Africans have, unfortunately, become accustomed to the lies and dissimulations of the senior members of Government, their avoidance of pointed questions even in Parliament, their consistent unwillingness to comply with the law in relation to disclosure of information.  They have learned to question the motivations of the top people in everything they do, to the extent that a popular talk show host asked what the State President was doing in Russia recently.  The answer came a couple of days later, when Russia announced that it had signed a contract to supply R111 billions of nuclear power stations to South Africa!  In the climate of distrust that now prevails, the frenzied attempts by the Departments of Energy and Public Works to explain that these were really only pre-tender feelings out of the capabilities of possible suppliers all fell on deaf ears.  The question, however, remains unanswered.  What was the President doing in Russia? The events related to the Arms Deal are still creating ripples, regardless of the attempts by the Commission to paper over the cracks.

The sixth fundamental is that the government does what is required to ensure that as many people as possible are enabled to look after themselves.  With 17 000 000 grant recipients, living on the backs of 4 200 000 taxpayers, that can certainly not be said to be the case in South Africa!  Add to that the fact that 27% of all employees in South Africa are employed by the Government.  Experience of the competence of all forms of government must lead to the conclusion that at least half of those Government employees are in reality recipients of a different form of social grant.  It requires little intelligence to understand that this is a situation that cannot continue.  But then, intelligence is not one of the noteworthy attributes of the present Government.

 

It is clear that South Africa is on an accelerating decline.  The only question is how long it will take to collapse. 

The process of collapse will be painful to all in the country, and the longer it takes for that collapse to reach the nadir, the more pain will be suffered, and the longer and harder the recovery will be.  The Germans have a saying:  rather an end with suffering than suffering without end.  We collectively have the choice, to allow it all to continue, or to put an end to it, the right way or the hard way.  Perhaps it is time for those with their hands on economic power to stand up and say ‘No more!’  Perhaps it is time to recognise that this country belongs to the people who work to support it, not to the parasites who steal from the public.

The 2014 Interim Budget for South Africa

The Interim Budget Speech by the new Minister of Finance Nene was as unconvincing as intelligent South Africans have come to expect.  It repeated all the pious hopes uttered by previous Ministers, and by President Jacob Zuma, but it offered no new ideas or glimmers of hope.  And there is good reason why this should be so.

The underlying cause for the numerous problems that beset South Africa is very simple.  The governing Party is using its political power to buy votes.  It concentrates its efforts on ‘improving the lives of the poorest of the poor’, but, unfortunately, economic activity does not grow in that politicised sector.  Growth comes from business, industry and agriculture.  Government has put a large amount of effort into making doing business in South Africa more difficult, with numerous charges, levies, fees and innumerable reports and submissions to a multiplicity of Government bodies, none of which appear to have the capability to make any meaningful use of the data gathered.  The fact that the labour unions represent a large portion of the voter base for the ANC and the SACP has resulted in a very militant labour situation, with demands for high wages that do not reflect the low productivity of the workers, and an apparent inability on the part of Government to moderate such demands to accord with economic realities.  The demands for increased participation by the Black population in the management and ownership of existing businesses represents to huge threats to such businesses.  They result in a much higher cost of doing business.  The average businessman would be delighted to employ a Black worker at an appropriate level, but having to employ an under-qualified person to do a job merely to meet a quota requirement has two important results.  It makes that business uncompetitive, reducing its ability to compete internationally, and it drives up costs locally, becoming an important driver of inflation.  The need to ‘sell’ a substantial shareholding in the business also represents a sizable cost factor.  Regardless of the disingenuous protestations of the ANC politicians and their stooges, the canny investor knows what level of profit can be achieved from the investment.  Any action that reduces the net profit to the investor on his investment must be balanced by an increased level of profit, sufficient to make that investment an acceptable one.  Bear in mind, the ‘investment’ is not necessarily expressed in financial terms – it can also be the value of the business creator in terms of his ideas, skills, ingenuity and experience.  If the return on the investment is not sufficient for any reason, that investment will seek an alternative home.  This is certainly one of the reasons that so few new innovative businesses have been established in South Africa in recent years.  And foreign investors are not the suckers that the ANC seems to believe them to be.  They have followed the discussions regarding the handover of 50% of established farm businesses to the workers.  On the face of it, this is the sort of thing that would appeal to a Marxist Party member.  It makes a large handover to the voter base at no cost to the Government, it gives a wonderful ‘story’ at the next election, where the ANC will use it as a reason to be returned to power, and it provides a wonderful opportunity for the Party faithful, with large bank accounts derived from their Party affiliation, to rake off another substantial bite of the wealth presently owned by the Whites.  However, it ignores the fact that it is no more than institutionalised theft.  To take from a man, or a family, the farm that he has built up over generations, with personal effort, investment and risk, and to hand it to the employees without paying any compensation to the dispossessed owner, is no better than highway robbery.  It will result in farmers taking pre-emptive action to protect his assets and his source of income, as is already happening, and it will result in a catastrophic collapse of agricultural output.  More than two-thirds of farms already handed to Black farmers have failed, and there is no reason to believe that the new idea will work any better.  Already, the number of commercial farmers in South Africa has reduced from 62 000 when the ANC came to power to less than 25 000 today, drained by the continuing threat of farm killings, which the Government still fails to combat in any meaningful way, by the politically-inspired farm labour strikes which have driven up costs to an unaffordable level, and by the continued attack on this bastion of White effectiveness in the re-opening of Land Claims, and the new Zimbabwe-inspired theft of productive farms. 

