The country’s electricity utility Eskom is becoming a national embarrassment. Facts shared by Nedbank Group Economist Dennis Dykes prove the folly of trying to enforce central planning in South Africa’s highly complex market-driven economy. Unbelievably arrogant decisions forced through by interfering politicians, especially during the term of the Zuma Administration, is wreaking havoc with electricity supply and, as a result, economic growth prospects. Zuma says the recent election proves the nation voted for more of the same. If so, we all need to be better informed. Have a listen to this interview. – AH
ALEC HOGG: Welcome back to Power Lunch. Big business and organised labour are worried that Eskom’s battle to have enough power (not just now, but for the whole of the next five years) will affect economic growth and South Africa’s ability to create jobs. We have Dennis Dykes in the studio with us. He’s the Chief Economist at the Nedbank Group’s Economic Unit. It’s been an interesting change in the strategy that Eskom are now, finally flagging after being forced to admit it. They wanted to keep the lights on at just about any cost and we’ve enjoyed the fact that we haven’t had any problems in the last few years, but it’s now taking a toll.
DENNIS DYKES: Yes. Obviously, if you’re running your current capacity at full capacity all the time and you don’t have much downtime to actually try to do some maintenance then clearly, you’re going to run into problems. The big problem of course, is that we just have not added to generating capacity. In the last six years or so, Eskom spent about R300bn. They’ve had a 300 percent price increase for the price of their goods and we’re actually producing ten percent less than we did in the middle of 2007 so it’s a real disaster.
ALEC HOGG: Who’s feet does it lie at?
DENNIS DYKES: Obviously, its project management, which has been very problematic to say the least, but Government as well, Government has looked at any of its infrastructure projects as being something where they can tick a number of boxes. For example, does it fit the local procurement? Does it employ many people, etcetera?
ALEC HOGG: Do we get a little slice of it for the ruling party (as in Chancellor House)? That has to have some play in that.
DENNIS DYKES: That’s obviously one of the concerns, particularly going forward with things like nuclear as well. The most one to tick is of course, ‘are we generating more electricity’ and with all these objectives, they’re good objectives etcetera. They do actually want to try to create local industries etcetera, but the very first objective must be to actually meet the energy requirements so that your companies are getting sufficient electricity so they can produce sufficiently, which then actually puts money in the coffers of the fiscus. Additionally, it allows you to raise tariffs and all those are not actually happening, so it’s very problematic.
ALEC HOGG: Peggy Drodskie is with us. She’s the Chief Operating Officer of SACCI. She’s on the line. Peggy, from your perspective, having heard what you did yesterday from Eskom, that they’re now changing their emphasis, are you putting out a different signal to members? For example, go and buy yourselves some generators because you might need them.
PEGGY DRODSKIE: No, we haven’t done that. The reason is that many are aware of the particular problems that are being experienced and a large number of them have already made alternative arrangements. This stems right back from when we had the rolling blackouts in 2008 and prior to that, when the electricity supply became very constrained. Many of our members have already made alternative arrangements and electricity-intensive users have come to arrangements with Eskom as well to scale down their use of electricity.
ALEC HOGG: But clearly, that scaling down cannot continue indefinitely. It appears as though Eskom might be asking them to scale down still further. Is that possible?
PEGGY DRODSKIE: That is going to be very problematic. If you consider that the electricity and energy-intensive businesses are the ones that are actually providing the economic growth for the country, which is abysmally low, it will impact the ability of South African business to continue operating efficiently, very negatively.
ALEC HOGG: Dennis, just unpack this for us. Clearly, you’ve explained to us that it’s been a very poor management of the whole energy crisis in South Africa. I think it’s there for all to see. How important is the provision of electricity and of reasonably priced electricity to the economic growth?
DENNIS DYKES: Well, it’s absolutely crucial. Bear in mind that we’ve come from a tradition of actually being very high intensive users for things like mining and heavy industry, and that’s because electricity was actually quite cost-effective in South Africa. It was one of our competitive advantages. As I said, we’ve had this 300 percent increase in the price in a very short space of time. The economy’s had to adjust very quickly. Had we continued growing at the rate that we were in 2007, we would have run into a brick wall much sooner. We probably would have lost something like ten percent of GDP. My own estimate is that in the last five years, we’ve probably lost something like two percent of GDP, which is an enormous sum – vastly outpacing some of the considerations.
