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Interview

with Robert Llewellyn Jeffrey, Managing Director and Senior Economist, Econometrix

23.03.2012 / Energyboardroom

The South African economy has traditionally been a mining-based economy. What role do we then see the oil and gas, and energy sector at large, playing as a macro-economic growth driver for the country?
It is a critical sector. At the end of the day, you need energy to raise standards of living and to create economic growth. While there is energy to drive vehicles in most countries, there is also electricity which has to be generated to drive businesses. The basic fact of any economy is that without growth in energy and adequate reserves, you cannot have economic growth. This is one of the most critical items and it is no different in South Africa.
When it comes to the various sectors, one needs to understand that over 80% of our electricity is still being generated from coal. We do import certain amounts of gas and there are limited quantities of gas available in the country. Further to that, there is some hydro- and nuclear power too.
We do not have the benefit of being in Europe, where you can power into a grid and take electricity from anywhere else. South Africa needs to be independent in respect of its electricity supplies and must generate power locally or from nearby territories.
We have a shortage of electricity and one should ask oneself where the future supply will come from. At the present point, apart from the coal-fired power stations of Medupi and Khusile, there are no further coal-fired power stations planned and the intention is to move towards renewable energy, which will be primarily wind and solar driven. While everyone is in favour of renewable green power, we raise questions about its reliability to power an industrializing and mining economy.
It could in our view become a very costly way to go if one were to become over reliant on development of these sources of electricity at too early a stage. Moreover at this stage there is probably insufficient additional electricity generating capacity being built to provide baseload power necessary for the mining and industrial economic development of the country. In our opinion the investment in these renewable sources must go ahead, however at the same time the country should seriously consider another coal-fired or nuclear power station. While renewable energy will only be able to take over in the longer term. it is absolutely essential to have reliable base load power now. Every home, office building, etc. should, where possible, have solar power. Industry cannot rely on solar power but needs reliable base load power from either coal, hydropower or gas.
Unfortunately, electricity is a necessary but not a sufficient condition of economic growth. You still need the policies in place to foster investment capable of building future economic growth.
We need to look carefully at the economic development required. There are some who believe that we can have a service-oriented economy. Firstly, South Africa has always been an importer of services although it does well in the tourism sector. Secondly, service sector generation is a skills-based industry while we have high unemployment amongst the unskilled. We need to focus on developing our manufacturing and mining base and the infrastructure to support it. Our wealth is in the mining industry where we have substantial reserves and a number of mineral resources. We need to develop these resources and add value to them.
It is no secret that mining and manufacturing are energy intensive industries. This means that we need to focus our needs on greater energy development, which obviously includes electricity. South Africa has suffered –for a number of years- from what we call jobless growth. Part of the reason for that is that we have had high growth in our service industry and government sector but insufficient growth in our manufacturing and mining industries. In addition to all that, the mining industry is of critical importance to balance economic development, because it constitutes over 60% of current exports. In addition, our current account is critically dependent on having sufficient manufactured goods to export. We need to develop our mining and its beneficiation, while also developing our industrial economy.
There is also a view that we need to focus on smaller more labour-intensive units. However, major investments are also required in certain primary industries in order to assist in the development of other sectors. This requires overseas investment and generally involves large enterprises. They become focal points for smaller business units, which are so essential in this economy. It is through the growth in major enterprises that you very often generate development in smaller and medium-sized business units. If you put in a new mine and develop beneficiation of the mineral output, there is a whole spillover effect in the economy.
A lot of people also think that we can move to a scenario where we use less electricity and move into lower energy usage. While we must certainly do that from an environmental point of view, Southern Africa –at the end of the day- has very high unemployment and poverty levels. The only way to alleviate poverty is not through temporary measures such as social grants. In our country, these grants are paid for by a very small tax base. Therefore, we need to expand this tax base by creating employment opportunities. In order to have this, one needs economic growth.
An independent report by Econometrix assessed the economic benefits of the shale gas potential in the Karoo region. The late Tony Twine, a respected economist in the industry was the lead economist on this project. The report did not discuss or attempt to assess the environmental impact of these developments. We recognize that this impact needs to be assessed. Our task was to set a benchmark for the potential of the Karoo shale gas deposits. . As a separate exercise, one then needs to assess the potential environmental costs and measure these against the benchmark benefits.
When it comes to the economic benefits and by looking at the numbers in the Karoo, the estimates shows a range of USD 11 to 30 billion per annum as a potential contribution to GDP. This may not be particularly significant in international terms, but in South Africa this represents between 3 and 7% of the GDP. This could create employment for between 200,000 and 700,000 people, representing between 2% to 7% of the employment numbers in this country. The impact is enormous when you recognize that we have over a 26% unemployment rate. We can even take the number 700,000 a little bit further, taking into account the very high dependency rate in South Africa, which is over 4. Thus, when we talk about 700,000 jobs, we are talking about putting food on the table for roughly 2.8 million people. This is an enormous contribution when one recognizes there are 14 to 15 million unemployed people. This is a number any government needs to look at closely.
The same comment can be made about additional power stations, which we believe are an essential component to delivering base load power over the coming 10 to 20 years before other sources of electricity generation come on stream.