Canny investors see the new idea, of legislating a requirement to hand over farms to employees without any compensation, as being the first signs of a new wave of dispossession of businesses and assets.  After all, if it is done in relation to farms, why should it not be done in relation to banks, insurance companies, IT firms, security firms and every other productive asset?  The short answer is that the ANC certainly has this in its long-term planning (next year or the year after, but, in any event, before the next general election, when it will be in dire need of another ‘good story to tell’).  Any intelligent investor will see the clouds on the horizon, and either get out while the going is good (consider Anglo American, Billiton, SA Breweries, Old Mutual and many others) or simply not come.  In the Consultancy business of which the writer is part, several reports written to evaluate South Africa, amongst other potential investment destinations, have concluded that it ranks low in practically every meaningful criterion – ease of doing business, honest dealing by Government, corruption, education stand of the workforce, worker productivity, energy cost and security, safety of employees, labour relations, security of repatriation of the investment, time required to get into business, and many other factors.  The result has been that the potential investors have elected to establish their businesses in other destinations.  An increasing number of companies which have already invested in South Africa have requested a similar evaluation of their investments, and an increasing proportion of them are withdrawing from the country.  These are not high-profile decisions.  The companies making them do not generally want to make a political statement, but the number of job losses is mounting, running to many thousands per year, and the unfortunate consequences of these decisions are mounting, as the investors, previously strong proponents of South Africa, have come to realise that this is no longer a place they wish to be, and spare no efforts to inform their colleagues of the reasons for the decisions.

It is time for the politicians running this country to realise that it is no longer possible to make political decisions based on their personal financial benefit.  They must now take the ‘radical’ steps of demanding that any person benefitting unjustly from a Government contract be brought to justice, serve jail time, be banned from any form of business with the Government and its bodies in the future, and be forced to refund any benefit unjustly received.  It is time that the Ministers and the State President accept that they are not kings and queens, but servants of the people, elected to work solely in the interests of the public, and subject to the Constitution and the laws that bind all of us.  It is time for politicians to understand that they represent all of the people, not only the constituents who elected them.  It is also time for the politicians to understand that, if they cannot come up with anything better that populist moves, the sole objective of which is to gain re-election, they must stand aside, to allow people who are competent to manage the economy.

There is not much time left to pull this country back from the brink of African mediocrity.

The Inflation Imperative

 

A factor has arisen that is starting to raise warning signals in the minds of those who understand the theory of economics, and particularly in those minds that experienced the world immediately post World War II.  It seems that the view has come to be accepted that inflation is not only necessary, but also desirable.  There can be no more deadly belief than this.

Inflation is sought by the CEO of the large corporations, whose inflated salaries are padded by the big bonuses based on the (monetary) value per share, and whose welfare, in the short term, depends on the (monetary) earnings of the companies they steer.

Inflation is loved by those who speculate on the Stock Exchange, because it permits the belief of never-ending share price increases.  It is a fundamental of the brokers on the Stock Exchange, who give learned statements on the investment value of companies, while their brokerage fees are based on the monetary value of the shares in those companies.  The recent boom on the Stock Exchanges of the world were partly the result of too much easy money chasing a short-term fixed supply of shares, caused to a large extent by the misguided boost in the supply of cheap money by the central banks, in the belief (hope?) that the funds being created would be channelled to assist cash-starved businesses to keep alive, to grow and to create more employment.  In fact, those funds were diverted to a very great extent into speculative activities on Stock Exchanges, leading to a widespread perception that stock exchange activity could be seen as a proxy for economic activity!  The cause of the boom in share prices is the very definition of inflation:  too much money chasing too few goods.  The sales of the companies being chased were increasing, the costs were being held down, and the profits mushroomed, leading the worldly-unwise mid-twenties traders to buy the shares.  After all, the share price was increasing.  Right?  It is true that the share price was increasing, but was the company’s intrinsic value increasing?  In many cases, the answer would have to be no.  Sales were galloping forward at ten or fifteen per cent per year, in money terms, but the number of loaves of bread being produced, the litres of milk sold, were stagnant.  The number of man-hours expended in production were not increasing, and may even have fallen.  The growth in sales represented nothing more than the increase in prices.  Consider this:  in 1967, a three bedroom house in a good middle class suburb of Sandton sold for R16 000.  In 2012, that same house, now nearly fifty years older, sold for R1 870 000.  A top-of the-range BMW cost R10 831 in 1974.  The top-of-the-range BMW today would cost in excess of R1 800 000.  Admittedly, it has better gadgets, fancier trim, but 16 000% more value?  A two-litre bottle of milk cost R16 two years ago, today R24.  The cost of a driver’s licence renewal rose from R150 five years ago to R224 now.  The financial world is fond of the Government official rate of inflation, which, today, is stated at about 6,5% p.a., but ask the man in the street what his experience of inflation is.  The answer is likely to come back at between 15% and 20%.  The official rate of inflation has very little to do with what the people actually experience in their daily shopping.

