3 BUSINESS REPORT Sunday, December 13 2015 Opinion & Analysis I N THE aftermath of the economic collapse in 2008, there has been increas- ing reliance among employers on “non- regular” workers. This includes free- lancers, temps, contractors, part-timers, day labourers, micro-entrepreneurs, gig- preneurs, solo-preneurs, contingent labour, perma-lancers and perma-temps. It’s practically a new taxonomy for a workforce that has become segmented into a dizzying assortment of labour categories. It is also a significant factor in the de- cline of the quality of jobs in the US, as well as in Europe, since 2008. Even many full-time, professional jobs and occupa- tions are experiencing this shift. This practice has given rise to the term “1 099 economy” in the US. Under the US tax system, these employees don’t file W-2 income tax forms as a regular, permanent employee. Instead, they receive the 1 099- MISC form for “independent contractors”. The advantage for a business of using 1 099 workers is obvious: An employer usually can lower its labour costs dramat- ically, often by 30 percent or more. It is not responsible for a 1 099 worker’s health benefits, retirement, unemployment or injured workers compensation, lunch breaks, overtime, disability or paid sick, holiday or vacation leave, and more. In addition, contract workers are paid only for the specific number of hours they spend providing labour, or completing spe- cific jobs, which increasingly are being re- duced to shorter and shorter “micro-gigs”. Set to replace the New Deal society is a darker world in which wealthy and power- ful economic elites collaborate with their political cronies to erect the policy edifice that allows them to mold their proprietary workforce into one composed of a dis- jointed collection of 1 099 employees. This is a direct threat to the nation’s fu- ture, as well as to the “American Dream”. After being laid off after many years of economic security, I stepped off the safe and secure boat of having a “good job” with a steady paycheck and a comprehen- sive safety net, into the cold, deep waters of being a freelance journalist. Suddenly I was responsible for paying for my own health care and saving for my own retirement. I also had to pay the em- ployer’s half of the Social Security payroll tax, as well as Medicare – nearly an extra 8 percent deducted from my income. The costs for my health-care premiums zoomed out of sight, since I was no longer part of a large health-care pool that could negotiate favourable rates. Uphill battle But that’s not all. Suddenly not only was the pay per article not particularly lucra- tive, but I didn’t get paid for those many hours in which I had to query the editors for the next article or conduct research and interviews. It was as if I had become an assembly line worker who was paid on a per-piece rate. Any moment I wasn’t work- ing, I was not earning. I no longer had paid vacations, sick days, holidays. Nor could I benefit from unemployment or injured workers com- pensation. I had to track my many and varied sources of income, making sure that unscrupulous editors didn’t stiff me. In short, I had to juggle, juggle, juggle, while simultaneously running uphill – my life had been upended in ways that I had never anticipated. And I began discovering that I was not alone. Many other friends and colleagues – including Pulitzer Prize-winning journal- ists, professionals and intellectuals, as well as many friends in pink-, white- and blue- collar jobs – also had become 1 099 workers, tumbleweeds adrift in the labour market. They found themselves increasingly faced with similar challenges. In short, we had entered the world of what is known as “precarious” work, most of us unprepared. Not to worry. The new economy vision- aries – who like Dr Pangloss in Voltaire’s Candide always see “the best of all possible worlds” – have a plan in place for us. A new mash-up of Silicon Valley tech- nology and Wall Street investment has thrust upon us the latest economic trend: the “sharing economy,” also known as the gig or on-demand economy. Companies such as Uber, Airbnb, Instacart and TaskRabbit allegedly are “liberating work- ers” to become “independent” and “the chief executives of their own businesses.” These companies, the sharing economy gurus tell us, allow us to “monetise our assets” – rent out our house, our car, our labour, our driveway, our spare drill and other personal possessions – using any number of brokerage websites and apps. This is the new “sharing” economy: contracted, freelanced, “shared”, auto- mated, Uber-ised, “1 099-ed”. An award-winning professional photog- rapher can be “liberated” to become an innkeeper in his own home and a taxi driver in his own car – all through the power of a smartphone app and a lay-off. These gig-economy workers hire them- selves out for ever-smaller jobs and wages, with no safety net, while companies profit. Uber, Upwork, TaskRabbit, Airbnb and others have taken the Amazon/eBay