Bridging the gap: SA’s healthcare conundrum

Podcast key moments

• LL: Letlotlo Lenake
• AS: Dr Aslam Dasoo

00:00: Intro

02:47 What are the biggest challenges facing South Africa's healthcare system?

DR:

“By the time we came to 1997, there was a comprehensive clear health policy that took into account the current situation in 1997 globally, economically, in South Africa and a very smart approach, which recognized that we have a private system and a public system - a small private system, but which was of a sufficient quality to be very useful. And so, what you wanted was a gradual integration to create one system, which would leave the private system profitable for those who wish to use it and a public system, which would cater for the 90 percent of the rest of the population, which the portion of the population that uses the public system. So, what happens? Naturally, there is the integration initially, which is all good. So now we've got one public health system from all the various bits and pieces.”

“But the private system continues to grow, it's highly efficient and people want to go there. But after 2000/2003, what you got was a decline in the management of the public system. And what happens then is that despite the fact that you have constitutional access - what you're finding is reduced access despite the fact that in the Mandela administration we built one thousand primary healthcare facilities in one of the largest ever clinic building programs in the world, which brought healthcare for the first time to almost every South African within 10 kilometers of their doorstep. But then there was a decline in that.”

08:39 The economic impact of a weak healthcare system

LL:

“If you're thinking about it from a trade perspective, what does that do for investor sentiment? Do investors want to put money into potential countries that have poor healthcare services, and especially for industries that have a high reliance on employees or the potential of employees? And what happens to your employees who aren't able to be active? What happens from a productivity perspective? It doesn't send the right signals from that perspective. And it is largely negative.”

10:41 Opportunities for public private partnership in healthcare

LL:

“So, you could say there’s a clear profit motive within the private sector that everyone is trying to push this fee for service kind of environment we have, especially in the South African context. Whereas in theory, the more people that you drive into the system should be bringing costs down, but there's maybe a balance of risk and the way that people incentivize in the public and the private sector are kind of misaligned.”

12:30 What should be the key focus areas to improve healthcare in SA?

AD:

“We must separate health from healthcare, your healthcare system is at the end of a long chain - that's the healthcare delivery system, public or private. Your health comes from other factors; genetics, environment, social factors and cultural factors, which all together determine how you maintain your health. It's very clear now that the greatest healthcare costs come toward the latter parts of life. All health is determined by social and economic determinants, but mainly your social organization. So, you need good nutrition, adequate shelter, access to potable water and clean sewage, access to basic education, personal and communal safety and you need those things to work. All those factors determine your health and when there's a breakdown in any of those modalities, then your health suffers and that's when you need the health care system. So, a health care system develops in response to that.”

17:50 Can South Africa afford NHI?

LL:

“I've written past research on this, that if the NHI bill is implemented in its current form without any material changes, it presents a material risk to our fiscus. If you look at some of the financial projections on which it's based, it’s about R256 billion once it's fully implemented. And these are numbers that haven't been updated for inflation or based on the white paper or projections that are almost more than 10 years old. So, if you take into account inflation, you potentially could get a significantly bigger number than R256 billion on an annual basis. And if you're taking that as a percentage of GDP, you could run somewhere in the double digits potentially. As an emerging economy, to spend that amount of money on healthcare is quite significant.”

20:35 NHI, is there an alternative?

AD:

“No, and for a very simple reason that the NHI is a political sleight of hand. It's a distraction. It's a deflection from a government that over 20 years has brought one of the best propositions we've had for anything approaching, say, the NHS in the UK to its knees, it's done that.”

25:40 Lessons from other countries

LL:

“The challenges that we face as a country from a healthcare perspective are potentially not unique. If we look at some of our emerging market peers like Brazil, Mexico, Thailand, Kenya, for example, they still deal with the same issues of inequalities between access. But the way they're going about it, it's very clear that they're following approaches where you have a mixed healthcare system across both parts where the public and the private sector work together to deliver healthcare. A big part of that in my view, is that a lot of these relationships are built through trust. I think both parties, public and private sector, have to work together and come to the same table to build. I think that's the only way we can get to some sort of a place where we can actually have a thriving healthcare system in my view, and it all starts with leadership and governance.”