What does this mean for investment (not the JSE variant, which is no more than an institutionalised form of slot machine)?  Investment means the purchase of productive assets by the use of saved funds.  The saved funds may be the money presently available, or it may be the funds that will be saved in the future from earnings in order to repay the loans taken today.  Investment happens when businessmen and –women see an opportunity to earn a profit by taking a risk now in the expectation that the investment made today will generate an increase in their earnings in the future.  They will not take that risk unless they are confident that the investment will continue to generate an excess of income over costs in the future.  That will not be the expectation when they believe, usually on the basis of experience, that the costs will gallop ahead faster than the increase in value of the production of the investment.  And that happens, of course, when the cost of staying alive is increasing more rapidly than the earnings of the people doing the buying.  That is what inflation does.  In the short term, people compensate for their shortfall in earnings by maintaining their desired level of expenditure by using credit wherever possible, but the day of reckoning will come, when the credit has to be repaid, and the asset has been consumed.  Credit is an inflation-generator of note.  The banks give out a multiple of the savings flowing into them, and the difference between the two represents an increase in the supply of money.  The classical definition of ‘inflation’ is ‘too much money chasing too few goods’.  The cycle is apparently endless.  The increased sales (or the maintenance of a level of sales not warranted by the earnings of the buyers) goes into the banks, to be re-lent at a multiple of the amount notionally saved, to finance the consumption expenditure.  More money is chasing the same amount of goods.  Unfortunately, the cycle is not endless.  It comes to an end, when manufacturers recognise that the end is in sight, or when the fiscus decides to step in and soak up some of the excess profits generated, or when Janet Yelland decides to warn the ‘investing’ public that stocks are over-valued.  Whatever the reason, the cycle stops, usually abruptly and often catastrophically, and the resultant cutback in consumer spending progresses speedily to retrenchments of bottom-level employees (any management consultant will tell you how management can never believe that the true source of cost increases is the incompetence and surfeit of management staff, usually at the top.  You need only look at the expenditure of Government on salaries and wages to see this!).  That results in an avalanche of spending reductions and job losses – the Negative Multiplier Effect, in which the loss of one job leads to the resultant loss of between eight and twelve other jobs, in a repeating cycle.  It does not require many months for the loss of one hundred jobs to result in the loss of ten thousand jobs, as the unemployed stop buying shoes, going to a restaurant for a pleasant meal or skip a haircut for another month, to stretch the available funds to buy another loaf of bread for the family, instead of the mince they would have bought last year.

Inflation is also dearly beloved by the fiscus.  Ever-increasing prices mean more VAT revenue, increasing wages mean more PAYE revenue, increasing profits mean more company taxation, increasing dividends mean more Company Tax revenue, increasing nominal prices mean more Property Taxes and Estate Duty.  All of this adds fuel to the fires of the Government, who are more than delighted to spend this increased tax revenue on things that buy votes and that add to their Swiss bank accounts.  Remember how smug Pravin Gordhan was when he begged for applause at his announcement that the annual budget was now more than one trillion Rands?  Of course, the increasing revenue flow makes the economy look stronger, particularly when compared with the artificially low stated rate of inflation, and that calls in more trillions of loans, often denominated in US Dollars or Euros, paying a rate of interest double or more of that for US bonds.  When the crash comes, as it surely will, those loans will attract interest at a much higher real rate, because of the crash of the SA Rand, and the repayment will cost fifty per cent more in Rand terms.  Does this scenario start making sense to you in the light of what is happening now?  The Government, unwilling to cut back on its wasteful pork-barrel expenditure, will continue to borrow, at ever-increasing rates in the face of declining security ratings.  The end result will be that our children and grandchildren will be repaying the debt that we allowed our Government to heap up on the hope that the cycle will go on forever.

What inflation does is debase the value of our real investments in the past.  It wipes away the benefits of frugality in our early years, making all of us poorer in later years.  It disincentivises saving, because we all know that R100 put away today will have the spending power of R1 when we reach retirement.  That knowledge says to us ‘Spend today on a high life, because there is no hope that you will be able to afford the little luxuries you forego today when you reach retirement.’  A current Liberty Life ad tells us of how the father of the founder had to live on a pension of R28 per month in 1965.  What it does not say is that the Legal Advisor of a major corporation started work in that year, with two university degrees, at a salary of R130 per month.  If that person were to start the same job today at a salary of R50 000 per month, the pension of Mr Gordon senior, on the same scale, would be R10 769 per month.  Not an exciting pension, but it demonstrates clearly the effect of inflation!  In order to earn that pension, at an assumed rate of earnings (by no means guaranteed!) of 8% p.a., his pension investment fund would have to stand at a current value of R1 615 000, or 103 500% of our young graduate’s annual salary in that year.  And don’t forget, two degrees is somewhat more than the start capital of most 22-year olds!

What inflation does is force us to pay more for the same value, more for our milk, more for our houses.  If you doubt the real meaning of that, look at the price of a Cadbury chocolate bar.  A year ago, a 200 gram slab cost R15, now a slab costs R22, and the mass is only 150 grams.  The cost has increased by 46% for a slab, and the value has decreased by 25% - our inflation rate of ‘6,5%’ has generated an increase of nearly 100% in the cost per unit of value in only one year!

Industrialists recognise the cycle of slowdown, far in advance of the Stock Exchange pundits and the Reserve Bank experts, none of whom seem to understand basic economics.  They understand that things are not likely to continue in the same blind, bling way.  They hold back on buying new productive equipment, believing that it is likely to stand at least semi-idle in the near future, while the cost of the capital invested continues to drain their resources, the reserves that they will need to survive the bleak years after the economic collapse.  They prefer to maximise profits now and hold onto the cash.  That, of course, aggravates the situation, but it is the prudent thing to do.  When the time comes, the cash will be available to acquire assets or even whole companies at knockdown values, while the less prudent, or less-experienced, will be banging on the doors of the banks for the funds they desperately need to keep in business.  The banks, in turn, will be banging on the doors of Government, demanding bail-out money, threatening the collapse of the economy, a situation that they were instrumental in creating, if public funds, in the form of investment are not made available (remember African Bank?) or lower interest rates or quantitative easing (read the inflationary creation of unbacked, fiat money), or preferably all three.  All of that, of course, will come from the wallet of the taxpayer, from you and me.