model the next logical step. They benefit from an aura that seems to combine convenience with a patina of revolution. The idea of a “sharing” economy sounds so groovy – en- vironmentally correct, politically neutral, anti-consumerist and all of it wrapped in the warm, fuzzy vocabulary of “sharing”. The vision has a utopian spin that is incredibly seductive. We live in a world where both governments and big business have let us down by leading us into the biggest economic crash since the Great Depression. Individualism can save us all. The sharing economy’s technologies make it so easy to hire freelancers, temps and part-timers. In that light, why won’t every employer eventually lay off all its regular employees and hire 1 099 workers? Any business owner would be foolish not to, as he or she watches their competi- tors shave their labour costs by 30 percent. Sounds extreme? Merck, one of the world’s largest pharmaceutical companies, was a vanguard of this underhanded strat- egy. When it came under pressure to cut costs, it sold its Philadelphia factory to a company that fired all 400 employees and then rehired them as independent contrac- tors. Merck then contracted with the com- pany to carry on making antibiotics for them, using the exact same workers. Examples abound of companies laying off workers and then rehiring the same workers as independent contractors, a clear abuse of this legal loophole. One new economy booster clarified employers’ audacious strategy: “Compa- nies today want a workforce they can switch on and off as needed” – like one can turn off a faucet or a TV. And now the apps and websites of the “share the crumbs” economy have made it easier than ever to do that. Companies can hire and fire 1 099 workers at will. Faceless In essence, the purveyors of the new econ- omy are forging an economic system in which those with money will be able to use faceless, anonymous interactions via bro- kerage websites and mobile apps to hire those without money by forcing an online bidding war to see who will charge the least for their labour, or to rent out their home, their car, or other personal property. These perverse incentives are threaten- ing to destroy the US labour force and turn tens of millions of workers into little more than day labourers. BuzzFeed’s Charlie Warzel has rightly observed: “Any tech reporter who spends their time covering the sharing economy is now, essentially, a labour reporter.” Outsourcing to these 1 099 workers has become the preferred method for US busi- ness leaders to cut costs and maximise profits. This is only the beginning. We have yet to see how these trends will affect the labour force over the next decade or so. But already we can see that the so-called “new” economy looks an awful lot like the old, pre-New Deal economy, in which piece-work jobs did not lift families or communities. Steven Hill is a senior fellow with the New America Foundation and a Holtzbrinck Fellow at the American Academy in Berlin. This article initially appeared on The Globalist. Follow The Globalist on Twitter: @theGlobalist I T MIGHT seem obvious that govern- ment subsidies for solar or wind-power companies are not the same as state aid for atom bomb development during a world war against a foul ideology like Nazism. Yet, this was an argument put forward by environmentalists when a solar power generation company in the US went bust, having been the happy recipient of $500 million (R7.8 billion) in state subsi- dies, known more correctly as taxpayers’ money. To be fair, it was not the only justi- fication put forward when the solar-panel company, Solyndra, went belly-up shortly after building a massive solar-power ”array” in Arizona. More history was hauled in as well. Apologists claimed there was a “tradi- tion” of state subsidies in the US. They cited land grants to encourage coal mining, and government spending on the Hoover Dam hydroelectric scheme during the Great Depression in the 1930s. Also claimed as a precedent was state support for nuclear power stations in the 1950s, and tax incentives for oil companies to encourage domestic exploration for oil in the 1970s. Justify However, all such arguments to justify the billions sunk into supporting wind and solar power are notable for what they leave out. Land grants to coal companies were made when coal was a crucial strategic mineral without which manufacturing and shipping would have collapsed. The land was free. Nothing else was. The Hoover Dam project opened up the West of the US to modern economic devel- opment and provided work for the millions of unemployed due to the great slump. Nuclear power station building got tax breaks so that the US could access enriched uranium to counter the threat from the former Soviet Union*. None of these arguments in favour of subsidies for so-called Green energy can avoid the uncomfortable truth that only direct or indirect subsidies by taxpayers keep afloat most companies selling wind generators and