27:13 How do we fix the healthcare system?

AS:

“If 85 percent of your population use the public system, spend 85 percent of your time on that. Fix that. Fix it to the extent that those who don't want to be in private healthcare, start migrating backwards. We have such an excellent cohort of health professionals, world class. It's a resource and a national heritage, it's not for the government to do with as it pleases. So, that's what you want in the first instance. And the second instance, the private sector must be regulated, there's the recommended regulations in writing – implement. You do those two things, in five years you will have a different healthcare system, and you tax fund. You don't put an intermediary like the NHI fund in your funding of public health, you just create costs there. You tax fund as you are tax funding now, but you make sure it's not stolen. So, the money must go where it's supposed to go, and then you've got a great system.”

17:13: Transitioning companies present an opportunity

IR: Boipelo, just in terms of global investments, we are seeing a massive outpouring of investments for companies with impressive green mandates. So in countries like New Zealand and in cities like Abu Dhabi, these companies rely less on fossil fuels and compete with each other for opportunities in the energy transition. Are there any indicators that help check the progress of these companies towards their journey of becoming more sustainable?

BR: We've seen more and more companies setting decarbonisation targets. For example, MSCI World Index, more than half, so that is 52 percent of listed companies have published their climate targets for 2023 and beyond. And this might sound like a small number, but in 2015 this number was only 6 percent of companies, but however of those MSCI companies, only 9 percent have science-based targets.

This means in a simplified way that a smaller percentage of companies have had their commitments assessed by the science-based targets or short for SBTI.

And what SBTI essentially does, it verifies and assesses these targets to see if the commitments made by these companies are basically realistic.

We monitor these companies with the help of a third-party data provider. And they have a net zero or climate capability, which assesses the net zero of these companies.

So the data provider first checks if the company has an ambition target. This is if there is an existence of a long-term net zero commitment by 2050, and then they try to see if those emissions are on track with the ambitions made. So if a company meets all these criteria, then it is seen as aligned with the global goal to achieve net zero.

 

17:54 Monitoring of companies' transition targets is vital

IR: I mean, it's interesting that you say that there is a small percentage of companies that have had these science-based assessments. Is The whole field sort of in its infancy, or is there a really great data set that's beginning to set a trend for companies in terms of realistic goal setting and keeping their commitments?

BR: Initially, as I said, the bare minimum was to disclose. Now, a lot of companies have started disclosing.

I think the next step, which is a step that a lot of the companies are taking, is to get these emission targets verified. And we've seen that increase come through with the companies that are getting verified by SBTI.

20:04 How will the adoption of AI impact net zero?

IR: It seems like no conversation these days can be had without including the looming subject of AI. We're not about to reveal some AI-powered investment strategy, but there are some revealing mechanics and stats in the context of energy that are worth noting.

IR: With the rise of new technology, artificial intelligence is used as a mechanism to provide solutions in the energy sector. We also see mining and software companies, they're joining forces to develop AI software for the energy industry.

However, there are concerns that AI uses significant water to run and cool data centers. A 2023 Google's environmental report stated that in 2022, the company's data centers used up to 5. 6 billion gallons of water. Now this water footprint raises concerns on the kind of impact AI might have on water and global energy.

Are there any impacts that we might experience in the future if AI continues to be regarded as a solution?

BR: So there's obviously a huge excitement around the A. I. theme. What is interesting is that there hasn't been as much light shine on how intensive AI Is around energy and water data.

Energy consumption has been stable at around 1 percent off global electricity production. But this is expected to increase significantly with the rise and the demand to power faster processing units.

Interestingly, these tech companies require a huge amount of water to cool down the equipment when processing large volumes of data. What is fascinating in the sustainability context is that all the companies that will be dominant and use AI have pledged to decarbonize and they've made climate commitments, but as the energy needs increase due to AI, we expect that they will continue to be a greater need for renewables.