And the person at the end of the chain is the blue-eyed, rosy spectacle-wearing man in the street, who allowed it all to happen.

How to fix the South African economy

 

South Africa has become a complex mess of problems, and most of them point to a decline in its economy.  That factor alone will exacerbate the underlying problems.  A suggestion has been made by Stephen Lings that the country needs a growing and vibrant business sector to achieve the sort of employment levels that will solve some of the underlying problems.  That is self-evident to any economist, but how can that be achieved? 

There is no quick fix possible, but there are several fixes that are vitally important in achieving that objective.  Here are some of them, not in any order of importance.

Fix the drift towards Communism.  The opportunistic socialist policies that are the hallmark of the ANC Government have done much to destroy faith in what was a healthy capitalistic economy.  The Apartheid economy managed to survive through years of sanctions and governmental ineptitude because the businessmen had the confidence to invest in the future.  That confidence has waned dramatically.  The reason?  No intelligent businessman can miss the signs of rampant Communism at its worst.  A street in Pretoria is to be renamed after Mao Tse Dung, the man who did more to destroy the Chinese nation than any organisation since the British occupied China.  That follows the example of Durban, in naming a street after Joe Slovo, the former leader of the South African Communist Party and a man who explained to Stephen Mulholland, a renowned and highly intelligent journalist, how the SACP planned to survive in South Africa when Communism had failed everywhere else in the world.  “Communism needs a capital base on which to work,” he explained with his normal smile.  “South Africa has that capital.”  And what will you do when that capital base has been exhausted?” asked Mulholland.  “We’ll then change to another system!” was the smiling reply.  The examples of Cuba and North Korea, East Germany, Czechoslovakia, Poland and all the other former USSR Republics should be clear to the most obtuse leader of a nation, yet we, together with the other sparkling example of a failed African economy, Zimbabwe, persist in following the policies learned at the desks of Moscow, Havana and East Berlin.  With a Communist as Minister for Higher Education, how can we expect our upcoming business leaders to do otherwise?

The standard of education is critically in providing the basis for the business leaders of tomorrow.  That standard in South Africa is amongst the lowest in the world, and the cover-up of the ineptitude of the Government in improving it, by lowering the requirements for a matric certificate only serves to make it lower.  Granting a matric to a student who achieves a pass of 30% in five subjects merely ensures that our economy has a plethora of certificated morons.  Would you drive your car over a bridge that was designed by an engineer who achieved a pass of 30% in mathematics?  No businessman or –woman would want to take the chance of investing their life savings in a company which will have to employ those people!  South Africa has a good number of highly intelligent people.  It is the responsibility of the education system to foster that intelligence, to force those young people to apply their minds in the achievement of a certificate that really has value.

The policies and intentions of the Government are very clear to those with the experience to understand them.  The discussion about forcing commercial farmers to hand over 50% of the ownership of their farms to their workforce is a guarantees way to ensure that those farmers do not make the investments that will ensure that the farms will remain sustainable.  The policies of the Government in land restitution – the purchase or expropriation of farms and their handing over to unqualified Blacks – has worked wonders in the farming sector.  The number of farmers has dropped to a quarter of the total when South Africa was able to export quantities of food on a reliable basis.  That fall will continue for as long as farmers do not have the certainty that what they invest today will have benefit for their children in the next few decades.  That certainty is what grew the agricultural sector beyond any other African country, and it is the removal of that certainty that will bring it to the level of the agricultural sectors in that country our political leaders seem to admire so much for their political example, Zimbabwe. 

However, that is not the worst.  Any perceptive observer will see that the policy of redistribution – theft of the assets of the Whites – will be extended to other areas of business.  There has already been much rhetoric about the obligation of the miners to bring the workforce into the ownership of the mines.  How long will it be before the Government decides that the mines must hand over 50% of the ownership of the assets which they developed at high risk of their own capital to the workforce?  And then the banks, the insurance companies and, eventually, all the other businesses.  If one puts the question to a foreign investor, the source of a huge portion of the capital that has brought the South African economy to the stage of development that the ANC now proudly claims to be responsible for, the answer is remarkably clear.  The question “Would you invest in a company in which you will be compelled by Government edict to hand over a half of the ownership and control to the workforce?”  The answer “You must be out of your mind to suggest that!  Where else in the world can I put my money where the Government has an understanding of economics?  That is where I will invest!”

Add to that the almost incredible stupidity of statements made by Trade Union leaders.  A trade union is an organisation in which extravagant promises are made to the members to convince them that they should contribute to the equally extravagant lifestyle of the leaders, and then convinced that a strike will achieve those unrealistic promises.  Both the employers and the employees lose.  The only winners are the trade union bosses.  Although some part of the wage demands in the recent platinum mines strike were achieved, that was a pyric victory.  Only the workers, not amongst the smartest economists on the planet, could believe that the higher wages would not lead to massive job cuts.  Shafts will close, mining companies will withdraw from this country which has now been shown to be an unreliable investment destination.  The withdrawal of Gencor / Billiton from South Africa has benefitted only the few Black ‘investors’ who were able to move in on the assets that were sold at a cheap price.  Anglo American is withdrawing from its homeland, a completion of the move that started when it established a holding company abroad, Lonmin is planning on downsizing its South African presence.  And that is just in the mining sector.  SA Breweries saw the future coming years ago.  So did Old Mutual.  So has Sasol.  It is not necessary to list the dozens of companies that have understood the future of politics in South Africa, but even a complete listing would probably fail to include the other business potential that has fled these shores.  Paypal could have been South African, and so could Tesla, if only the Government had ensured that the leaders of those dynamic companies could believe that the results of their efforts and risk-taking would remain theirs in the future.  It is no coincidence that Australia, a country that lagged behind South Africa in terms of economic development two decades ago, should have far outstripped South Africa in economic growth in that time.  The secret?  It is twofold.  The Australian Government gave the assurance that there would be no Government-sponsored theft of the fruits of the work of the entrepreneurs who would work to build the economy, and that assurance attracted the brightest and best of those who left their homeland because they feared the communisation of that country.  The biggest still unanswered question in this regard is when will the Government read the signboards that have been there for twenty years?