photovoltaic panels (out- side communist China where state subsi- dies are rife and labour is cheap). The latest solar panel company to crash and burn is significant for our own ideolog- ically-driven rush to burden the economy with fashionable green technology, sub- sidised one way or another by South African taxpayers. Now heading for bankruptcy is the Spanish firm Abengoa. The company built the massive parabolic-trough solar power station north-east of Pofadder. Like its infamous cousin in the US, it too only man- aged to do this with the benefit of a large dollop of South African taxpayers’ cash. KaXu 1 (its name an ingratiatingly politically correct sop to the San people) was opened with massive fanfare earlier this year. It is huge. Reputed to have cost R7.9bn (call it R8bn, why not?). The array stretches three kilometres in one direction and is a kilometre wide. Everything about it is massive. It is claimed that it will add 100 megawatts of electricity a year to the national grid (plus/minus 320 gigawatt hours) suppos- edly enough to power 80 000 houses. Using words like “claim” and “suppos- edly” is deliberate since claims for such projects often fail to materialise. This monster is supposed to be able to store three hours of electricity (in molten salt) even after sundown. Jolly good. Time will also tell if this claim is accurate. Meanwhile, Eskom, as it always does, has picked up the tab for connecting the ar- ray to power lines. It is also responsible for integrating the power KaXu 1 generates into the national grid and giving its engi- neers headaches in the process. But, so far, so good. Lots of Spanish executives of soon-to-be bankrupted Abengoa were on hand to watch the switch- on, among them Javier Benjumea, the president of Abengoa Solar International Advisory Board. So were the local investors’ representatives. Geoffrey Qhena, the chief executive of the Industrial Development Corporation (IDC), was there. Economic Development Minister Ebrahim Patel was there of course. Armando Zuluaga, the chief exec- utive of Abengoa Solar; and Fadiel Farao, the chairman of the KaXu Community Trust, made up the VIP list. The investors’ contributions to the R8bn was split between Abengoa (59 per- cent), the IDC (29 percent), and the KaXu Community Trust (21 percent). There is another solar project called !Xhi 1 in which Abengoa also has a substantial interest. It is still under construction. All these mega amounts will soon receive the attention of Abengoa’s creditors. The exposure of international banks is about $21.4bn, according to Reuters. The total debt is likely to be higher. Liquidate The most interesting things to watch will be any attempts to liquidate the Spanish company’s assets in South Africa and, of course, how these will affect our very own, taxpayer-funded IDC – let alone the KaXu Community Trust and not to forget the unfinished !Xhi 1. We must hope that in our government’s enthusiasm for solar power its lawyers have made sure that an Abengoa bank- ruptcy will not negatively affect the rest of the shareholders in KaXu 1. We shall just have to wait and see, and hold our breath. Meanwhile, this all seems to highlight an eternal economic truth, expressed best in the words of Daniel Simmons, vice-pres- ident for policy at the US Institute for Energy Research. “When you have a company that is based on subsidies, it is no surprise it runs into financial trouble because its business model isn’t based on economics; it’s based on politics.” Those who think solar power projects around the world are not political should think again. *A key difference is that Chernobyl- type nuclear reactors were bomb mate- rial producers first, and electricity producers second. The reverse was true in the US. Another difference is that no one has ever died from a US nuclear power station exploding. Keith Bryer is a retired communications consultant. I T IS the season for predictions. Every December there is a flurry of forecasts about what might happen in the com- ing year – forecasts for the world economy, equities and bonds, the oil price, commodities and so on. There are the various official forecasts from governments, their agencies and central banks, and from international bod- ies such as the Organisation for Economic Co-operation and Development, World Bank and International Monetary Fund. And there are hundreds of private sector ones from banks, consultancies and so on. Too much information indeed; but clearly there is a market for predictions even if everyone knows that almost all of them have in the past failed to predict the real game-changers for the world economy. They must have a use, even only to set a benchmark against which people can test their own ideas. So what are they saying? As a very general proposition, the eco- nomic predictions are reasonably upbeat, but the market ones rather more circum- spect. The best way to get a handle on the economic side of things is data collected by Consensus Forecasts, which