Hypothetically speaking, if the Karoo exploration takes place and production starts in 2020-2025, will this for example eliminate the need for additional coal-fired power stations as you mentioned?
First of all, exploration has to be done safely. An environmental study needs to be conducted to see if we can go ahead. There would be a long phasing-in period while, in the meantime, we will be short of electricity. This shortage will grow between now and 2018 to 2020, even with the contribution of Medupi and Khusile. It could be sufficient if we have low economic growth and rising unemployment. It is necessary to put in place carefully planned policies if we are genuinely aiming at some real high economic growth in the right sectors, which are primarily the mining and manufacturing sectors. This, of course, is all subject to the government fostering an environment that promotes investment in these areas, the current potential of necessary usage of electricity is likely to exceed our supply capacity, right into the 2020s.

Others have high expectations from the gas fields offshore, such as Ibubhesi and Kudu. Do you see the potential to pull in those resources?
Absolutely and if one can, one should look at it. But at the end of the day, these represent fossil fuels too. When talking about coal-fired power stations however, it needs to be said that one can clean up such processes too. We are encouraging exports of coal, but where are they going? They go to countries that utilize the coal to generate electricity and add value to their products. In the process, however, they are polluting the atmosphere in their countries while enjoying the benefits of the value-added products. We can control coal and ensure that we also have cleaner processes in South Africa.

Coming back to the energy and electricity mix, you already mentioned that coal now represents over 80%, further complemented by other sources. In this sense, Mozambique plays a key role as a gas supplier, where Anadarko has recently even shown great enthusiasm to further raise this potential. Will this impact what we see happening in South Africa?
I would say those may well impact on future coal-fired power stations, but there needs to be certainty of supply. Apart from the policy side, the two things that are essential for industrial development are the quantum of energy that is available and the sustainability or regularity of supply.
The opportunity in South Africa is to grow and export into the main growth areas, which are clearly China and India. If we were to do that, we would be able to reach a higher rate of economic growth. While Africa has been growing at 5 to 6% in its high growth areas, growth in South Africa only reaches 2.5 to 3.5% now. It will be lower in the future, unless we address our energy problems and some of the policy issues.

A key issue with the energy shortage is the resulting electricity tariffs. How do you see the energy mix and the aforementioned developments impacting the tariff scene?
One needs to have electricity generated at a fair price, giving a reasonable return on one’s capital. In the total development of the South African economy however, we are very dependent on certain energy-intensive sectors. The service sector is what it is, a service sector. The goods producing sectors need to be globally competitive, both to prevent imports into this country and to foster exports. Globally, if you want volume in these industries, you need to be amongst the lowest cost producers. There is very little point to be charging excessive electricity tariffs taking into account that we need to be globally competitive at the end of the day.
When one is short of electricity, the industries that really need the electricity will be neither the service industries, nor the consumer. What one needs to do is to keep focusing on supplying the industries so that one can keep people employed and producing the goods for the consumer, who can then pay for electricity and new plants thereby reducing imports and increasing exports. You need to create the employment generators and people who will put money in the pockets of the consumer. There is a whole chain of supply which by and large starts with electricity – this is where the value-added process starts. The first value-added process in the country is actually adding value to coal. The entire logistics system also needs to be looked at. For example, for this, you need to have the most efficient rail network possible. You need to bring the product from the producer to the consumers.

Infrastructure sure has been a hot topic this year, starting with President Zuma’s State of the Nation address. A lot of resources will be committed to creating new infrastructure. Is there still infrastructure lacking that hampers some of South Africa’s growth potential?
The mere fact that Transnet is spending so much money on its infrastructure is a point in that direction. It is exactly the same for Eskom, while there are shortages in the port infrastructure as well. It all goes back to the fact that, in order to run the economy, one needs to have: the correct policies, the correct infrastructure and the right focus on a number of key industries which create more employment for unskilled or semi-skilled labour, which means focusing on the manufacturing and mining industries.

When it comes to policies, Minister of Trade and Industry Rob Davies was rather enthusiastic about the potential that the new Special Economic Zones (SEZs) may bring. Is this a step in the right direction?
This comes down to the New Growth Path –South Africa’s economic growth plan- which has had its focus on mining and manufacturing. It is now a question of implementing this plan, which then comes back to developing the right infrastructure, developing certain areas, and so on. It is correct to have such SEZs, although one still requires other policies which are essential to drive progress. For example, when it comes to labour laws, one needs legislation that allows flexibility too. If one looks at that, one needs to consider that the legislation is actually in favour of the employed rather than the unemployed. Yet, there is a pool of workers out there that need employment. At present, the unemployed are not really being catered for and the laws are actually favouring the employed.

Econometrix has been active in various projects in its 25 to 30 years of history in the industry. Is there any project you particularly look forward to becoming engaged in through the company?
We engage in projects encompassing many business aspects, ranging from financial and government institutions to smaller and larger corporations. Our goal has always been to give an independent view to what we consider as the real economic arguments. We pride ourselves in being able to do so, and also believe that one of the major reasons for this is to focus on the real economic issues that affect the South African citizen in the end.

Would you like to share a final message with our international readers?
We look forward to working at an international level with international partners and clients. We believe that the knowledge and skills that we have developed are applicable in the broader African region, as well as in other development areas of the world.

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