If the Government sincerely wants to promote business and so the creation of jobs, the most important move it can make will be to clear away the logjams of bureaucracy that it has built up.  It is wonderful to have the most progressive (?) Companies Act in the world, but explain to the shack-dweller in Alexandra, who has looked for any work for the past five years, how that benefits him.  Numerous people complain that the registration of a company can take nearly a year!  One German businessman, has written eight letters to the Companies Office requesting a listing of the Directorships registered in his name.  His enquiry stems from a suspected fraud perpetrated in his name.  Unfortunately, no reply, or even acknowledgement, has been received over the past eighteen months.  In the UK, a company can be registered within eight hours, and the details of directorships are available on-line!  The dozens of meaningless reports required by various Departments of Government add significantly to the hurdles any businessman has to jump over each month before he can even start to think about running his business in one of the highest-risk economies in the world, and then he has to face the possibility that the South African Revenue Services will take it into its head to destroy his business in order to advance the interests of favourites!  These are not imaginary problems.  They are faced by the real businessmen and –women who work to create the jobs that Government talks of.

The problem of corruption continues to bedevil the business community.  That takes place not only in Government, but the supreme indifference of senior members in Government to finding a way to deal with corruption continues to promote.  When has a public trial of a Minister resulted in a lengthy jail sentence, a sentence that will be served in prison, not on the golf course?  The BBEE legislation has promoted a new brand of corporate corruption.  In order to run their businesses in anything approaching a profitable way, many businessmen have been induced to set up elaborate structures to present the BBEE front, with multi-level contractual relationships to ensure that the shares handed to Black partners will not be disposed of for a quick profit, in many cases foiling the Black shareholder element, and ensuring that the effective control remains in the hands of the businessman who has spent twenty years gaining the experience and qualifications necessary to make the business successful, while the new partner, who often has little to offer in the form of experience or capital or, most importantly, a good educational foundation for learning, has as his prime priority a new 7 Series BMW or a Range Rover!  In the past, a well-educated person started at the bottom and worked his way up the organisation over fifteen or twenty years before he gained the position, and salary, that is now demanded by twenty-five year olds.  That process, although frustrating, was the foundation on which the economic success of the nation was built, and the lack of that foundation of learning, education and experience is the likely cause for the failure of the economy that we are witnessing today.

Finally, for today, if we want to have an economy that will grow, we must have a Government that we can trust.  We must have leaders who accept the pronouncements of the Courts and the Public Protector, and give effect to them.  We cannot afford to have a Minister who appoints a Chief Executive of the SABC in direct contradiction of the requirements of the findings of the Public Protector, with the lame excuse that an independent firm of attorneys found that he was not guilty of any wrongdoing!  When did an unnamed firm of attorneys gain precedence over a Constitutionally-grounded Chapter Nine institution?  That action prompts any thinking person to ask the obvious question.  What does the executive in question know about the Minister to warrant that action?  We don’t need a President who presents red herrings instead of complying with a clear finding of the Public Protector.  He gained unjustly from the improvements made to his mansion and must inform the public of how much he is to repay, and when he will make that repayment.  The question is simple, the prevarication clear.  We don’t need a President who has remained under suspicion of having engineered the withdrawal of criminal charges against him by the exercise of political persuasion, and has failed to comply with a clear order of the High Court to deliver the (incriminating?) tapes.  Instead, we need people like the present Public Protector, with the power to enforce a finding in the same way as an Order of the High Court can be enforced, with the power to imprison those who don’t comply on the basis of Contempt of Court (yes, even the President!), subject only to an appeal to the Court of Appeal.  We need a rule that, when a Government Department or body goes to Court wastefully, the responsible Minister or Director General must pay the wasted costs personally.  Most of all, we need a Government that speaks the whole truth to its citizens, in a way that allows them to make a rational decision on the correctness or otherwise of the policies and actions of that Government.

Ministerial Disinformation - can we believe it?

Listening to the discussions of Ministers and Directors General is a formula for the development of ulcers!  The Minster of Energy is a case in point, with numerous platitudes and generalisations being given, and very little meat.