polls more than 250 forecasting enterprises. We won’t get the December results till later this week but the November forecast was pretty solid. Growth overall next year would be 2.9 percent, up from this year’s 2.6 percent, with the US at 2.6 percent, Japan 1.3 percent, Germany 1.8 percent, France 1.5 percent and the UK 2.4 percent. No one is forecasting recession for any of the big economies, even Japan. Forecasts for inflation are for a return to more normal times, with the consensus expecting consumer prices to rise from near zero this year in the US, UK and euro zone to 1.7 percent, 1.3 percent and 1.1 per- cent respectively. Looking further ahead, the outlook over the next 10 years is for inflation to average 2.2 percent in the US, 2 percent in the UK and 1.7 percent in Ger- many. If that is right, investors in the US and UK would just about break even if they bought 10-year bonds now, but would lose more than 1 percent a year if they were to buy German ones. Burden of bonds This highlights the illogicality of anyone buying bonds at current yields, particu- larly euro zone or Japanese ones. Worst of all are Swiss and Swedish bonds, both of which have a prospective negative real yield of 1.2 percent. Why buy something that, if you believe the consensus, you will lose money on? Better, surely, to remain liquid, even if cash earns next to nothing, and wait for a better opportunity. The only rational explanations would be that there is some regulatory or legal requirement to hold bonds, or you don’t believe the con- sensus on inflation, or you think some- thing dreadful may well happen and bonds will be a safe haven as and when it does. Maybe it is this illogicality that is un- settling fund managers and their advisers. Equity values are stretched. Bond prospects are dreadful. Interest rates will climb, with the only debate being about the timing and speed of the uplift. So what are they thinking? It is harder to get a handle on market predictions. The various investment banks have targets for indices, favoured “buy” recommendations, and a few big warnings. But these views are too disparate to be boiled down. Instead, here is a sketch of two commentaries that seem to catch the mood, from Goldman Sachs and UBS. Goldman expects the US economy will start hitting full capacity sooner than oth- ers expect, and that will mean that mone- tary policy tightens faster than expected. If that is right, the dollar will do well (up 20 percent overall by the end of 2017), while the 10-year US bond yield will rise to 3 percent by the end of 2016. The euro and bonds in general are a big “sell”. Goldman is cautious about US equities, thinks oil will fall in the short run but recover, and that commodities are not a bad prospect. UBS has a broadly similar outlook. Things that will rise include equities, US interest rates and oil, while those that will go down include government bonds and euro zone interest rates. It is less bullish on the dollar. UBS has also done a separate long-term study. It forecasts that UK shares will produce an average return over the next five-plus years of 8 percent or more. I think the big message in all this is that if the world economy grows as expected, then more normal investment conditions will return. Savers will be rewarded; well- run companies will do well; countries whose economies grow will share the fruits of that growth. – The Independent Now is the season for economic forecasts New sharing economy leaves workers worse off Sun does not always shine on solar power These perverse incentives threaten to destroy the US labour force and turn tens of millions of workers into… day labourers. When you have a company that is based on subsidies, it is no surprise when it runs into financial troubles because its business model isn’t based on economics. EYES ON THE FUTURE GREEN ENERGY Keith Bryer Hamish McRae SPOTLIGHT ON LABOUR Steven Hill ❚❚ QUOTE OF THE DAY Everything you have ever wanted is on the other side of fear. – George Washington Adair, American property developer (1823 – 1899) KaXu 1, which was built by a Spanish company, now headed for bankruptcy and with a large dollop of taxpayers’ money, was opened to massive fanfare earlier this year and is reputed to have cost about R8 billion. PHOTO:SUPPLIED Uber and other internet businesses form part of the so-called sharing economy, which the writer says is driving a shift away from secured employment. FILE PHOTO: BLOOMBERG
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3BUSINESS REPORT Sunday, December 13 2015
Opinion&Analysis
IN THE aftermath of the economiccollapse in 2008, there has been increas-ing reliance among employers on “non-regular” workers. This includes free-lancers, temps, contractors, part-timers,
day labourers, micro-entrepreneurs, gig-preneurs, solo-preneurs, contingent labour,perma-lancers and perma-temps.
It’s practically a new taxonomy for aworkforce that has become segmented intoa dizzying assortment of labour categories.
