/ 3 February 2013

State dithers as crisis over Eskom price hike looms

New AngloAmerican chief executive Mark Cutifani
New AngloAmerican chief executive Mark Cutifani

This was the overwhelming view from those opposed to a 16% increase in the cost of electricity over the next five years, proposed by the state-owned power utility and deliberated by the National Energy Regulator of South Africa (Nersa).

"The South African economy was established on low energy costs and it is plain knowledge that a lot of economic activity would be immediately at risk should electricity prices continue to rise the way they are doing at the moment," Chris Hart, chief economist at Investment Solutions told the Mail & Guardian on Sunday.

If the proposed hike is granted, the wholesale price of electricity will have spiked by 543% in the period from 2007 to 2017 or at a compound rate of growth of 20% annually over the decade.

The South African Chamber of Commerce and Industry in their presentation to the hearings even predicted a 2.5% drop in gross domestic product and a 4.5% spike in unemployment should the increases be allowed to take effect.

The chamber added that, should the proposal succeed, businesses would lose varying levels of product competitiveness and customer support capability. The proposal has thus found few supporters from the business world, with several individuals echoing Hart's sentiment, and some even slated the move during the Nersa hearings, which ended in Midrand on Friday.

"People use the word 'crisis' and in many cases it's overused. In this case it's a legitimate word. At these sorts of numbers we really will struggle – we'll all struggle," Mark Cutifani, South African Chamber of Mines president and Anglo American chief executive-designate said on Thursday.

'Inconsistent' strategy
Besides job losses and depressed job creation, Cutifani warned of the real prospect of potential investors being scared away due to energy costs and other challenges to doing business.

"This strategy is inconsistent with the government's strategy to industrialise and increase employment," he said.

This view was supported by Adenaan Hardien, senior economist at Cadiz, who said significant increases might adversely impact growth.

"Significant electricity price increases pushes up the cost of doing business in South Africa," Hardien told the M&G.

"It is a bit of a catch-22 in that the increases are necessary to fund needed electricity infrastructure, not being allowed significant increases would reduce potential growth over the medium to long term," he said.

Yet, in spite of this apparent danger to the economy's immediate potential for growth, no direct mention was made of this when President Jacob Zuma issued a statement at the close of a government-business meeting in Pretoria on Sunday.

The president said government and the business sector would work "very closely together" to address the challenges affecting economic growth in South Africa – but made no direct reference to what these were.

Ironing out the obstacles
It was rather decided that government and business would meet within two months "to iron out obstacles to economic growth

The meeting was hosted by Zuma and was attended by Deputy President Kgalema Motlanthe, as well as economic Cabinet committee ministers.

"The absence of a concrete plan to deal with this pending crisis is a disaster waiting to happen," Hart said. "We need to realise that if this is not dealt with effectively, it could spell doom for South Africa's immediate economic prospects."

For Eskom though, the increase is essential within the energy framework the country finds itself in.

"Many of the suggestions and responses which were made during the Nersa hearings touch on policy issues, rather than being issues that Eskom can address on its own, so there are country choices to be made and policy frameworks that need to be put in place," Eskom spokesperson Hilary Joffe told the M&G.

Joffe added that Eskom made their proposal transparent and urged people to engage it. "We have listened and provided as much information as we could in our responses. The decision is now Nersa's to make," she added.

The decision on the increase was due to be announced by Nersa on February 28.