The Government’s determination to promote the development of shale gas deposits in the Karoo makes one ask whether the decision has been made as to who is to share in the profits generated by the granting of the licence.  In the light of numerous Government actions, such as the Arms Deal, the Police Headquarters lease, the purchase of the IEC offices, leads one to ask, in any major decision by Government, who is to benefit.  Shale gas and shale oil deposits were once considered to be the next great provider of energy.  However, experience has shown that the energy supplied by these deposits tends to decline at a rapid rate, far quicker than the always-optimistic projections of the oil companies seeking the licences.  The result is that they companies need to drill new holes, fracture a greater area, in order to maximize their profit from the licences.  And, of course, that activity has two major results.  More destruction is caused to the environment, and more land is rendered sterile for any other purpose.  The oil companies, when asked about the question of water contamination, point out that the amount of water and chemicals used in the fraccing process is very small.  That ‘information’ is purposely misleading.  By far the biggest damage likely to be caused by fraccing in the Karoo will be to the huge water resources held in the aquifers under the Karoo.  Those aquifers hold sufficient water to meet the needs of South Africa!  When the rock that holds them in place is fractured, the methane that is trapped in the shale is freed to migrate into those aquifers, destroying their potential for use for agriculture and other purposes for the indefinite future.  The value of that water, if applied correctly, far exceeds the short-term value of the oil or gas likely to be recovered.  In addition, the methane that will be released in incalculable volumes, is at least twelve times as effective as a greenhouse gas than is carbon dioxide!  When the rock structures holding that methane underground are fractured, the methane will be free to migrate to the surface and into the air, compounding the already critical global warming problem!  And once the rock is fractured, there can be no stopping this migration.  It will remain a factor that cannot be controlled for hundreds of years.  As to the promise of hundreds of jobs being generated by the fraccing process, on would be pardoned for doubting the reality of those promises.  Basic common sense tells us that the promise of the creation of jobs by an activity with a very limited life must be carefully scrutinised before we take the huge risk of destroying a significant national asset.

The President and the Minister have spoken of the need to ’develop a nuclear capability’.  Perhaps those two worthies can explain the rationale of the decision to dismantle the Atomic Energy Corporation less than twenty years ago!  That body was a centre of excellence matched by perhaps three other organisations in the world.  It was built up at huge cost to South Africa, and then, when the ANC took power, simply destroyed, leaving behind a shell that was reduced to stripping the copper wiring from the buildings to sell in order to pay the bills!  Perhaps the gullible public can remember the scandal when the plant that manufactured the seamless tubes for the nuclear fuel pellets was sold to the Chinese for sufficient money to pay the commission on the sale!  A plant that was valued at R600 million went to the Chinese for R16 million!  Now we plan to use the French to provide us expertise to build nuclear power plants.  Why the French, when they, in common with most other countries using nuclear power are reducing their dependence on that technology?  One is tempted to believe that the prime reason is the proclivity of the French to pay healthy bribes to the people in power!  The fact that no new nuclear power plants will be built in France must surely be a significant driver for the sale of the technology to the unsophisticated Governments of Africa (described by a senior official in one of the companies involved in the Arms Deal as ‘a bunch of jungle bunnies’!), where France has a reputation for unloading outmoded technology at unaffordable prices and on generous terms, not the least of those being the payment of considerable ‘inducement money’ to the officials who make the decision.  One factor that the Government seems to be unaware of is that a large proportion of the nuclear fuel presently changing hands throughout the world derives from the reprocessing of the nuclear warheads, particularly from Russia.  The actual production of new uranium is presently only about a third of the current demand.  Once the warheads have been used up, the cost of replacement fuel will go through the roof, and we will be stuck with yet another worthless ‘investment’ by Eskom!  Of course, the gullible public will wind up carrying the can, paying prices for electricity that have become and will continue to be a major deterrent to the development of industry.  One further point on nuclear power.  In the past, the question of disposal of radioactive waste was glibly passed over.  It was known then that the ‘disposal system’ comprised a shed in a remote area, packed with rusting steel drums containing highly toxic material.  The public should demand, as a precondition for any further nuclear power plants, that a comprehensive disclosure be made of the waste disposal provisions presently in place and projected for the future.  Nuclear waste disposal has been a major reason for the discontinuance of nuclear power plants in Germany, a country which is known for its honesty of Government.  If we have a much better system, let us and the rest of the world hear about it!

Nuclear Power Stations

Today’s Questions for South Africa

Nuclear Power Stations

One of the most pressing questions today is that of nuclear power stations.

The destruction of the nuclear power plants in Japan raises the question of how safe a nuclear installation can be?  There can be little question that nuclear power presents a variety of problems and questions that need to be answered before a country commits itself to the construction of new nuclear power plants or even the continued operation of existing nuclear power plants.  In the context of South Africa, the Cabinet decision in March 2011 to construct six new nuclear installations, only days after the disaster in Japan, must be questioned.  Some of the questions that need answers are addressed below.

Motivation

Nuclear power is one of the alternatives available for the provision of power to an increasingly power-hungry population.  Others include:

v  coal, which consumes large quantities of the Earth’s limited resources of fossil fuels, resources that could well be used for more valuable and durable purposes.  Oil, coal, natural gas and other similar resources are the primary feedstock for the production of a vast range of plastics, without which our modern civilization would be unable to function.  Look around you.  How many of the things that you use every day are made without the use of plastics?  That’s right!  Practically none!  Do you think it is right and good to burn this valuable resource, and do away with your car, shoes, clothes, cellphone and computer?  These reserves will be exhausted one day, and that day will be much sooner if we continue to consume them at a profligate rate! 

v  Solar energy, of which there are abundant and practically inexhaustible quantities poured down on us every day.  It is clean and leaves no harmful residue, produces no Earth-destroying bye-products.

v  Water power generation, which, unfortunately in South Africa as in many other developing countries, requires resources of water that are scarce, although generally not entirely absent.  This possibility has the valuable possibility of supporting agricultural development as an additional benefit of the construction of dams.

v  Wind power, with which South Africa is richly endowed along long stretches of its coastline and mountain ranges.  This, too, with the exception of a low level of noise generation which affects the immediate vicinity, has no undesirable side effects and bye-products, and is produced by an inexhaustible resource.

v  Wave energy, which remains relatively undeveloped at present, but which offers enormous possibilities, and uses a natural source of renewable energy in abundant supply along South Africa’s long coastline with, apparently, no negative effects and extremely limited environmental impact.

