Black Swans, Cost Overruns and Industrial Tariffs

World Cup or Black Swan

South Africa currently has two large Cinderella projects: the Gautrain and the 2010 World Cup.

Both projects are astonishingly expensive. When the Gautrain was announced in February 2006 it was to cost R 14 billion. Now it is suggested that it may cost R 24 billion. The same has happened with the World Cup. It was R 2 billion in the original bid and is now rapidly shooting over R 9 billion.

Nassim Taleb, a specialist financial analyst, has a phrase for unexpected events that have an extreme impact and that are made to seem predictable with explanations concocted afterwards. He calls these "black swans".

The likelihood is that, as we approach due dates on both projects, the original cost estimates will be seen to be many orders of magnitude less than what we actually spend. Government will then come up with some wonderful "black swans" to explain precisely why the cost overruns were necessary and why we didn't need the extra schools or hospitals.

The latest on this is that government is to reduce tariffs on products needed for its R 400 billion infrastructure development programme. The products affected include a range of electric equipment and mechanical appliances. Motor spares are not included, to continue the protection of our cosseted motor industry.

All the noise and stone-throwing about the Doha round of World Trade talks has been about how rich nations should cut their agricultural subsidies to allow poor nations to sell their goods competitively.

The G8 Summit has just announced that they intend spending US$60 billion on health and development in Africa to be spent over the next three years. In other words, the US$20 billion per year is as much as the US spends giving direct cash subsidies to their cotton farmers.

This is important, but it takes attention away from what developing nations can do for themselves. Wealthy nations protest that they have little interest in removing subsidies if they don't get a return in the removal of Industrial Tariffs imposed by developing nations.

Consider this: South Africa imposes massive import tariffs – taxes – on industrial and manufactured goods that are imported. The main reason cited for this is that it protects the local industry from unfair competition and saves jobs. We can argue about this where the imports compete with goods manufactured here, but it is a particularly stupid argument where the goods are not.

Large scale generators needed for power production are imported and subjected to massive taxes. This increases the cost of doing required maintenance at power stations. And this is just one industry. Most businesses in South Africa require critical components of their supply chain to be imported.

The net result is that local goods are much more expensive than they need to be. Not only does this make the poor poorer, but it also dramatically reduces our competitive advantage on exports. By way of example: instead of buying two machines that would make a company twice as efficient and employ twice as many people, that company can only afford to buy one because of the extra tax costs.

Think how much cheaper cars would be if we didn't ban the importation of second-hand vehicles from Japan. The astonishing expense of Telkom's broadband has already embarrassed government when a recent international request for call-centre tenders received not a single bid.

It is wonderful that government has decided to unilaterally reduce some of the tariffs holding back our development. One hopes that this will continue long after the memory of the "black swan" explanations are forgotten to justify why the Green Point 2010 Stadium wound up costing R 14 billion.

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