Imagined government omniscience is a fatal conceit

Government works hard. Most of what it does seems to be to keep up the unceasing struggle to circumvent the bad things caused by other things it already does. This is illustrated yet again by the unfolding decision by government to go the nuclear route.

Department of Energy officials categorically stated last month that South Africa would purchase 9,600MW of nuclear power despite the government not having an accurate idea of how much it will cost. Last week the Minister of Trade and Industry, Rob Davies, stated “You can rest assured that when and if (really?) a decision is taken about the procurement of nuclear power facilities, we as a department will be working to get a high level of localisation in the inputs involved”.

The government has also confirmed that it will be using the Integrated Resource Plan (IRP) of 2010 to guide its energy planning framework (as opposed to the updated version published in 2013 but not approved by cabinet and which effectively puts a brake on South Africa’s nuclear ambitions). Using the IRP of 2010 is an attempt to legitimately justify South Africa “going the nuclear route”.

The fact that South Africa is “going the nuclear route” and the government “will be working to get a high level of localisation” reaffirms what economists have known for many years and Friedrich Hayek, the late great Nobel Prize winning economist, succinctly summed up as, “The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design”.

An astonishing hubris pervades the halls of government departments and reveals that government is far more concerned about politics rather than economics and conserving scarce taxpayer resources. Government has no idea what the correct energy mix is or how much local content is required in the inputs and nor should it.

Government seems to think that by getting “a high level of localisation in the inputs involved” will keep more money in the South African economy. But there is no rational economic logic behind preordaining how much “localisation” is required to build a plant; that is a business decision. If it turns out that a South African company is more efficient at making boilers than a Russian company then so be it. But to try and dictate the situation and rig the rules to favour narrow special-interest groups in the economy at the expense of South African consumers and taxpayers is wrong.

Every tax paying South African should demand that their scarce resources be spent on the best goods and services available, no matter their origin, so that every South African obtains the best possible value from our limited resources. South Africans do not care whether the nuclear reactor/wind turbine/boiler etc is made in France, Russia, China or South Africa – all they care about is the cost of power. Should we ‘buy South African’ regardless, to preserve money and jobs domestically? Not if it means we would be buying overpriced products or services that probably should not have even been considered for purchase in the first place. The jobs “preserved” would come at the cost of jobs that would be created elsewhere in the economy by consumer savings on cheaper imported goods and services.

Government should also not be determining an “appropriate energy mix” – this should be left to the market. Meeting South Africa’s power shortage should be put out to tender so that private companies can bid to build, own and operate the power stations. Private companies that use their own money instead of that of taxpayers to build the power plants, will be more adept at enforcing tight controls over the contractors employed in the build process. Any cost overruns would be borne by the private owners and not by taxpaying South Africans. All that government needs to concern itself with is to get the best price and conserve scarce taxpayer and consumer resources and to ensure that the company adheres to its contractual obligations. What the source of energy is, should be left to the market to decide. The market would also decide how much power is needed and not distort the extent of real demand.

Going the nuclear route without weighing the economic consequences will also be a massive set-back for independent power producers (IPPs) and the possibility of using gas as energy source. Not only will there be less capacity allocated to the private sector at a time when private power is proving the more affordable option for the country but it will also put a brake on the pressure to explore the country’s various gas options.

The outdated power model that applies in South Africa, where one single entity is responsible for all of the generation, transmission and a large part of the distribution, has been abandoned in every commercially competitive country worldwide. IPPs are eagerly awaiting the opportunity to build, own and operate power stations. They will not start supplying electricity to customers, though, if Eskom retains the power to be both referee and player in the market. The South African government should create a policy environment that provides the right economic incentives to attract companies to utilise and develop resources and should not be dictating how much localisation or what kind of energy source should be used.

The government urgently needs to establish an independent transmission system and market operator so that energy companies that fully meet reliability requirements can have unconstrained access to the grid. With the right economic environment a multitude of IPPs will compete to deliver sufficient and affordable energy to keep the wheels of the economy spinning.

Author  Jasson Urbach is an Economist and director of the Free Market Foundation. This article may be republished without prior consent but with acknowledgement to the author. The views expressed in the article are the author’s and are not necessarily shared by the members of the FMF.


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