Given the wide range of options available, all of which have been available for a long time, the questions to be asked are Why nuclear?  Why now?

The answer to these might be found in the fact that the Cabinet decision to go nuclear was made only after a visit to France by a high-powered delegation, including a number of members of Parliament and Government of South Africa who have amassed enormous wealth in circumstances that might be deemed questionable, and would certainly benefit from a clear statement of source.  French and German companies were accused some years ago of securing lucrative munitions contracts by paying large bribes to senior politicians and Government officials.  The investigations into these transactions by the German Police were abandoned after the South African Police failed, over a number of years, to provide information.  The same South African Police abandoned the investigation in 2010, alleging that it would take too long to obtain the required information from the German Police!  Are these same companies, or their associates, involved in the provision of the nuclear power stations that the Cabinet now proposes building?  It should be recalled that the decision to place the large munitions contracts with companies that were previously not even short-listed was made after personal visits by the officials concerned to the companies.  Given the questionable past and present associations of several of those now involved, it would certainly be legitimate to ask the question if any party to the nuclear power plant contracts has been paid anything, how much has now been paid, and to whom?

Safety

Government and Escom claim that the Koeberg reactor is safe.  Escom states that it does not have the potential problems that the Japanese reactors, Chernobyl and Three Mile Island had, that South Africa is one of the most geologically safe areas in the world.  It does not suffer earthquakes.  Is that the truth?  There was a major earthquake south of South Africa, measured at 5,0 on the Richter scale, in January 2011, in Ceres, not very far from Koeberg, a 6,3 earthquake occurred in June 1979, followed in September 1979 by a 5,7 earthquake!  That does not seem to be very safe, does it?  The Milnerton Fault runs in a south-easterly direction from about 8km offshore of Koeberg, beneath the Milnerton, Cape Town, area and probably across the central Cape Flats and the north-eastern part of False Bay! 

It is well-recognised that the Japanese have some of the most efficient managers and planners available.  The Western world has long viewed the Japanese model of management with envy.  Yet the Japanese reactors have suffered devastating damage, with a major nuclear disaster still looming.  The proponents argue that the disaster is the result of natural causes that cannot happen in South Africa.  The Japanese knew that these causes were a threat to their nuclear industry, yet, with all of their wealth, planning and management efficiency, the disaster did happen!  The short version of the story is that the Japanese built the reactors to be as safe as they could make them in an earthquake. 

The disaster that destroyed the reactors was not an earthquake directly, but a tsunami that resulted from an earthquake!  Nuclear reactors, because of their need for massive cooling capability, have to be built next to large bodies of water, i.e. next to the sea, and that is where tsunamis occur.  It is quite possible that a large shift in the Earth’s crust occurring in the middle of the Atlantic or even in Patagonia, could unleash a tsunami larger than the one that destroyed the Japanese reactors!  How do you build a nuclear plant to withstand a wall of water forty metres high, travelling at a thousand kilometres an hour?  The short answer – you can’t!

When a nuclear reactor fails catastrophically, as those in Japan, Chernobyl and Three Mile Island did, it has the potential to unleash a cloud of radioactive dust that enters the wind systems of the world, and contaminates very large areas.  The contamination is extremely long-lived.  The Welsh farmers, on the opposite side of Britain from Russia, are still unable to sell the meat produced by the sheep grazing on the contaminated land, a quarter century after the Chernobyl melt-down!  This is absolute evidence of the high level of danger to the entire world posed by the nuclear power industry.  And this danger is not confined to operating nuclear power stations. 

The nuclear industry has not yet found a way to deal safely with the radioactive waste of the plants.  This waste continues to emit heat and to require cooling systems for many years after it is put into storage.  When the cooling systems fail, as they have done in each of the nuclear failures, the result is radioactive contamination.  The risk is not confined to nuclear power plants, but also to their waste dumps, and the risk continues decades after the power station is switched off, decommissioned and even demolished!  A glance at the evidence of the incapability of Escom to ensure its continued capability to produce electricity, its prime responsibility and the reason for its existence, must surely bring into question its capability to continue to keep the nuclear waste safe decades after it has ceased to fulfil any economic purpose!

Any nuclear power station, or any other enterprise, is manned by people.  Not only are these people prone to making errors and failing to foresee problems, but they are there for the money.  We have seen how teachers go on strike immediately before exams, how the Defence Force goes on strike, the Police, the medical profession, and all the other so-called essential workers.  The nuclear workers, at any level, are subject to the same drives and motivations.  What is to stop them going on strike and holding the entire country to ransom?  This threat is not confined to the employees of the nuclear facility.  It includes transport companies delivering goods to the plant, maintenance workers, suppliers of pumps, taxi drivers who transport the plant workers, road maintenance workers, and so on.  The list of people who could use the vulnerability of the plant to any sort of failure for their own benefit is practically endless.  It is highly probable that, some day, these workers will be motivated to use their work stoppage ability to hold their employers to ransom.  The result may well be a nuclear catastrophe!

