Should the Western Cape secede from South Africa?

by Galen Sher

The impetus for this blog post is a conversation between Julian and I at the Cape Party's Facebook page. The Cape Party is a political party that contested the 2009 national elections and one of its goals is to "Return the Cape to a Free and Independent State".

Summary
There are two major arguments here for secession:

1. National government is not sufficiently accountable to the people of the Western Cape. Hence it is difficult for people of the Western Cape to drive policy changes or to hold national government to account for unfair practices.
2. Tax revenue raised in the Western Cape should be spent in the Western Cape, or should at least be spent as the people of the Western Cape would like it spent.

Conversation
Here is the conversation at 2 April 2010 as it relates to secession:

GALEN:
If the national government continually "sidelines the people of the Cape" then why not redouble efforts to hold national govt to account? It seems to me that arguing for separation is a real jump in logic. Somewhere down the line, when the Cape government neglects its constituents in Helderberg, should we vote for Helderberg to be emancipated from the Cape govt?

It seems that establishing a Cape Nation won't really make any difference.

JULIAN:
...even if the people of the Cape were vocal and did hold national government to account, what incentive does national government have to actually listen to them? I mean, the ANC & DA support bases lie elsewhere. Also, the ANC doesn't seem to be doing much for their own constituencies (cf. service delivery protests), because it's almost guaranteed their votes.

Cape secession represents a massive decentralization of power, which I think you'll agree is almost always a good thing. Added to that, the Cape Party is campaigning on a platform of even further decentralization & increased political / economic freedom. The CP could campaign for SA to change it's constitution in favour of greater political autonomy for each region, but I think that really would be tilting at windmills.

The most obvious benefit of decentralization is that each community has greater representation in the primary power structures that govern them. That's why the chance of Helderberg being neglected would be lower. Finally, I think if Helderberg really wanted to, they should have every right to secede.

GALEN:
On accountability: we must discuss this within the context of SA's three tiers of government - national, provincial and local. Yes, accountability requires more than vocality - it requires citizens to change their vote. Given that local govt can change hands independently of the other tiers and given that spending is directed at a provincial level, why is further autonomy necessary?

If further regional autonomy is necessary then CP needs to demonstrate why this could only be achieved through seccession.

To respond to ur first question: the national government has an incentive to listen to the people of the WC to the extent that the WC represents 11.4% of SA's registered voters and is the 4th largest province by this measure.

Last sentence and the "right to secede": In any secession group there will be a (usually minority) subgroup which is opposed, and the rights of both groups must be observed. The opposition group would have to be sufficiently small to justify violation of their right not to secede.

JULIAN:
...the problem is that all the taxes are controlled by national government - provinces have no taxation power and local governments can only increase property rates if they want additional revenue.

Spending is not directed/allocated only at provincial level, a substantial part of the budget is given to the national administration to spend as they choose. Added to that, some of the money that is allocated to provinces falls under "conditional grants", which basically means the national government tells the province how to spend it. Added to THAT, the money allocated to the Western Cape is 60% of what it should be. Check the "Division of Revenue Act" discussion, or get in contact with Adrian Kay, he has more info.

Don't forget that money isn't the only issue. Our police, courts, prisons, schools, hospitals, laws etc. are all, at the least, heavily influenced by the national legislature and administration.

Apart from secession, how else could greater autonomy be achieved? What kind of lobbying would convince the ANC that it's a good idea to reduce their power?

Re. the incentive for the ANC to listen to WC population, I'm afraid you'll need to explain to me how having 11% of the vote counts as an incentive. If you were a cutthroat politician, wouldn't you exploit the 11% (who are unlikely to vote for you anyway) in order to win the votes of the other 89%?

Re. your last point: on a practical level, the system the Cape Party is proposing could theoretically allow for a community to keep the policies and laws of SA, or perhaps even become an enclave within the Cape Nation. But on a philosophical level, I don't actually believe in natural rights. I'm a nihilist, so for me right & wrong don't exist, might makes right and all that. But I do like individualist principles, and I think they generally make life better. So for me, "right to secede" translates into the individual right to choose one's government, which (for me) is good. So even if only 51% in an area (which could be very small) want to secede I think they should be allowed to, the practical details can be dealt with according to each case. The "right not to secede" will often translate into "forcing those other guys to live the way I think they should live". Of course, this discussion goes to the very heart of libertarianism...

