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Aug 03, 2012

National interests are barriers to regional energy integration

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While trade between South Africa and the rest of the continent is growing, it is still low, compared with other regions in the world. South Africa’s economic prospects lie firmly in how the regional question is dealt with.

Concentrations of economic growth in different centres in various countries in the region will slowly lead to stronger regional ties, where isolated activity becomes increasingly connected because of expansion and the desire to trade goods and skills between different countries.

The momentum of growth will force the consensus that road, rail or other types of infrastructure will have to be built. But, as usual, somebody has to put up the money upfront.

In our region, those with the money are increasingly becoming a mix of national governments (some of whom are reaping the benefits of commodity booms), foreign States (and their national companies), multilateral agencies, private firms and domestic or international investors who can foot some of this bill.

But there could be distortions: infrastructure linked to facilitate resource extraction and the transportation of goods may gain preference over pure public-good type of infrastructure that is of value to the general populace rather than a limited ‘audience’ of economic agents.

Angola and Mozambique may demonstrate an incessant surge in gross domestic product (GDP) figures but such windfalls may not translate into apportioning investments into general public goods but concentration around expanded resource exploitation.

The proceeds to national coffers is a function of how well resource rent deals are structured (now becoming an issue of concern for Mozambicans, who feel gas contracts are not the optimal resource rent deals and want them revisited).

But, more importantly, good governance ensures proceeds go to the right things and the right people – misappropriation of windfalls is always a danger.

The state of national coffers and the spread of wealth among the populace are the great enabling factors for bold leaps into large domestic and transnational infrastructure. It breeds confidence among both internal and international players looking to support or further new markets.

The Southern African region, though, is a mix of rich and poor countries. Not all the national coffers nor personal incomes of its citizens can afford the infrastructure development of plant and transmission and distribution lines. Countries with a bigger balance sheet, strong sustainable growth trends and the capacity to carry the bulk of the cost burden can help tackle some of the infrastructure backlog. They can carry the risk because growth in their own countries will generate sufficient resources to sustain the long-term financing and maintenance costs of transnational infrastructure. A poor country sits with the resource but lacks bankability and offtake agreements of sufficient scale to sustain the bulkiness necessary to make options economically viable.

In the region, big economies and international assistance through multilateral and even export and import banks are necessary. Energy integration is but one aspect of the economic integration puzzle. Energy solutions offer two complementary drivers of integration: investment flows act as stimuli of local and national economies, and energy security itself facilitates investment in plants and extractive industries, and allows small and large entrepreneurs to engage productively and efficiently in trade and commerce.

Theoretically, all South Africa’s, as well as sub-Saharan Africa’s, electricity supply, as a case in point, can be met by the unlocking of large- and small-scale hydro projects in the region. There is also gas, biomass and non- hydro renewables like wind and solar – a comprehensive low-carbon solution stares us right in the face but it will not be realisable because of political and other barriers.

National preference can slow transnational projects because every country has its own domestic development challenges.
There is internal pressure to focus spending domestically and stimulate GDP growth in so far as domestic spend is insulated from leakage. This is a highly politicised issue and partially explains why South Africa’s spend on large infrastructure has domestic pri- macy and not a regional focus.

In any case, special interest groups within a national political economy would put pressure on government for spend to be localised if they see themselves as key beneficiaries of such spending.

Energy, too, is notoriously a subject of security concerns. High dependence on politically vulnerable and unstable countries not only heightens project risk but also creates anxieties about whether a secure line for the transmission or transportation of energy can be provided by the source country.

The buying country itself may have to bear the costs of extra security – through the private sector or its own military, as the US does to secure sea routes for the transportation of oil. In the final analysis, while regional energy sources offer great promise to lower dependence on costly domestic options, these will not be realisable without long-term economic sustainability and diversification by different regional member States.

Booms that are distorted by optimum and selective commodity export performance do not speak to the general economic health but specifics. This is the pincer grip of uncertainty that holds the entire development of transnational infrastructure in the region at ransom.

The bigger economies have their own domestic political economy and vested interests that tug investment allocations towards the domestic agenda as they have no readiness yet to be that generous nor so blindly egalitarian against their own priorities and constituencies.

Therefore, the flush of investments will be centred within the domestic economy and the outflow towards other regional States will be measured in terms of the net returns and benefits to the national economy and private players concentrating capital accumulation within their own home base. Transnational projects are always vulnerable to domestic pressures, even though larger economies can play an anchor ‘tenant’ role – politics always mires good economic common sense.

Edited by: Martin Zhuwakinyu
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