March 11, 2020
The Economic Cost of DarknessContact
Load-shedding or rolling blackouts as they are commonly known in other parts of the world, have become a mainstay of South African life. Since implementation in 2007, the South African government has been unwilling – or perhaps unable – to solve what can be best described as the biggest inhibitor to economic growth.
While some encouragement can be found from Andre De Ruyter’s appointment as CEO of Eskom and President Cyril Ramaphosa recent pronouncements that municipalities will be allowed to procure their power from independent power producers, and mining companies allowed to generate their own power, there still seems to be a lack of urgency to solve the problem. This policy brief will look to shed some light on the impasse that has led to years of indecision as well as make an attempt to estimate the total economic cost of the country’s energy insecurity.
Dark days ahead
Moody’s has revised SA’s 2020 GDP growth forecast to 0.4%, citing a stalling economy, the crippling effects of power outages and the expected economic impact of Covid-19 now having hit our shores. Furthermore, Stats SA recently announced that the South African economy contracted 1.4% in the fourth quarter of 2019, officially putting us in a recession.
As a result of the dismal Q4 performance, South Africa’s economy only grew 0.2% in 2019, its worst showing since the throes of global financial crisis in 2009, when it shrank 1.5%. We can only expect that the resumed blackouts will have an even more severe negative impact on Q1 growth numbers – especially when coupled with the coronavirus narrative. Research from Efficient Group found that load-shedding had reduced our GDP growth by roughly 0.30% in 2019, the equivalent to R8.5bn of real GDP.
Disincentivised and disinvested
Adding to the opportunity costs, blackouts have disincentivised companies from committing long-term capital to investment projects, further undermining both growth and employment prospects. The desperate exit of AngloGold selling their last remaining assets at half the book value is a clear indication of fading love for what was once the biggest economy and a gateway into Africa. Manufacturing, mining and other employment generating sectors have been the hardest hit.
It is further disheartening to see several mass retrenchments on the cards in such a high unemployment environment. Mining company Glencore has issued section 189 notices to 665 employees as it struggles to keep its Rustenburg Smelter operational due in part to uneven energy supply, Sibanye-Stillwater reported that 1142 employees have been retrenched following operational restructuring at its Marikana operations. Additionally, Telkom has announced it is considering 3000 retrenchments and SAA and Massmart are looking at a potential 4700 and 1440 employees respectively, who may lose their jobs.
Furthermore, the extremely high level of unemployed youth is a structural risk to our society. When considered in the light of our current low growth rate, expected additional destabilisation from the impacts of Covid-19 and our impending investment downgrade, the economic prospects for South Africa seem dire.
Zero-point-something growth outlook
Traditionally South Africa generated a considerable amount of its GDP from primary services that include mining, manufacturing and agriculture. Recent stats show that manufacturing production decreased by 5.9% in December 2019, owing to severe power shortages, which negatively impacted local economic activities.
The knock on effect of reduced productivity is fewer sales and exports, which ultimately reduces tax revenue collection for SARS. Trading and general economic activity have been severely affected by load-shedding. Eskom, which also faces its own troubles in terms of the exorbitant debt burden is another risk to the economy. Several bailout packages are rumoured to be in discussion behind closed doors, but we are yet to see a substantiated effort to resolve Eskom, other than the fiercely contested unbundling or separation.
Shining a wider light on risk
An overlooked aspect of load-shedding is the indirect costs of the blackouts. Frequent blackouts create darkness that can be exploited by enterprising criminals which has a further knock-on effect on insurance premiums for individuals and enterprises. When added to the increased operating expenses that come from having diesel generators and the cost of the delays in freight and cargo deliveries from the traffic chaos, the impact of the blackouts paints a very disconcerting picture.
In addition, the threat of Covid-19 is leading large companies to consider insisting that employees work from home. While in other countries this is a viable option, in South Africa, load-shedding significantly compromises mobile and internet connectivity. This undermines the potential of mobile working as a viable solution to South Africa’s Covid-19 containment endeavours – load-shedding becomes more than just an economic and security risk, it may be a health risk too.
More competition, more electricity, more economy
The darkness imposed by Eskom continues to cost the country dearly – directly and indirectly. President Ramaphosa must take decisive actions to bring about change before we run out of time. This would mean opening up the energy market to independent producers, fast-tracking the unbundling of Eskom and solving, once and for all, its debt problem. A tall order, but we have there is no room to delay any longer.