Opposition to Eskom's World Bank Loan is hot air

Environmentalists vent frustration but ignore bigger picture
by Galen Sher

If you haven't heard already, Eskom has applied to the World Bank for a $3.75bn loan to cover some of its enormous financing gap. The majority of the loan ($3bn) will go towards the 4,800 MW Medupi coal-fired power station in Limpopo. Understandably, environmentalists in South Africa and abroad are concerned that the World Bank should not finance power generation based on fossil fuels. While it is good that people around the world are concerned about the environmental consequences of World Bank investments, much of the opposition is principle-based and lacks a broader perspective.

1. Medupi will be constructed regardless of the outcome of the World Bank loan

Construction of Medupi began in 2007 and has slowed since financing became more expensive. However, the project is going ahead with a coal-supply agreement recently confirmed. Opposition to the World Bank loan often ignores the fact that construction of Medupi will continue regardless of the outcome of the loan application.

2. There will be severe regional consequences if Medupi does not go ahead

South Africa supplies "60 percent of all electricity produced in sub-Saharan Africa and our neighbors Botswana, Lesotho, Namibia, Swaziland and Zimbabwe all rely on Eskom for their electricity."

Eskom would have to redirect funding from other projects (including renewable energy projects) to finance Medupi. Failing this redirection, Eskom will have to apply for further electricity price increases to finance Medupi.

Medupi will also generate job opportunities for workers in Limpopo.

3. The World Bank loan will also fund renewable energy projects

The balance of the loan, some "$745 million, will be invested in wind and concentrated solar power projects, each generating 100 MW, and in various efficiency improvements". Pravin Gordhan

4. The construction of Medupi must be seen in the context of South Africa's national climate change policy

South Africa is pursuing reductions in carbon emmissions of "34% by 2020 and 43% by 2025" (Pravin Gordhan). As long as the construction of Medupi and other coal-fired power plants in South Africa are compatible with these reduction targets, it is debatable whether construction of these power plants should be opposed at all.

Eskom has also undertaken efficiency improvements at Medupi to reduce coal and water consumption at the power station. The construction has also passed its environmental impact assessment through the Department of Trade and Energy. These are at least a small comfort.

Now, instead of getting frustrated with the environmental implications of such coal-fired power stations, the public should be more concerned with the potential corruption in the award of the contract to Hitachi to construct Medupi and Kusile - contracts valued at some R39bn!

The benefits of aluminium smelters and Eskom's risky contracts

By Galen Sher

The context
At Creamer Media's Engineering News, Matthew Hill has discussed a 2008 Econometrix report, which says the South Africa enjoys "enormous" benefits from its controversial aluminium smelters.

The report was commissioned in 2008 by BHP Billiton. Southern Africa has three aluminium smelters, two in Richards Bay and one in Maputo, all drawing their power from Eskom. They are part of Eskom's controversial undisclosed deals, obtaining power at much-reduced rates. The smelters have been criticised because:

1. They use large amounts of electricity - as much as 5% of South Africa's total electricity consumption.


2. They obtain their electricity at low cost, which is seen as inequitable.


3. They are a capital (machinery)-intensive use of resources, rather than a labour-intensive use of resources, and hence they do not meet South Africa's employment generation objectives.

Risky contracts
None of this is new. However, the article makes a striking observation:

Under the terms of its contract with Eskom, BHP Billiton pays less for power when the aluminium price falls and more when it climbs. For Eskom, the economic crisis of 2007 and 2008, which led to precipitous declines in commodity prices, including the price of aluminium, blew in the perfect storm, with large chunks of power reportedly supplied to the smelters at below cost. [emphasis added]

Any actuary would immediately spot these contract terms as being extremely risky for Eskom. The cost to Eskom of providing electricity has virtually no relationship to the aluminium price. Therefore, these contract terms effectively place Eskom in a position where it has taken an outright bet on the aluminium price. Specifically, when the contracts were signed Eskom effectively took a wager that the aluminium price would continue to rise at least as fast as inflation.

The aluminium price graph below (Source: London Metals Exchange) shows the aluminium price hovering between $2500/t and $3000/t until late 2008 when the financial crisis broke in earnest, after which the price drops to some $1300/t in March 2009. Today the price has recovered only to some $2200/t. Therefore, from March 2009 to today Eskom has been forced to provide the smelters with low-cost electricity at a time when the utility could least afford it. This situation has arisen through Eskom's own folly in entering into such risky contracts and failing to provide adequately for the risk.



