Political economy

Guns vs. butter

The DA muses on what the electricity crisis reveals about government’s priorities.

Johannesburg - 

One of the first things that any economics student learns is the "guns versus butter" model. It poses the scenario of a hypothetical country choosing between two competing options on which to spend its finite resources: guns (spending on defence) or butter (spending on citizens' immediate needs). This model cannot adequately capture the many complex choices facing a developing country such as South Africa . However, it does make a valid and pertinent point about the electricity crisis we currently face.

When one looks at the chronology of government policy-making, it appears that when the hard choices needed to be made, the decision was for guns before butter. More specifically, the government chose to spend billions of Rands on arms that we do not need (and in some cases do not have the capacity to use) instead of adequately investing in infrastructure to lay the basis for long term economic growth. This infrastructure includes diverse aspects, such as our road networks, water purification and sewage systems. Electricity generation and distribution is currently the most topical case in point.

As far back as 1990, the former government knew that South Africa would not have the capacity to generate enough electricity by 2007 if no power stations were built. The new government certainly knew about impending crisis at least from the mid to late Nineties.

In 1998, the Department of Minerals and Energy released a detailed energy review. It explicitly warned that unless "timely steps [were] taken to ensure that demand does not exceed available supply capacity", generating capacity would reach its limit by 2007. It added that the next decision on supply-side investments would have to be taken by the end of 1999. This review was ignored.

Instead of ensuring the development of the required infrastructure, the government instructed Eskom to stop building power stations in the vain hope that the deregulation of power generation would encourage private investors to build the stations.

I must stress that deregulation, in itself, is not a bad thing. If it had been implemented with the requisite foresight, we may not be in the quagmire we find ourselves in today.

The problem was that Government did not consider the barriers to entry for independent producers in this market. One barrier was extensive red tape which held up private sector entry. More importantly, as Andrew Kenny has noted, the price of electricity was too low for private investors to get a decent return and the result was that no power stations were built.

Meanwhile, following a similar review of defence needs in the late 1990s, government committed to a massive and costly revamp of South Africa 's armaments complement, despite there being no obvious threat to our country's security.

In 1998, Cabinet announced the names of preferred suppliers in an arms deal with a projected cost of R30 billion over twelve years (this has now more than doubled). This contradicted the advice of many of South Africa 's defence experts, and cost significantly more than their preferred alternative.

Rumours of more sinister motives for entering into the contracts began circulating when it emerged that Tony Yengeni had received a discount on a Mercedes Benz from a company that had benefited directly from the arms deal. As Chair of Parliament's Joint Standing Committee on Defence, he had played a key role in the tendering and bid adjudication process.

When Mbeki and his cabinet colleagues moved to block any investigation into the arms deal, it became clear that the Yengeni discount was merely the tip of the iceberg.

And while the ANC government was committing to this deal, it dismissed and ignored warnings of the looming energy crisis. In April 2003, (former) DA MP Brian Bell was informed by an Anglo American official that company mines were operating at their lowest production capacity, following an instruction by Eskom to do so.

This prompted Bell , in May that year, to raise the early warning of a crisis during the Minerals and Energy budget vote in Parliament. His warning was ignored. In fact, Bell was chastised at a reception later that day by former Minerals and Energy Minister Phumzile Mlambo-Ngcuka. She told him that she had been assured by Eskom's CEO that the utility "would never run out of power".

At the beginning of 2006, the first power cuts began-and were greeted with bizarre and conflicting explanations by Eskom as well as Public Enterprises Minister Alec Erwin. Erwin even went as far as to say, on the eve of the 2006 local government election, that the Koeberg power station had been sabotaged by the ANC's political opponents. He quickly retracted the allegation once the polling stations had closed.

In that same month, responding to questions from the DA in Parliament, President Mbeki (unconsciously echoing the denials of a previous head of government, B.J. Vorster, during the 1976 Soweto riots) assured Parliament:

"There is no crisis...We shouldn't frighten ourselves too much...We shouldn't be [sending out] threats to local and foreign investors that something disastrous is going to happen with regard to energy and therefore, they must be on their toes."

He added that he saw "no purpose" in setting up a commission to investigate government's failure to meet South Africa 's energy needs.

Within months, these words came back to haunt President Mbeki, as the euphemistically termed "load shedding" began to affect homes and businesses across the country. By late 2007, Eskom admitted that the cuts were here to stay. Projected costs to 2025, according to its CEO, would be in the order of an astounding R1 trillion.

The President has now apologised for the crisis. Alec Erwin has today conceded that government did get it wrong, but that the country was "a victim of its own success" and the government could not have anticipated the increased demand for electricity. This is a blatant untruth, given that Cabinet knew in 1998 that more power stations needed to be built if the economy was to grow at a projected rate of 4.2%.

The fact of the matter is that government refused to heed advice that we would face crippling power shortages, unless something was done. Why the government chose to ignore the impending crisis is still not clear, but whatever the reason, there is little doubt that the government prioritised guns over butter.

The armaments industry is notorious throughout the world for its culture of graft and kickbacks. Was it this that lured the government into making arms its capital procurement priority? The arms deal scandal, that will not go away, suggests that personal interest drove public choices and that the country is now paying the price. We will not rest until the full truth emerges.

South Africans must now face the reality of power cuts becoming the norm at least until 2013. Our role, as the official opposition, is to hold the government accountable, and to propose alternative policies. We combine this approach to every major issue in South Africa , and we are doing the same with the energy crisis.

Next week, the DA will launch a comprehensive energy plan that sets out innovative and practical proposals to help alleviate the crisis in the medium to long term. This will go much further than Cabinet's announcements today. Our ideas will not solve the crisis completely - it is too far gone for that - but, if implemented, they will go a long way towards dealing with the most acute problems generated by power shortages.

As difficult as it is, we will all have to accept that the electricity cuts will remain for the foreseeable future. We must pull together as a nation to deal with the short term emergency, by doing everything we can to save electricity.

Yes, we must hold the government accountable for its decision to choose guns over butter, and find out why it chose to prioritise arms procurement over the need to ensure that we had enough electricity generating capacity. But, as South Africans, we must once again demonstrate our renowned ability to turn a crisis into an opportunity.

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