ALEC HOGG: What has the GDP done in the last five years? How much bigger has our economy gotten?
DENNIS DYKES: It’s not that we’ve been growing at two/two-and-a-half percent. It really hasn’t been that spectacular and then of course, there have been energy efficiencies – households and companies, as has been illustrated – but I think the low-hanging fruit there has been taken away. The big tragedy of course, is that had we gone for more a more diversified supply of electricity much sooner… Had we actually gone with IPP’s (independent power producers) in gas for example, at the coast, done much more in the way of co-generate electricity, or actually signed power agreements with Botswana in 2007, which was an option as well, this would not have been a problem.
ALEC HOGG: So there were some very bad decisions.
DENNIS DYKES: Very bad.
ALEC HOGG: You mentioned earlier (and Peggy, I’m going to ask you to answer from your perspective, too) nuclear. Now, the talk is our President went off to Russia to go and sign some kind of nuclear deal. Whatever whomever is paid what will presumably come out in the wash if it happens. Does South Africa (a) need nuclear and (b) if it does, why has it taken so long for a decision to be made?
DENNIS DYKES: Look, we’re obviously going to need beyond Kusile and Medupi. You mentioned earlier on that in five years’ we’ll have a problem but in fact, we’ll have a bigger problem in ten years’ because a lot of power generation is going to be put on ice because of the age of the power plants. The problem with nuclear though, is you have this massive upfront cost (and they’re talking R1tr) and you have a Government that is fiscally challenged at the moment. We actually just do not have that capacity. Far better to go a modular route with something like liquid gas where you can basically ramp it up very gradually and hopefully, it becomes more cost-effective over time as you make oil discoveries off the coast. There are those types of options, such as co-generated electricity as well where initially, there was enormous reluctance to sign any sort of off-take agreements with Co-Gen and that’s definitely to our detriment now.
There definitely are options. I think there are much more cost-effective options. The other thing is that nuclear doesn’t come very quick. It’s very expensive – upfront. The running costs are very low, which is an advantage (if you don’t have complications, clearly).
ALEC HOGG: Nobody throws a bolt into the nuclear reactor. Let’s bring you in here, Peggy. From your perspective, it does appear from what Dennis is saying, we had these options as a country, to work more closely between the private sector and Government, but Government has made its own decisions and now it has its own bed to lie in, which we’re all going to pay for. Are you find that that’s changing? Are you finding that there is more of a desire to come into a partnership arrangement?
PEGGY DRODSKIE: Firstly, I do need to say that I do agree with Dennis, but I think we also need to bear in mind that future power stations, when you are using coal, is not the most ideal way in terms of the environmental impact, which coal generation has, so we need to balance that as well. I think if you look at what is being said, there appears to be a move to a greater collaboration between business and the independent power producers/renewables etcetera. Of course, the proof of the pudding is really in the eating and we need to see what actually comes out of it. They are saying they’re now into the third round of the PPP’s, but the problem is that we’re still waiting to see what sort of impact the independent power producers can make because although there’s talk there’s not much happening.
ALEC HOGG: Peggy Drodskie is with SACCI. Dennis, just to pull it all together, we do have a shale gas reserve, which is the envy of many countries in the world. We’re moving ahead there. Shell is putting a lot of money into discovering or looking at whether it is indeed the resources we thought it was. Isn’t that an option – to start getting serious about electricity generation?
DENNIS DYKES: Yes. Obviously, the environmental concerns there – the concerns in the Karoo about the long-term effects on water etcetera…. It’s not an easy one. It will take some time to actually develop, but I think the key there is that at least Government’s allowing exploration so that you can do a reasonable cost benefit of what’s involved.
ALEC HOGG: Are we right to be suspicious, as a nation – as citizens of a nuclear plant coming to this country? We’re suspicious because it’s talk everywhere. ‘Well, we know that some palms are going to be greased if that happens because so much money is required from the fiscus’. Are we right or should we be more trusting?
DENNIS DYKES: I think that as public citizens, you have to be suspicious about these things. It has to be done transparently. If they go that route, it has to be on a transparent, open bidding basis otherwise, there’ll be huge suspicion around the terms of the contract.
ALEC HOGG: And maybe some more work for Thuli Madonsela. That was Dennis Dykes, the Chief Economist at Nedbank Group’s Economic Unit.
There may be slight errors in this transcript
