KEY TAKEOUTS

• Operation Vulindlela aims to fast-track essential reforms, focusing on stabilising key sectors.
• A major success has been the passing of the Energy Regulation Act, which is expected to transform South Africa's energy market.
• Improving logistics, particularly through Transnet, is critical for growth.
• The next phase of reforms emphasises private sector investment, particularly in infrastructure
• The sustainability of Operation Vulindlela relies on a stable Government of National Unity and the retention of key personnel.

Operation Vulindlela, established in October 2020, has made a name for itself as a unit that will accelerate the implementation of the much-needed reforms in South Africa. Sceptics have said “I’ve seen this movie before”, and understandably so as previous attempts at implementing reforms in South Africa have produced mixed outcomes at best. And as a result, we have had to live through an extended period of acutely constrained growth.

With that in mind, a natural question is, why would this time be any different? And if it is, is Operation Vulindlela the saviour to lift us out of the doldrums of the woeful economic growth we’ve experienced over the past decade?

Well…this time is different

We have reason to believe that this time is different, so yes to the first question. Previous attempts at reform have either lacked government buy-in, collided with state capture, or had severe coordination challenges resulting in complex plans and scope creep. This time around Operation Vulindlela was set up directly under the presidency, and so is driven by his office in conjunction with National Treasury. This means that, when a problem exists concerning a necessary reform intervention, it can quickly be escalated.

As an example, the President provided strong political cover for the recently signed Energy Regulation Act (ERA) which was signed into law in August this year. This bill is critical in its role to transform the energy market into a more competitive energy system and should lead to long-term energy security, faster take-up of renewable energy and ultimately lower energy prices for South Africans.

The second key difference now is that Operation Vulindlela is less aspirational in the breadth of reform, and rather focussed only on a few key supply-side interventions that will drive higher growth. These objectives are to stabilise the supply of electricity, create a competitive and efficient freight logistics system, reduce the cost and improve the quality of digital communication, ensure a stable, quality supply of water and reform the visa regime to facilitate skilled immigration and support tourism.

This time we have also seen stronger collaboration between the delivery unit and various stakeholders e.g. ministers, departments and entities, who collectively are taking ownership to drive reforms. Within the context of the newly formed Government of National Unity (GNU), collaboration should naturally be a less challenging endeavour and allow for better impact from decision to implementation.

The second question, however, is more difficult to answer. Will the planned interventions from Operation Vulindlela lift South Africa’s long-term growth rate from the 1-1.5% range to the 2-3% range? While we do think that it is very possible, we’ll need to continue to see reform momentum in certain key areas to achieve the desired growth.

Logistics is a big lever of growth

One of these areas is logistics. As a priority for Operation Vulindlela, a National Logistics Crisis committee was set up to implement a recovery plan at Transnet. This included establishing a Freight Logistics Roadmap (adopted by Parliament), which aims to address the serious challenges of a derelict rail system. The payload for rail freight transportation has plummeted from its highs 10 years ago, and while it has stabilised, we’ve seen limited improvement despite the operational turnaround plan. Remarkably, while Transnet has sufficient locomotives, the state of the railway remains poor, and thus speed limits have had to be reduced due to signal challenges which has severely impacted payload.

Admittedly, policy reform progress in logistics has been too slow. An important intervention is enabling open access to the freight logistics network and introducing private sector participation in container terminals. Additional hurdles include finalising the segmentation between the infrastructure and operations entities, as well as repricing the proposed tariff for the private sector, as the current unattractive tariff incorporates the sunk cost of Transnet’s unsustainable debt burden.

Further to the point on Transnet’s debt burden, their government guarantee facility of R47bn will be running out in 2025. It is therefore important that Transnet finds a funding solution soon that will support its strategy to improve rolling stock, secure the safety of the rail network, and sustain (or possibly expand) operations. Whether the National Treasury announces another capital injection either in the upcoming Medium Term Budget Policy Statement or next year’s budget remains a highly contentious debate, but almost seems inevitable.

Private sector needs to come to the party

Now that the first phase of Operation Vulindlela – with the focus largely on regulatory interventions – is complete, the next phase needs to embrace private participation and investment as a priority. South Africa’s gross fixed capital formation has been structurally trending lower for decades, while private investment spending is significantly lower than its peak in 2008/2009, and current private sector capital expenditure intentions are also at low levels.

Some policy work has begun though, for example, the Private Sector Partnership (PSP) framework which was approved by cabinet in 2023 provides a model to enable effective private sector investment and participation in the South African rail sector. However, government needs to do more to incentivise and enable corporates to confidently increase private investment, specifically in infrastructure.

Risks to Operation Vulindlela

A durable GNU is strategically important to Operation Vulindlela being effective. There is broad alignment in both the ANC and DA that the implementation of structural reforms will support economic recovery, and currently not an imminent threat to the coalition, outside of some sticking points around implementing bills such as BELA and NHI.

Another challenge that needs to be avoided is hollowing out any skills in the unit itself. Recently, Nomvuyo Guma, the co-head of Operation Vulindlela and the Chief Director for microeconomic policy at the Treasury, left the unit. Rudi Dicks, who currently heads up the Project Management office of the Presidency and drives Operation Vulindlela needs to be retained for the foreseeable future to ensure continuity, bulking up capacity and technical expertise, whether internally or from external advisory services. Fortunately, it appears that Operation Vulindlela is drawing on outside expertise from the private sector to provide support to fast-track implementation of reforms – a positive sign.

The ability to identify and plan policy, drive execution and track performance is non-negotiable for a reform implementation team that, if successful, we could say saved South Africa from drifting out into economic stagnation.