It is also a significant factor in the de-cline of the quality of jobs in the US, aswell as in Europe, since 2008. Even manyfull-time, professional jobs and occupa-tions are experiencing this shift.
This practice has given rise to the term“1 099 economy” in the US. Under the UStax system, these employees don’t file W-2income tax forms as a regular, permanentemployee. Instead, they receive the 1 099-MISC form for “independent contractors”.
The advantage for a business of using1 099 workers is obvious: An employerusually can lower its labour costs dramat-ically, often by 30 percent or more.
It is not responsible for a 1 099 worker’shealth benefits, retirement, unemploymentor injured workers compensation, lunchbreaks, overtime, disability or paid sick,holiday or vacation leave, and more.
In addition, contract workers are paidonly for the specific number of hours theyspend providing labour, or completing spe-cific jobs, which increasingly are being re-duced to shorter and shorter “micro-gigs”.
Set to replace the New Deal society is adarker world in which wealthy and power-ful economic elites collaborate with theirpolitical cronies to erect the policy edificethat allows them to mold their proprietaryworkforce into one composed of a dis-jointed collection of 1 099 employees.
This is a direct threat to the nation’s fu-ture, as well as to the “American Dream”.
After being laid off after many years ofeconomic security, I stepped off the safeand secure boat of having a “good job”
with a steady paycheck and a comprehen-sive safety net, into the cold, deep waters ofbeing a freelance journalist.
Suddenly I was responsible for payingfor my own health care and saving for myown retirement. I also had to pay the em-ployer’s half of the Social Security payrolltax, as well as Medicare – nearly an extra8 percent deducted from my income.
The costs for my health-care premiumszoomed out of sight, since I was no longerpart of a large health-care pool that couldnegotiate favourable rates.
Uphill battleBut that’s not all. Suddenly not only wasthe pay per article not particularly lucra-tive, but I didn’t get paid for those manyhours in which I had to query the editorsfor the next article or conduct research andinterviews. It was as if I had become anassembly line worker who was paid on aper-piece rate. Any moment I wasn’t work-ing, I was not earning.
I no longer had paid vacations, sickdays, holidays. Nor could I benefit fromunemployment or injured workers com-pensation. I had to track my many andvaried sources of income, making surethat unscrupulous editors didn’t stiff me.
In short, I had to juggle, juggle, juggle,while simultaneously running uphill – mylife had been upended in ways that I hadnever anticipated. And I began discoveringthat I was not alone.
Many other friends and colleagues –including Pulitzer Prize-winning journal-ists, professionals and intellectuals, as wellas many friends in pink-, white- and blue-collar jobs – also had become 1 099 workers,tumbleweeds adrift in the labour market.
They found themselves increasinglyfaced with similar challenges. In short, wehad entered the world of what is known as“precarious” work, most of us unprepared.
Not to worry. The new economy vision-aries – who like Dr Pangloss in Voltaire’sCandide always see “the best of all possibleworlds” – have a plan in place for us.
A new mash-up of Silicon Valley tech-nology and Wall Street investment hasthrust upon us the latest economic trend:the “sharing economy,” also known as thegig or on-demand economy. Companiessuch as Uber, Airbnb, Instacart andTaskRabbit allegedly are “liberating work-ers” to become “independent” and “thechief executives of their own businesses.”
These companies, the sharing economygurus tell us, allow us to “monetise ourassets” – rent out our house, our car, ourlabour, our driveway, our spare drill andother personal possessions – using anynumber of brokerage websites and apps.
This is the new “sharing” economy:contracted, freelanced, “shared”, auto-mated, Uber-ised, “1 099-ed”.
An award-winning professional photog-rapher can be “liberated” to become aninnkeeper in his own home and a taxidriver in his own car – all through thepower of a smartphone app and a lay-off.
These gig-economy workers hire them-selves out for ever-smaller jobs and wages,with no safety net, while companies profit.
Uber, Upwork, TaskRabbit, Airbnb andothers have taken the Amazon/eBay modelthe next logical step. They benefit from anaura that seems to combine conveniencewith a patina of revolution. The idea of a“sharing” economy sounds so groovy – en-vironmentally correct, politically neutral,anti-consumerist and all of it wrapped inthe warm, fuzzy vocabulary of “sharing”.