The benefits of smelters
Notwithstanding the costs incurred through providing them with cheap electricity, Southern Africa's smelters have given the region substantial economic benefits, according to the unreleased Econometrix report:

1. The smelters employed more than 3 200 employees and 2 800 contractors when the report was written


2. contributing R1,3-billion in corporate tax to the South African and Mozambique governments


3. it was estimated that about 100 000 South African citizens depended on the Bayside and Hillside smelters for their livelihoods


4. Foreign currency earned from exports... [were] more than R21-billion. [Net of imports, the smelters earned the region R12 billion in foreign exchange.]


5. The facilities comprised around 1% of gross regional product.

The report goes on to argue that South African investment in aluminium smelters should be increased, not reduced, at the time of writing. If only Engineering News, BHP Billiton or Parliament would release the full report to the public.

Patel Pursues Pensions 2

by Galen Sher

In our first blog post on this issue, Julian provides a great introduction, his view and the full bibliography. I chose to create a second blog post, rather than comment directly, because my response is too long for a comment. I strongly encourage the reader to view this short post and some of its bibliography before reading my instalment.

I am close to pensions and this issue is therefore compelling to me. I hope to provide a middle ground between the various commentators here and an actuarial perspective.

Patel is mooting that 5% of pension funds' assets be invested in government debt, potentially a special kind of 'developmental' government debt, with the intention that this policy would provide government with additional capital to finance public infrastructure.

The Pension Funds Act of 1956 and the FSB's Regulation 28 already encourage retirement savings vehicles to invest in government bonds. Government bonds also provide a good match for level pensions liabilities and provide diversification. For these three reasons, pension funds already invest, sometimes extensively, in government bonds.

If the 5% is viewed as a minimum allocation to government bonds, its impact would be negligible as the vast majority of funds already achieve this. Funds could also use structured products to circumvent this requirement.

If the 5% is viewed as an additional allocation to Dion George's "parallel system of government debt", then this policy could be viewed as Dawie Roodt's "nothing more than an additional tax" strictly when pension funds would otherwise not have invested in such debt. It would amount to an additional tax when markets are performing well, and a subsidy otherwise.

Mike Schussler points out that the real (pun intended) risk is that long-term inflation erodes the fixed returns earned on government bonds. Contrary to Dawie Roodt's skepticism, this problem could be overcome by issuing more inflation-linked government bonds, the demand for which is large in SA.

It is impossible to be decisive on this issue without more information. The proposal is both "workable" (Mike Schussler) and "flaky" (Dion George).

I have purposely ignored the moral issue of whether this level of government intervention is acceptable, or the philosophical-legal issue of whether it infringes on individuals' property rights, but these certainly merit discussion for another blog post.

The management of retirement savings is a sensitive subject because retirement savings constitute a substantial portion of an individual's wealth at retirement.

Gross Greek Government

Not even 2000-year-old ruins are safe from bad government:

Greek heritage crumbles - Mail & Guardian

Perhaps this shows that national monuments shouldn't necessarily be owned by national government.

Patel Pursues Pensions

So the state wants to "encourage" the trustees of private citizen's retirement savings to "invest" in "development projects". So much for private property rights.

Incidentally, this is why I oppose pension funds: they significantly reduce people's power over their (implicit) retirement savings. It's almost a Law of Nature that the less power you have over your money, the less of it you will have in the end.

Here are some relevant links:

Patel to tap pension funds - Times LIVE

Patel eyes pensions trillions for state fund - Free Market Foundation
"The unintended consequences of this action are entirely predictable - individuals will stop investing in retirement vehicles, thereby reducing the level of savings in the economy, resulting in less money for genuine investments that drive economic growth."

Patel's pension plan dangerous - DA - Politicsweb
"Under Apartheid, pension funds were utilised to fund the Apartheid regime through the implementation of prescribed assets."

Uasa opposes Patel's retirement fund plan - Times LIVE
"If the state were a business, we at Uasa certainly would not have invested our hard-earned retirement savings with them."

NUMSA backs Patel's pension funds proposals - Politicsweb

Patel's pension plan 'workable' - Fin24.com
Economist Dawie Roodt: "Politicians are not good at identifying winners and here we have the idea that pension funds be forced to invest 5% of their savings into a politically determined project."


Well, at least we're not Argentina:

Argentina Makes Grab for Pensions Amid Crisis - WSJ