The devastating impact of power cuts on South Africa’s economy

The severe power cuts in South Africa are hurting the country’s economy and stifling growth, warns the Reserve Bank of South Africa. The bank has estimated that the country could lose up to 2 percentage points in growth due to power cuts and projects growth of 0.7% next year, assuming fewer days of power cuts. The International Monetary Fund predicts growth for South Africa of 1.2% this year and 1.3% next year. The power cuts are causing lower production, higher costs, and reduced income for businesses, such as mining and retail, and are impacting crop yields due to reduced irrigation. The pending 18.65% increase in Eskom tariffs will further increase the cost structures of South African companies. Financial journalist, Jonathan Katzenellenbogen, unpacks the somber facts on the table.

Two percent of GDP lost – power cuts make SA a high-cost economy

By Jonathan Katzenellenbogen

About thirty years ago, when I worked as a management consultant, our team was often asked by clients about what competitive advantages were due to their location in South Africa. There were three slides to show that South Africa had two advantages which could not be easily eroded.

There was a slide showing that Eskom was in the lowest 10 percent of power producers worldwide in terms of its tariffs. Next was a slide showing that there was a next-to-nothing chance of power cuts. During the 1970s and 80s Eskom had built its fleet of coal-fired power plants and was now considering mothballing a few power stations. And next was a slide stating that the roads, railways and ports were a key South African advantage.

The conclusion of our slide pack was that these advantages would last for many years.

Even if President Cyril Ramaphosa does declare a state of disaster to deal with the crisis, or introduces some sort of energy relief package for small business, we will pay a heavy price for power cuts. It is unclear how a state of disaster can actually help solve this sort of crisis when it takes years to build a large power station. Easing and speeding up the regulatory process for new projects could help.  

We now face the prospect that SA will become a significantly slower-growing, underperforming and higher-cost economy.

 Last week the Reserve Bank said that the country would lose up to two percentage points in growth due to power cuts. If the loss were greater, the Bank’s estimate of 0.3 percent growth would go down to negative territory. Next year, the Bank projects growth at 0.7 percent, based on the assumption that there will be fewer days of power cuts.

In its updated World Economic Outlook released yesterday, the International Monetary Fund (IMF) is slightly more bullish than the Reserve Bank and predicts growth for South Africa of 1.2 percent this year and 1.3 percent next year.

As our population growth rate is currently a little below one percent a year, that means on a per capita basis we are hardly growing, even on the more bullish IMF forecast.  And a negative shock could easily push us into an economic contraction.

The Bank says the country grew by 2.5 percent last year, partly due to a snap back from two Covid-19 lockdown years. It might well have been higher, had there not been severe power cuts toward the end of last year.

With power cuts becoming more severe, the Bank has raised its forecast of the number of days with power cuts from 100 to 250 days.  The Bank says its forecast of an almost flat economy is also due to other “logistical constraints”, a reference to the problems with the rail network and ports.

Power cuts are the binding constraint on our economic growth. 

The own goals of the Eskom and Transnet crises mean we are severely underperforming, whether we grow at 0.6 or 1.2 percent this year. In its updated World Economic Outlook released yesterday, the Bank expects the world economy to grow by 2.9 percent, emerging markets and developing economies by 4 percent, and sub-Saharan Africa also by 4 percent.

Strong growth can be a self-reinforcing cycle as investors take note of an economy in which they should expand. Jobs are created, higher incomes are generated, tax revenues rise, and this helps create the conditions for the solution to many problems.

Assessing the real cost to the economy of load-shedding is a difficult task. It means slower economic growth, increased costs for business, lost opportunities, difficulties in ensuring reliable delivery times, and reputational damage to the country. And there is a heavy price to pay from the immense uncertainty about the future that comes with blackouts.

The economic cost has been reduced by recent heavy private investment in generators and solar panels. But the Reserve Bank argues that this has only reduced the economic cost at lower stages of power cuts: Stages 1 and 2. Besides, the investment in generators and solar comes at a cost. It is a form of taxation, albeit not paid to the government, but one that must be met if people are to stay in business.

Lower production due to blackouts means economies of scale can be lost, and hence there are higher unit costs of production. Poultry producer Astral has said disruptions due to power cuts push up costs and reduce production, and in the process raise prices.

Power cuts mean reduced production and higher costs for mines. They cannot get rock to the surface, or they face higher operating costs such as electricity during load-shedding. As a result, gold miner Sibanye-Stillwater is considering closing its marginal operations and not investing in new mines.

Retailers that are unable to invest in generators are suffering. Customers tend to stay out of the stores during power cuts and fewer people visit malls. Shoprite Holdings says it spent an additional R100 million a month on diesel during the severe power cuts last year. According to My Broadband, Vodacom spends R1 billion a year on batteries to counter the effect of blackouts on their network.

The Bureau of Food and Agricultural Policy, cited by the Bureau for Economic Research, says a third of total farming income depends on irrigation. Reduced irrigation means a higher risk of crop failure, and lower yields and income.

A survey by the Council for Scientific and Industrial Research of nearly 500 small and medium-sized companies found that they suffered an average loss of R8,000 per month in income due to power cuts.

Further upward pressures to the cost structures of South African companies will come with the pending 18.65 percent increase in the Eskom tariff.

Then there is the negative economic impact of Eskom bailouts. The transfer of much of the R400 billion in Eskom’s debt to the state is likely over the next few years. This is a gross misallocation of resources, as a properly functioning Eskom could have paid this off itself. And what is so outrageous is that Eskom will need continuing bailouts.

Add to this the failings of Transnet and the economic price of incompetence rises. The Richards Bay Coal Terminal through which most of our coal is exported does not have sufficient capacity. That restricts exports, mining revenue, and tax revenue. Overseas demand for our coal is robust but last year the terminal shipped only 50 million tons, the lowest amount since 1993 when 51 million tons were exported. Cable theft and insufficient availability of Transnet locomotives are problems, so the mining company has to use road freight, which pushes up costs.

How wrong we were as consultants to expect that competitive advantages would necessarily be long-lasting. 

The views of the writer are not necessarily the views of the Daily Friend or the IRR.

*Jonathan Katzenellenbogen is a Johannesburg-based freelance financial journalist. His articles have appeared on DefenceWeb, Politicsweb, as well as in a number of overseas publications. Jonathan has also worked on Business Day and as a TV and radio reporter and newsreader.

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