The vision has a utopian spin that isincredibly seductive. We live in a worldwhere both governments and big businesshave let us down by leading us into thebiggest economic crash since the GreatDepression. Individualism can save us all.
The sharing economy’s technologiesmake it so easy to hire freelancers, tempsand part-timers. In that light, why won’tevery employer eventually lay off all itsregular employees and hire 1 099 workers?
Any business owner would be foolishnot to, as he or she watches their competi-tors shave their labour costs by 30 percent.
Sounds extreme? Merck, one of the
world’s largest pharmaceutical companies,was a vanguard of this underhanded strat-egy. When it came under pressure to cutcosts, it sold its Philadelphia factory to acompany that fired all 400 employees andthen rehired them as independent contrac-tors. Merck then contracted with the com-pany to carry on making antibiotics forthem, using the exact same workers.
Examples abound of companies layingoff workers and then rehiring the sameworkers as independent contractors, aclear abuse of this legal loophole.
One new economy booster clarifiedemployers’ audacious strategy: “Compa-nies today want a workforce they canswitch on and off as needed” – like one canturn off a faucet or a TV.
And now the apps and websites of the“share the crumbs” economy have made iteasier than ever to do that. Companies canhire and fire 1 099 workers at will.
FacelessIn essence, the purveyors of the new econ-omy are forging an economic system inwhich those with money will be able to usefaceless, anonymous interactions via bro-kerage websites and mobile apps to hirethose without money by forcing an onlinebidding war to see who will charge theleast for their labour, or to rent out theirhome, their car, or other personal property.
These perverse incentives are threaten-ing to destroy the US labour force and turntens of millions of workers into little morethan day labourers.
BuzzFeed’s Charlie Warzel has rightlyobserved: “Any tech reporter who spendstheir time covering the sharing economy isnow, essentially, a labour reporter.”
Outsourcing to these 1 099 workers hasbecome the preferred method for US busi-ness leaders to cut costs and maximiseprofits. This is only the beginning.
We have yet to see how these trends willaffect the labour force over the next decadeor so. But already we can see that the so-called “new” economy looks an awful lotlike the old, pre-New Deal economy, inwhich piece-work jobs did not lift familiesor communities.
Steven Hill is a senior fellow with the NewAmerica Foundation and a Holtzbrinck Fellow atthe American Academy in Berlin. This articleinitially appeared on The Globalist. Follow TheGlobalist on Twitter: @theGlobalist
IT MIGHT seem obvious that govern-ment subsidies for solar or wind-powercompanies are not the same as state aidfor atom bomb development during aworld war against a foul ideology like
Nazism.Yet, this was an argument put forward
by environmentalists when a solar powergeneration company in the US went bust,having been the happy recipient of$500 million (R7.8 billion) in state subsi-dies, known more correctly as taxpayers’money. To be fair, it was not the only justi-fication put forward when the solar-panelcompany, Solyndra, went belly-up shortlyafter building a massive solar-power”array” in Arizona.
More history was hauled in as well.Apologists claimed there was a “tradi-tion” of state subsidies in the US. Theycited land grants to encourage coal mining,and government spending on the HooverDam hydroelectric scheme during theGreat Depression in the 1930s.
Also claimed as a precedent was statesupport for nuclear power stations in the1950s, and tax incentives for oil companiesto encourage domestic exploration for oilin the 1970s.
JustifyHowever, all such arguments to justify thebillions sunk into supporting wind andsolar power are notable for what theyleave out.
Land grants to coal companies weremade when coal was a crucial strategicmineral without which manufacturing andshipping would have collapsed. The landwas free. Nothing else was.
The Hoover Dam project opened up theWest of the US to modern economic devel-
opment and provided work for the millionsof unemployed due to the great slump.
Nuclear power station building got taxbreaks so that the US could accessenriched uranium to counter the threatfrom the former Soviet Union*.
None of these arguments in favour ofsubsidies for so-called Green energy canavoid the uncomfortable truth that onlydirect or indirect subsidies by taxpayerskeep afloat most companies selling windgenerators and photovoltaic panels (out-side communist China where state subsi-dies are rife and labour is cheap).