IR: But it's not just energy and water use that data centers are big on. There's also a need for metals, a very big need.

CP: Over the last couple of years, we spent about 100 billion annually on new data centers. That number is now maybe 200 billion, but every billion dollars spent on a data center requires 7 billion to be spent on new electricity supply to that data center over the 20 year life that data center exists.

That's a massive amount of copper, basically the copper intensity of data centers and AI and all that sort of thing. It's anything between 27,000 tons of copper per gigawatt of capacity in those data centers.

That's a big number in terms of copper demand. And it's one we're watching very closely. 

22:42 Is AI a responsible investment?

IR: Those stats are astounding! Barry, given the impact of climate change on the world's water resources, should we be more circumspect before we invest in AI?

BS: I think absolutely it's an important area of growth. I think it's just up to each company individually to understand the environment they're operating in, to make sure that they domicile their manufacturing capability in areas where there aren't water shortages, where they aren't impacting the community around them, and where there is appropriate infrastructure in place.

And I think that is what differentiates a good quality management team. It's making those assessments up front. I think the other part of it is, will be technological innovation. So while these chips right now do run hot, I think as technology advances, they'll be able to operate at lower temperatures as their technology evolves.

So I think we can't stop progress. I think we just have to manage it carefully. 

23:31 2022 Inflation Reduction Act and its impact

IR: Zane, I want to go to the United States and the 2022 Inflation Reduction Act. It's considered groundbreaking legislation when it comes to addressing climate change. It offers funding to businesses and also supports programs that focus on speeding up the transition to cleaner energy.

A number of businesses are set to benefit from this initiative. Are there any high quality companies in the U. S. and further that have a strong focus on sustainability in their investment approach?

ZB: It is a seismic shift in policy in the U. S. By the Biden administration, there's discussion as to what extent parts of this act are at risk.

But even the quantum 369 billion, it's not enough. It is below what the US Needs to be spending incrementally. Each year, we should be spending an extra four trillion. That's trillion with a T globally to achieve net zero.

And China being by far the biggest investor, even in terms of if you aggregate everyone, we are still far below what we should be doing.

But it is helpful. And we are, in terms of our portfolio and investment ideas, we are seeing benefits to certain companies. In terms of the wind market, we already seeing, uh, benefits accrue to some of the wind turbine manufacturers.

These are investable and for illustrative purposes, there's a company called Vestas is it's a Danish company, but it pretty much operates in what is now a duopoly in the US in terms of the wind turbine manufacturing industry between itself and general electric.

And in terms of the tax credits and the incentives, we are seeing a ramp up in orders, particularly from the U. S. to put down factories in the US and to make these wind turbines in the U. S. for consumption of the US wind power industry. So we are starting to see a ramp-up in demand stimulated by the Inflation Reduction Act.

25:27 Global Sustainable Equity Fund

IR: Closer to home, Investec created the Global Sustainable Equity Fund. Boipelo mentioned it earlier. It provides investors with an opportunity to put money in companies that have business fundamentals guided by sustainable development goals and still make impressive investment returns. Zane and Barry explain.

ZB: With our Global Sustainable Equity Fund, we continually I'm thinking about ways to invest in the energy transition and maybe just taking a step back from specific companies or even subsectors, we've broken it down pretty much into a value chain and this is the energy transition.

Although it's been underway for some time, it's still very much in its infancy where you look at renewable penetration globally, it's around 15 to 20 percent of the energy mix are still far away from being a dominant source.

But in terms of looking at the value chain, instead of us trying to get overly clever and trying to predict the future as to whether it's a VW or Tesla that wins out in the electric vehicle race, we look at the value stream and where we're seeing the demand or maybe safety and probability is upstream.

That's where resources are very important because they are at the starting point of the whole value chain. There's also got to be complementary storage around that and what that looks like.

