Nedbank: South Africans can no longer pay for inefficiency

1Any further increase in electricity tariffs will come on top of a 350% increase since 2007 and will be unaffordable says Dennis Dykes, chief economist at Nedbank.

Dykes reacted to news that over-burdened consumers and businesses may face an electricity tariff increase of between 11.5% and 13% next year, instead of the 8% determined earlier.

On Wednesday the national energy regulator (Nersa) determined that Eskom had a R7.8 billion shortfall in 2010-2013 due to a variety of factors, including lower than expected sales volumes, and higher than expected primary energy costs.

This shortfall will be clawed back through increased electricity tariffs, but Nersa has yet to decide on how it will be implemented.

Eskom actually applied for almost R18.4 billion, but Nersa only approves the recovery of prudently incurred costs. It is still to publish detailed reasons for its decision.

Dykes said South Africans can no longer pay for inefficiency. “If Eskom was a private company in a competitive market it would not be able to claw back costs. It would have had to change its processes,” he said.

“If a business paid 10% of its revenue to cover electricity costs in 2007, it will now be in a tight squeeze with these costs having increased by 350% since then,” he added.

Dykes said Eskom is spending R250 billion on new generation capacity, but these projects are subjected to huge delays and are not ready to generate energy and subsequent revenue.

He said the energy market should be opened up to allow private companies to generate base load electricity. Unless that happens, the cost overruns will continue, he said.

“The policy responses from government are not reasonable and do not acknowledge that what we have, is not working.”

Coenraad Bezuidenhout, CEO of the manufacturing circle, said a further increase will be problematic for manufacturers that are still battling to recover from protracted strikes.

“The manufacturing sector is currently shrinking and has already lost 150 000 jobs in the first two quarters. The sector cannot absorb further increases, especially in the light of the huge margins municipalities charge on top of the Eskom tariffs,” he said.

“Many business owners currently have to take hard decisions just to survive”, Bezuidenhout said.

“Government has to decide how important manufacturing is for the country and whether it is going to assist the sector to absorb this shock.”

Christo van der Rheede, CEO of the Afrikaanse Handelsinstituut (AHI) said electricity tariffs have a widespread effect in the economy. It should enable, rather than inhibit economic growth.

“Especially small businesses in rural areas are battling because some municipalities see the sale of electricity as a money-making scheme,” he said.

He also called on Eskom to act against defaulting municipalities and individuals, including those in Soweto. “It is unfair that the productive side of the economy should pay more and more for electricity while others are not paying at all,” he said.

Peggy Drodskie, chief operating officer of the South African Chamber of Commerce and Industry (Sacci) said further electricity tariff increases will come at a very difficult time for consumers and businesses with other costs like fuel and interest rates also on the rise. She said they will battle to absorb further increases.

Eskom is in a difficult position where it has to encourage users to reduce electricity demand, and subsequently suffer the impact of lower sales volumes and revenues, she admitted.

Sacci is also concerned about Eskom’s outstanding municipal debtors.

Professor Raymond Parsons from the North West University Business School said: ‘It is essential that Nersa adopt a highly conservative approach to Eskom’s application to claw back certain costs, and the fact that less than half of what Eskom wanted has been granted should be welcomed.

“Nonetheless, with the SA economy currently in a fragile state, it would be less of a shock if the inevitable additional increases in electricity tariffs were spread over more than one year, as this makes it easier for business and consumers to absorb the hike. Excessive electricity tariff rises are a major reason for persistently high inflation in SA and Nersa’s decision will reflect in the CPI next year, dependent on the final percentage.”

He said the decision by Nersa also highlights the methodological and structural issues around Eskom pricing that still need to be urgently addressed and resolved, if business and the economy are not to experience more shocks ahead. “The latest proposed tariff increase comes at a time when Eskom showed a profit, when the threat of a credit-rating downgrade remains and where a capital injection is needed from government. The latest Nersa decision and what it presages ahead are a wake-up call to decision-makers to restore confidence in the important role of Eskom in the economy by tackling the restructuring of the parastatal and its finances.”

Source: MoneyWeb

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