Economic Benefit

One of the claims made for nuclear power is that it is relatively cheap.  No accurate study proving this has been published by Escom or the Government, and one may be pardoned for doubting the figures supplied for the construction cost and the operating costs.  Very few projects in the New South Africa have been completed at the stated cost, or even at 150% of the stated cost.  Part of the reason for this is that large projects are prime targets for corruption, which explains the plethora of large, often unnecessary, projects promoted by Government.  Another part of the reason for cost overruns is that there is a severe lack of qualified and experienced persons with the required skills in the country.  A third part of the reason is that contractors often have to carry a large, unproductive BBEEE component, as well as having to comply with a multiplicity of unproductive Government requirements and form-filling in order to get the contracts in the first place, which pushes their cost base sky-high while, at the same time, displacing those scarce skills that could do the job effectively.

Part of the economic benefit to be derived from a large project is the industrial activity required to produce the components that go into the project.  Unfortunately, in the case of South Africa, a large part of the cost of these components, and so the industrial activity and the jobs it brings, will go abroad.  For example, the tube manufacturing plant that produced the fuel rods for the Atomic Energy Corporation was sold by the ANC government to China for a knockdown price, of which only an amount sufficient to cover the commission of the (ANC-related) selling agent was ever paid!  The atomic Energy Corporation was effectively disbanded, thereby dispersing the extremely valuable expertise it had built up in the nuclear field at huge cost to the country.  Even that expertise would have had to be put under a microscope before the Cabinet could decide to proceed with the commitment to construct a whole series of nuclear power plants.  Without that expertise, they would have had to rely on the expertise of the company supplying the plant.  Or, perhaps, on the money of that company.  It seems unlikely that even the amount of work and products to be supplied locally during the construction phase of these plants will justify the massive expenditure needed for them.

One of the objections to the other forms of (renewable) power generation is that they are expensive in terms of capital requirement.  Perhaps, from a macro point of view, this is not really valid.  The job creation caused by the local manufacture of the components under licence will likely be substantial, and may lead to a new export industry.  The people newly employed will move up on the income scale, making job space available for those below them.  At the end of this process, many of those presently receiving welfare payments will be able to move into formal employment.  The saving of those welfare payments and the taxes paid by the newly employed are never taken into the calculation but are, without doubt, substantial.  The counter-argument to this is that the people to be employed will not be those receiving welfare.  That is true, but their employment in higher-level jobs will free up at least the same number of lower-level jobs, and this effect will cascade down the ladder of job levels to the lowest.  It will open opportunities for new entrants to the job market, and will assist South African industry to enter new fields of opportunity for exports to replace those exports lost to the ever-increasing cost of South African labour.  We must not forget about the Multiplier Effect of new job creation.  This is the effect created when a new job permits the worker to buy a newspaper each day, a new outfit of clothes, send his or her child to a better school, take a vacation at the coast, or to set up a small business to supply materials, parts or services to the new activity, thereby creating a chain of job creation that has been shown to amount to as much as eight to twelve times the number of jobs directly created.  Present Government efforts seem to be aimed mainly at the ‘poorest of the poor’.  This sector of job creation tends to have the lowest Multiplier Effect.  It is much more effective in economic terms, as well as in total job creation terms, to create a high-technology job than one moving gravel on a road repair site.

Escom aims to increase the supply of power to South Africa by the construction of nuclear power plants.  There is a shortage of electricity in South Africa.  It may be possible to achieve the same effect as the generation of power by a nuclear plant simply by subsidising, to the same capital cost, the purchase of energy saving appliances, plant and equipment by the public.  Many factory owners have found that the cost of power to their plants is almost identical regardless of whether coal, gas, oil or electricity is used.  The small difference in cost may be the factor that induces the choice of a higher polluting source over a low polluting source.  The same logic may be applied to a subsidy in the cost of electricity for the switch-over to more efficient methods of using the power, to make that switch-over economically attractive to the factory owner.  It is likely that such a program could easily reduce the need for at least one of the proposed new power stations.

Alternative Power Generation

Although the capital cost of an array of solar panels equivalent to the capacity of a nuclear power station may be high, if that array is broken down by the number of houses in the country, the cost will not be for the direct account of Escom.  In Germany and elsewhere, there is a program under which private persons install their own solar panels on their homes and factory buildings, and sell the excess power they generate to the central supplier.  A study done in German has revealed that many householders have recovered the capital cost of the installation from the sale of their excess power over a period of as little as four to seven years, depending on their own usage.  That is a good return on investment in any terms, and it could be made better by making it tax-free!  Subsidising the capital cost of this installation, in return for a lower selling price of the electricity produced, together with an agreement with financiers to fund the balance, could make it available as a long-term investment to even poor communities.  This could be the start of the democratisation of electricity production! 

The argument against the use of solar or wind power is that it produces power only when the sun shines or the wind blows.  However, that power can be stored in a variety of ways.  For example, the excess power generated during the sunny or windy times can be used to pump water into high-level storage dams, to generate power in a water-powered system in low-sun or windless times, or it could be used to store heat in the form of molten salt, to provide for steam generation at night.  There are many such systems already available and tested.  They need only to be used.

What do we, the public, need to know?

There are many questions still to be asked, but, possibly, the most important are included in the following list.

v  Why do we need nuclear power?

v  What will the real cost be?

v  What are the alternative sources of power?

v  What is the cost of the alternative sources of power?

v  Why has a decision not been made to apply these alternatives?

v  What methods have been considered and adopted for the conservation of the existing electricity supply?

v  What are the real time lines, and how will they be met?

v  Who is going to benefit from the contracts?  Are those in a position to decide on the provision of the nuclear power stations willing to undertake to refund to the public coffers any profit they may subsequently be found to have made from the process that they have not publicly declared up front?

v  What are the real risks of the project, for the full life of the possible risk?  How will these risks be countered?  What assurances will be offered in this regard?

v  What have we not been told?