And then there's the end-use application. So instead of guessing how quickly the end-use application is going to transition, you spend a lot of time thinking if we sit far upstream, that will provide us with a degree of safety. Because there will be winners and losers in the energy transition.

Ultimately, what we try and stay true to, is we have this strong sustainability-linked agenda within the fund, but ultimately we still remain true to an investment philosophy because not all themes are profitable from an investment return perspective.

And we try and pursue and see companies that demonstrate strong quality characteristics, which we defined as above cost of capital returns.

So they value creating led by strong and aligned management teams, and then the energy transition as a growth opportunity provides that runway for compounding returns for our investors.

BS: So what we try and do once we've reviewed all those companies from a fundamental point of view is to review them in terms of their contributions to the United Nations Sustainable Development Goals.

So as long as the company on a net basis or in aggregate is contributing to the Sustainable Development Goals, either through their revenue or their operations, they then become investable to us.

So it could be a company like Vestas that is manufacturing something in the renewable space, or it could be something like an Anglo American that is mining commodities that are going to be used in renewable systems ultimately down the line, but they do so in a responsible way.

28:15 Investing for good without compromising returns

BS: So as long as they're contributing to the sustainable development goals and their value creating that makes them investable. Like I said earlier, that all boils down to the management team.

So the sort of visionary management that understand that they don't operate in a vacuum, that they need to take all stakeholders into account and that they need to operate in a responsible and sustainable manner. We believe those are the companies that will succeed in the long term and will provide investors with the best returns.

Our funds do often perform different to the benchmark MSCI will because a lot of the underlying constituents are not investable to us.

They don't meet our criteria. In 2022, we outperformed the MSCR world. Last year we underperformed.

I think there was a case that a lot of global equity funds also underperformed last year because the performance was concentrated in a small number of companies, namely the Magnificent seven. And unfortunately at.

A number of those seven weren't investable for us, so they don't screen as sustainable. They accounted for probably half of the return on the market over that period.

At the same time last year, which was also quite impactful for us, there was a big derating in the clean energy space. And there were probably two key reasons for that.

Very high interest rates globally resulted in a lot of the big projects that were about to be launched being put on hold because of the economics of those projects.

They just didn't make sense anymore in terms of providing a decent IRR. The other part was caution around the potential for another Trump presidency and the risk that he tries to undo a lot of the work done by the Biden administration, which was put in place through the Inflation Reduction Act.

But we are at a point in the cycle where we believe rates are about to start turning down. Uh, and that change in the cycle, as well as the fact that we've seen this big de rating in the clean energy space, makes us quite optimistic about the future from here. I'd say over the long term, we should do well,. But we won't always do what the market does.

That's because we have a high active share or simply we just look different to the index. 

30:09 Energy transition- the megatrend that offers a myriad investment opportunities

IR: Net zero and the United Nations Sustainable Development Goals aren't just the purview of governments and big corporations. There are things that every citizen can do to help move the world to net zero. And as we've heard in this episode, there are ways to invest in this reality that will help lead the world into a sustainable future and can deliver profits while doing so.

CP: This energy transition is the megatrend of our lives. It's going to influence lives in so many different ways in the next 20 years. It brings with it myriad opportunities for investors, right from the upstream side of things, from mining companies. All the way through carbon capture, nuclear and enabling companies.

So I think there's a host of potential opportunities out there to invest in. That's what we're doing here. We sit every day and we think about them and we hope to introduce these to our clients in the years to come.

BS: Energy transition is extremely commodity intensive. Projects have been delayed, but they haven't been cancelled. Net zero deadlines remain in place.

In addition, there's a lot of traditional infrastructure that hasn't been replaced or upgraded for decades. This demand coupled with limited supply due to underinvestment in mines will be very beneficial for commodity prices and those countries that are commodity exporters.

And that's fantastic for South Africa as we're a commodity exporter. And it's wonderful that there are a number of world class mines operating responsibly here that we're able to invest in.

ZB: Well, what we are learning is that starting with a blank sheet of paper, humanity would have not created the energy system that we have now, knowing what we know now and the technologies available to us now and the cost of those technologies.