The latest solar panel company to crashand burn is significant for our own ideolog-ically-driven rush to burden the economywith fashionable green technology, sub-sidised one way or another by SouthAfrican taxpayers.
Now heading for bankruptcy is theSpanish firm Abengoa. The company builtthe massive parabolic-trough solar powerstation north-east of Pofadder. Like itsinfamous cousin in the US, it too only man-aged to do this with the benefit of a largedollop of South African taxpayers’ cash.
KaXu 1 (its name an ingratiatinglypolitically correct sop to the San people)was opened with massive fanfare earlierthis year. It is huge. Reputed to have costR7.9bn (call it R8bn, why not?). The arraystretches three kilometres in one directionand is a kilometre wide.
Everything about it is massive. It isclaimed that it will add 100 megawatts ofelectricity a year to the national grid(plus/minus 320 gigawatt hours) suppos-edly enough to power 80 000 houses.
Using words like “claim” and “suppos-
edly” is deliberate since claims for suchprojects often fail to materialise.
This monster is supposed to be able tostore three hours of electricity (in moltensalt) even after sundown. Jolly good. Timewill also tell if this claim is accurate.
Meanwhile, Eskom, as it always does,has picked up the tab for connecting the ar-ray to power lines. It is also responsible forintegrating the power KaXu 1 generatesinto the national grid and giving its engi-neers headaches in the process.
But, so far, so good. Lots of Spanishexecutives of soon-to-be bankruptedAbengoa were on hand to watch the switch-on, among them Javier Benjumea, thepresident of Abengoa Solar InternationalAdvisory Board. So were the localinvestors’ representatives.
Geoffrey Qhena, the chief executive ofthe Industrial Development Corporation(IDC), was there. Economic DevelopmentMinister Ebrahim Patel was there ofcourse. Armando Zuluaga, the chief exec-utive of Abengoa Solar; and Fadiel Farao,the chairman of the KaXu CommunityTrust, made up the VIP list.
The investors’ contributions to theR8bn was split between Abengoa (59 per-cent), the IDC (29 percent), and the KaXuCommunity Trust (21 percent).
There is another solar project called!Xhi 1 in which Abengoa also has asubstantial interest. It is still underconstruction.
All these mega amounts will soonreceive the attention of Abengoa’screditors. The exposure of internationalbanks is about $21.4bn, according toReuters. The total debt is likely to behigher.
LiquidateThe most interesting things to watch willbe any attempts to liquidate the Spanishcompany’s assets in South Africa and, ofcourse, how these will affect our very own,taxpayer-funded IDC – let alone the KaXuCommunity Trust and not to forget theunfinished !Xhi 1.
We must hope that in our government’senthusiasm for solar power its lawyershave made sure that an Abengoa bank-
ruptcy will not negatively affect the rest ofthe shareholders in KaXu 1. We shall justhave to wait and see, and hold our breath.
Meanwhile, this all seems to highlightan eternal economic truth, expressed bestin the words of Daniel Simmons, vice-pres-ident for policy at the US Institute forEnergy Research.
“When you have a company that isbased on subsidies, it is no surprise it runsinto financial trouble because its businessmodel isn’t based on economics; it’s basedon politics.”
Those who think solar power projectsaround the world are not political shouldthink again.
*A key difference is that Chernobyl-
type nuclear reactors were bomb mate-
rial producers first, and electricity
producers second. The reverse was true
in the US. Another difference is that no
one has ever died from a US nuclear
power station exploding.
Keith Bryer is a retired communicationsconsultant.
IT IS the season for predictions. EveryDecember there is a flurry of forecastsabout what might happen in the com-ing year – forecasts for the worldeconomy, equities and bonds, the oil
price, commodities and so on.There are the various official forecasts
from governments, their agencies andcentral banks, and from international bod-ies such as the Organisation for EconomicCo-operation and Development, WorldBank and International Monetary Fund.And there are hundreds of private sectorones from banks, consultancies and so on.
Too much information indeed; butclearly there is a market for predictionseven if everyone knows that almost all ofthem have in the past failed to predict thereal game-changers for the world economy.They must have a use, even only to set abenchmark against which people can testtheir own ideas. So what are they saying?
