Overcoming the Conservation of Energy

What lies beneath ...

The London Underground – the world's first inner-city mass-transit underground railway system – first opened in 1863. The underground allows 3 million people a day to get in and out of the city.

The benefit to London of such infrastructure is incalculable and has been vastly exceeded by its original costs. At the same time, the miracle of London's current success depends on the continued functioning of the train network. If it stops working so will London.

The same is true for any economy.

A sophisticated and invisible network of connections make the seemingly miraculous process of wealth generation and job creation possible. The system can take a lot of abuse, yet it isn't indestructible. The number of mangled motorcar wrecks in scrap-yards attest that even the best cars eventually become rusted heaps if they aren't maintained correctly.

Such neglect is visible throughout the South African economy; most obviously in public schools, public health, and public electricity.

Mining companies have announced major retrenchments. They are the inevitable consequence of being unable to operate without electricity. Employees may like to believe that their bosses can let them work reduced hours or send them home while keeping them on full pay. That isn't possible for long. Without production, there is nothing to sell. Without anything to sell, there are no profits. Without profits a company doesn't need employees.

Any large manufacturing company wishing to expand their operations must consider the availability of electricity before they spend millions of rands on a new plant. Many platinum producers have been frustrated by their inability to up production to take advantage of the platinum price's stellar $1,900/oz.

Private hospital administrators are in a similar fix. There is plenty of demand for their services, but, say hospital strategists, their key concern is the lack of staff. "Before we build a new ward, we ask one question: are there enough nurses?" says one.

Just over 2,000 nurses a year graduate in South Africa every year. There are over 33,000 vacancies in the public health sector alone. There is no way that, any time soon, this crippling shortage will be met. Despite 25% unemployment in South Africa, hardly any of these are nurses.

Anything that is in short supply drives up the price of that good. Including nursing.

Companies cope in two ways when critical constraints are limited: either they reduce the quality of the good to use less of the critical constraint, or they increase the price to be able to purchase more of that constraint.

We have an example of both. Public hospitals cannot pay more (or charge more) and so the level of service has gradually declined. Private hospitals maintain their quality but at an increasing cost, passing this on to their consumers.

The Health Minister has declared that this is outrageous, that the private healthcare industry is profit-driven, not accessible to the poor majority and must be regulated. It is the government's mandate to care for the poor, not the private sector's. That doesn't mean that the private sector hasn't shouldered some of the load.

As a clearly incensed Dr Richard Friedland, CEO of Netcare, declared during the recent witch-hunt – apologies, conference – in Cape Town aimed at reducing the cost of healthcare: Netcare operates subsidised nursing colleges where 40% of graduates go to their competitors. They spend money on Netcare 911 – an emergency service that assisted over 15,000 people in 2007 at a cost of R 20 million. Their corporate social responsibility spend is now 4.6% of their company profits.

They are not obligated to do any of this. If the government insists on fixing prices below the service cost then there is only one response. Services must suffer. First thing to go, says Friedland, is that healthy CSI budget. "We're cutting it to 1%."