If you thought 2009 was bad, the coming years are going to hurt even more than our current recession.
Eskom is pushing for a 45% hike in tariffs, each year for the next three years.
The request has economists concerned that the spike will place further pressure on consumer price inflation (CPI).
In addition, the request by Eskom to use the tariff to cover its operational expenditure as well as fund its new building programme is problematic.
According to Annabel Bishop, group economist for South Africa at Investec, the cumulative effect of 45% increases will equate to a 250% hike over five years.
”Infrastructure should be financed through borrowings, operational costs through revenue. The biggest cost is capital expenditure, which we estimate at R1,25-trillion to 2025,” said Bishop.
”Eskom and/or the South African government should borrow the funds for its infrastructure expansion from the World Bank so it can rapidly embark on expanding its capacity to enable the economy to run at a 6% to 8% growth rate.
”This does not mean it is an alternative to ongoing hikes, as hikes are needed for operational costs, but should not cover infrastructure spend.”
Eskom garnered a R9,7-billion loss on its books this year, thanks to problematic commodity-linked pricing contracts with large aluminium and ferrochrome smelters. Had the embedded derivatives in the contracts, of around R9,5-billion, not had such an impact, the company would almost have broken even.
Domestic consumers pay twice as much as large industry and even more than energy-intensive users such as the aluminium smelters.
These particular tariffs, however, remain a secret between Eskom and its energy-intensive customers, such as BHP Billiton.
Domestic consumers paid an average of 54c a kilowatt hour last year, while industrial users paid about 22c a kilowatt hour, according to Eskom’s multi-year price determination review application.
The document was published in an edited form on Tuesday after the full application was leaked to Reuters last week. Parliament did not wish to have the figures made public because of the consternation it would cause, according to media reports.
Eskom maintains that industrial customers subsidise domestic customers, since distribution costs to industry are far cheaper than the cost of distributing power to residential users.
But this does not factor in the hikes that municipalities will add on top of Eskom’s charges which, according to economists, are likely to increase by a further 45%. For municipal customers this could equate to a 90% increase in total each year.
Nor does it account for the fact that this scenario will leave Eskom with a cash shortfall of R30-billion, or consider the discounted tariffs that Eskom gives to big industry.
According to Eskom, the subsidies that commercial and industrial users pay towards residential users range from between 7% for large industry to 16% for business. These figures do not account for the large discount given to the smelters.
Economist Mike Schussler believes this argument holds no water. ”At best, direct Eskom customers are subsidising industry, if at all. But bring in municipal increases and the picture is very different.”
In addition, should average tariffs increase so dramatically, the argument, if it is true, that industry subsidises domestic consumers would no longer be valid.
According to Schussler, the profit margins on electricity made by municipalities in South Africa is historically very high.
”Municipalities use electricity to fund other services and this effectively becomes a tax,” he said.
Incidental debt, or money owed to municipalities by residents, has soared to R37-billion across South Africa. This excludes the R80-billion in debt that consumers owe credit providers.
”The local consumer is deeply indebted and these hikes will only aggravate the situation,” he argued.
Schussler estimated that indirect effects on inflation could see CPI rise as much as 3,9 percentage points. While these indirect effects will only be felt over time, it will still have a severe effect on the economy.
”If these hikes go ahead, South African domestic consumers could have among the highest tariffs in the world. This makes no sense for a country that is coal-rich, does not import its primary fuel, does not have far to transport that fuel and does not make use of more expensive green technologies,” he said. ”This points to some serious inefficiencies in the system.”
There is a ”lack of transparency” regarding how Eskom has decided on these numbers, Schussler said, given that people cannot make appropriate decisions when all information, including details on the commodity-linked contracts, are kept hidden.
The current state of Eskom points to a greater malaise among state-owned enterprises and their impact on the economy, he said.
”Greater competition needs to be introduced into the economy.”
Bishop called on Eskom to approach institutions such as the World Bank for funding.
”An ever-increasing financial Âburden is being placed on the dwindling taxpayer base. South Africa’s proposed health and welfare policies borrow heavily from developed countries and, as such, are often not appropriate [to South Africa],” said Bishop.
”The proposed [national health insurance] will further add to the financial burden on the taxpayer, with the electricity tariff hikes further reducing SA’s level of competitiveness and employment-creating potential.”
Virgil James, a spokesperson for the city of Johannesburg, declined to say how much municipal tariffs were likely to increase: ”It’s bad enough that Eskom’s prices are going up. We do not want to alarm residents with speculation about how much municipal rates may increase.”
Eskom had not responded to requests for comment by the time of going to press.