As a very general proposition, the eco-nomic predictions are reasonably upbeat,but the market ones rather more circum-spect. The best way to get a handle on theeconomic side of things is data collectedby Consensus Forecasts, which polls morethan 250 forecasting enterprises. We won’tget the December results till later thisweek but the November forecast waspretty solid. Growth overall next yearwould be 2.9 percent, up from this year’s2.6 percent, with the US at 2.6 percent,Japan 1.3 percent, Germany 1.8 percent,France 1.5 percent and the UK 2.4 percent.No one is forecasting recession for any ofthe big economies, even Japan.
Forecasts for inflation are for a returnto more normal times, with the consensusexpecting consumer prices to rise fromnear zero this year in the US, UK and eurozone to 1.7 percent, 1.3 percent and 1.1 per-cent respectively. Looking further ahead,the outlook over the next 10 years is forinflation to average 2.2 percent in the US,2 percent in the UK and 1.7 percent in Ger-many. If that is right, investors in the USand UK would just about break even ifthey bought 10-year bonds now, but wouldlose more than 1 percent a year if theywere to buy German ones.
Burden of bondsThis highlights the illogicality of anyonebuying bonds at current yields, particu-larly euro zone or Japanese ones. Worst ofall are Swiss and Swedish bonds, both ofwhich have a prospective negative realyield of 1.2 percent. Why buy somethingthat, if you believe the consensus, you willlose money on? Better, surely, to remainliquid, even if cash earns next to nothing,and wait for a better opportunity. The onlyrational explanations would be that thereis some regulatory or legal requirement tohold bonds, or you don’t believe the con-sensus on inflation, or you think some-thing dreadful may well happen and bondswill be a safe haven as and when it does.
Maybe it is this illogicality that is un-settling fund managers and their advisers.Equity values are stretched. Bondprospects are dreadful. Interest rates willclimb, with the only debate being about thetiming and speed of the uplift. So what arethey thinking?
It is harder to get a handle on marketpredictions. The various investment bankshave targets for indices, favoured “buy”recommendations, and a few big warnings.But these views are too disparate to beboiled down. Instead, here is a sketch oftwo commentaries that seem to catch themood, from Goldman Sachs and UBS.
Goldman expects the US economy willstart hitting full capacity sooner than oth-ers expect, and that will mean that mone-tary policy tightens faster than expected. Ifthat is right, the dollar will do well (up20 percent overall by the end of 2017),while the 10-year US bond yield will rise to3 percent by the end of 2016. The euro andbonds in general are a big “sell”. Goldmanis cautious about US equities, thinks oilwill fall in the short run but recover, andthat commodities are not a bad prospect.
UBS has a broadly similar outlook.Things that will rise include equities, USinterest rates and oil, while those that willgo down include government bonds andeuro zone interest rates. It is less bullish onthe dollar. UBS has also done a separatelong-term study. It forecasts that UK shareswill produce an average return over thenext five-plus years of 8 percent or more.
I think the big message in all this is thatif the world economy grows as expected,then more normal investment conditionswill return. Savers will be rewarded; well-run companies will do well; countrieswhose economies grow will share thefruits of that growth. – The Independent
Now is theseason foreconomicforecasts
New sharing economy leaves workers worse off
Sun does notalways shine onsolar power
These perverse incentivesthreaten to destroy the USlabour force and turn tensof millions of workersinto… day labourers.
When you have a companythat is based on subsidies, itis no surprise when it runsinto financial troublesbecause its business modelisn’t based on economics.
EYES ON THE FUTUREGREEN
ENERGY
Keith BryerHamish McRae
SPOTLIGHTON LABOUR
Steven Hill
❚❚QUOTE OF THE DAYEverything you have ever wanted is on the other sideof fear. – George Washington Adair, American property developer (1823 – 1899)
KaXu 1, which was built by a Spanish company, now headed for bankruptcy and with a large dollop of taxpayers’ money, was opened tomassive fanfare earlier this year and is reputed to have cost about R8 billion. PHOTO: SUPPLIED
Uber and other internet businesses form part of the so-called sharing economy, which thewriter says is driving a shift away from secured employment. FILE PHOTO: BLOOMBERG
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