And what excites us is we have what we've got, but ultimately where we need to go is very exciting for us. And for us as investors, we just need to be true to our investment philosophy and cognizant of the investment cycle.

IR: Thanks for listening to this episode of The Current brought to you by Investec Focus Radio. In our next episode, we're taking a deeper look at the role that oil and gas have to play in the energy transition.

You can find all the episodes of this series at www.investec.com/thecurrent  or wherever you get your podcasts.

[00:33:15]      If you enjoyed this episode, please rate it. Leave a comment and forward it to your friends and colleagues.

23:40: Affordability of renewable energy

IR: And Chris, what about affordability? The one issue is supply and us being able to have electricity when it’s needed, and the other is affordability. 

We've seen increases, exponential increases in, the price of power over the years. How does South Africa find the balance between producing energy that’s sustainable but also affordable?

CH: I can refer to my own personal experience. We installed solar and batteries probably about a year or so ago. And we financed that through our home loans. We just took an extra bit on our home loan and now we pay interest on that. And the interest payment on that loan is roughly equivalent to the reduction in our electricity cost. 

So, for my monthly expenses, for myself as an individual, it was cash flow neutral from day one. Pay a bit more interest, pay a bit less for electricity. And that's just an individual that doesn't have access to capital in the same rates that a corporate would and is not generating electricity at utility scale. 

So, what it does suggest is from an affordability perspective, it is affordable already, certainly for the large users of electricity to transition, if it is affordable for an individual.

24:51: Insights from COP28

IR: The final part of this episode touches on a global approach to sustainability, through the lens of COP28. 

Sam and the Investec Sustainability team attended the event, so I asked her what insights she gleaned. 

Sam, one of the outcomes was a decision to create a fund that could help countries like South Africa address its energy crisis. 

Would this help South Africa play its part in reducing greenhouse emissions? 

The developing world or the developed countries, you know, spend the money and we pick up the tab from a climate change perspective on the continent.

SM: So first, quite interestingly, was to hear that we're currently calling it the Loss and Damage Fund, but the name still needs to be confirmed as the US doesn't like loss and damage. 

But I think whatever you call it, I think it's a step in the right direction. It's not the first year that this is coming up. So, while there are pledges and we're really happy that, you know, there was consensus, I think within the first 15 minutes or something, we'd like to see the commitment. And once we have the commitment, how can we better use it? 

Of course, this is going to reduce our reliance on coal, and fund our transition as South Africa. That's what we would be able to use it for. 

But I think there's another challenge that comes from that for ourselves. How are we, as South Africa, going to ensure that we're using the funds effectively? How are we going to make sure that they're being managed appropriately? And then, of course, I'm going to bring it up again, that the transition is fair for everyone.

26:30: Closing comments

IR: There is, of course, still a long way to go for South Africa. Not just in creating a sustainable energy industry, but one that's also equitable. 

We're just at the start of what will no doubt be a long and difficult journey, but we have a good roadmap, the right focus, and don't forget that good old South African resilience.

CP: So unfortunately, loadshedding is with us for a while. But ramping renewables is the right thing to do. It's the correct thing to do in terms of the just energy transition.

JM: I think there's a lot of things that we can look at that are moving, that are very positive. We've got to really focus on implementation and not get too caught up in saying, you know, everything is burning and that we've got so many problems. 

SM: It will lead to massive energy efficiency and, a modernised grid. So, people will not have to worry about loadshedding. We will have cleaner air, we'll have energy security, we'll have green jobs and a sustainable future.

IR: Thanks for listening to this episode of The Current, brought to you by Investec Focus Radio. This is episode one of 10 episodes where we’ll have in-depth discussions about the state of energy in South Africa, what the future holds and what a just energy transition looks like. 

To make sure you don’t miss an episode, follow Investec Focus Radio SA wherever you listen to your podcasts. And if you enjoyed this episode, please rate it, leave a comment and forward it to your friends and colleagues. 

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