The International Monetary Fund’s (IMF’s) latest annual assessment of our economy is blunt and highly critical of some economic policies, as well as the management and performance of State-owned enterprises (SOEs).
The IMF wants more competition in the South African economy and in the labour market. The IMF and rating agencies have also long pointed to SOEs’ big influence on the economy – by creating growth bottlenecks and their insatiable need for government guarantees when they expand capacity.
David Lipton, first deputy managing director of the IMF, speaking at Wits Business School, said: “Then there is the matter of State-owned enterprises. They play a crucial role in the economy, but they are plagued by inefficiencies, poor management, and weak balance sheets.… Moreover, the private sector is unable to enter key sectors dominated by SOEs. This only fortifies the bottlenecks in the economy.”
A few days later Eskom announced it no longer wished to buy more power from independent power producers (IPPs).
This is exactly what the IMF is worried about: an SOE making economic policy by shutting out the private sector, instead of government.
Eskom’s power-generation woes have been a brake on the economy and now, just when they appear to be solved, it influences the economy again.
Eskom prices have driven inflation and it does not make sense to block cheaper power.
Firstly, yes IPP power is more expensive than Eskom power at present, but even Eskom states that the weighted cost of IPP power fell from R2.17 to R1.71 per Kwh. That is a 21% decline in one year, while Eskom’s average cost increased by 5% to 64 cents a kilowatt hour in the last year.
Prices for renewables have fallen to below current Eskom levels and will in probability continue to decline when compared with Eskom’s own prices. The utility’s new power stations are far more expensive, according to Chris Yelland.
Eskom has not been able to keep a lid on new build costs and calculations show that the cost of production of Medupi and Kusile will be R1.05 and R1.19 per Kwh. These calculations estimate a weighted cost of capital of 8%, while Eskom and government bonds presently have yields above that level.
Further cost overruns are very possible along with higher interest rates, so the average price of Medupi and Kusile could come in at over R1.30 cents a Kwh (Any further delays will make for even higher prices). What? Current renewable power at half the price of future fossil fuel power?
Currently, the latest solar prices in the United Arab Emirates show costs declined to less than 43 cents (South African currency), or about one third of Eskom’s new power station costs. Can we ignore this price trend or will we rather risk even higher monopoly prices again?
Weaker economy due to higher electricity prices
Electricity weights over 4% in the CPI basket while Eskom is the monopoly which controls the basic price thereof. This price has increased so much in recent years that the use of electricity declined to the extent that the structure of the economy changed.
Excessive price increases have had a big structural effect on the economy. Beneficiation has given way to services while self-reliance is a major trend too.
Electricity bills as a percentage of what we produce:
While SA uses less.
This has resulted in electricity costs increasing from about 3.5% to 6.5% of the value added in manufacturing since 2006! This despite the fact that industry used 12% less electricity than in 2006, while costs increased by 276%.
Despite moving away from beneficiation and heavy industry, SA manufacturing now pays more for power per unit of production.
This makes it difficult for SA Inc to compete. Of course, this hurts growth and jobs – exactly what the IMF has warned about.
Then, just when IPPs can compete on price, Eskom says no. This constrains growth.
Other sources of finance help the SA balance sheet
Eskom was a constraint on the SA economy for nearly a decade when independent producers were welcome. The department of energy set up policies bringing in independent producers.
The IPPs also finance their own infrastructure, which helps cash-strapped Eskom, making the decision even more curious. It will ensure less pressure on tax payers to fund coal and nuclear infrastructure.
Government reaction to Eskom will be closely watched by the market.
Uncertainty and investment do not mix well
When Eskom could not deliver for the economy, the economy was forced to adapt at a very high cost to jobs, growth and investment. Some estimate we lost 10% of our GDP potential.
Independent production was encouraged, which led to substantial investments in the South African electricity sector. IPPs brought new capacity as did firms that became self-reliant.
Electricity investment became a major driver both from IPPs and Eskom. They all made investment decisions based on a policy.
Now Eskom wants to protect its high-cost investments at the expense of private producers. Eskom wants the rules to change. This sends the wrong message to investors, who want to invest with policy certainty.
South Africa cannot allow policy changes too suit one player. That will destroy investment.
The economy is being held hostage once again by our monopoly electricity producer. The more Eskom wants to do itself, the more expensive electricity becomes. The result is this will push up inflation, cause interest rate increases and slow economic growth. This in turn will result in more unemployment and increased poverty.
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