Good news about economy, but policy uncertainty in gas and petroleum – BLSA

There was good news last week about the South African economy, with the Bureau for Economic Research now believing that growth will be 2.2% next year, but much still needs to be done to move us closer to the 5% per year growth level that would enable a real difference in the welfare of South Africans.

Busisiwe Mavuso, CEO of Business Leadership South Africa (BLSA), says in her weekly newsletter that it was pleasing to see an upgrade to our economic growth outlook from economists at the Bureau for Economic Research (BER), which is well ahead of the Reserve Bank’s expectation of 1.5% and the IMF’s at 1.2%.

“I expect that we will start to see more upgrades as reform momentum continues. The BER cited the solid progress in dealing with our logistics challenges and the ability of Operation Vulindlela to speed up reforms.”

Mavuso points out that improved growth is the fruit of the reform efforts of the past few years, which largely overcame load shedding, helped ease access to visas for skilled immigrants and now easing our port and rail backlogs, although a lot still must be done to stimulate economic growth of 5%.

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Policy uncertainty in gas and petroleum sector affects economy

However, policy uncertainty in the gas and petroleum sector shows how far we still have to go, Mauvo says.

“French energy company TotalEnergies quit its two large offshore gas fields, Brulpadda and Luiperd, last week where it made major discoveries back in 2013. At the time there were major hopes that the discoveries would enable South Africa to develop gas independence and tap the energy source to transition from the relatively more polluting coal.

“But now TotalEnergies says it is too difficult to economically develop and monetise the resources for the South African market. While the company did not say it, I am sure that ongoing regulatory uncertainty is a major contributor to that difficulty.”

Mavuso says since TotalEnergies’ discovery, there has been a series of dramatic flip-flops over regulating the gas sector. “Government at times announced it should get a free 20% ownership interest in all gas projects, only to then abandon amendments to the Minerals and Petroleum Resources Development Act.

“The department then introduced a new bill to govern gas exploration and development which was passed by parliament in April this year, that experts said violates the constitution in several respects. It reintroduces the state’s right to a 20% interest in new projects at exploration and production phases.”

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Too much power for the minister?

This allows the minister to order companies to sell a percentage of petroleum to any state-owned company designated by the minister. Mavuso says for any company looking to develop gas or petroleum resources, this is a new source of considerable uncertainty.

“The bill is sitting on the president’s desk for ascent and it would be better to send it back to parliament for reworking to enable companies to take on the huge risks of developing major new gas resources.”

She emphasises that uncertainty remains the theme of the minerals sector after two decades of decline. “The lack of exploration activity means the industry is in a sunset phase unless there is a considerable change in how the sector is regulated. We still have among the best mineral reserves in the world, yet we are steadily falling behind many other jurisdictions in the economic contribution these reserves can make.”

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Effectiveness of the legal system also a problem for business and economy

Mavuso says another important issue for the business environment is the effectiveness of the legal system. “I have written often enough about crime and corruption, but a further frustration is simply the efficient operation of our courts. The Johannesburg High Court, the busiest commercial court in our country, can now only give court dates for commercial litigants over a year from now. Road Accident Fund litigants will have to wait over four years.

“The reason is one of capacity as there are simply not enough judges to hear cases. Deputy Judge President Roland Sutherland has taken to pleading with the legal community to provide experienced lawyers to help deal with the backlog on a pro bono basis. The swift resolution of commercial disputes is key to business and the backlogs in our courts mean investment and other commercial decisions get held up.”

She says this is a further dampener on economic activity that will require a concerted effort from government, along with funding, to resolve. “While there has been good progress in getting on top of crime and corruption, such as the legislating of the investigating unit at the National Prosecuting Authority before the election and the president signing amendments to the Independent Police Investigative Directorate Act last week that strengthen the institution to deal with police corruption, the overall effectiveness of the rule of law depends on our courts.”

Mavuso says there will of course always be strengths and weaknesses that affect our economy and economic outlook. “Our challenge, in working with our government partners, is to shift the dial more toward strengths in our economy. That will result in further improvements to the growth outlook, which ultimately leads to more economic activity, jobs and taxes for government to use in improving social services.”