Question

What are the economical concequences of Eskom's financial crisis in South Africa? Include references (10)

Answer 1

Critics have warned Eskom's above-inflation increase will have detrimental effects on consumers and the economy. The National Energy Regulator of South Africa (Nersa) announced that Eskom's tariffs will increase by 9.4% in 2019, 8.1% in 2020 and 5.2% in 2021.

Eskom is a major driver of the economy not only through its role as primary provider of electricity, but also by way of the economic stimulus provided through its operations and significant capital expenditure. Eskom provides more than 90% of all electricity in South Africa, a critical input to most major industries.

South Africa ranks 86th in the world by nominal GDP per capita (6,179 US$). The top 10 countries by GDP (nominal) per capita are: Luxembourg, Switzerland, Macau, Norway, Iceland, Ireland, Qatar, United States, Singapore, Denmark, Australia.

Eskom is wholly owned by the South African government: Generation. Transmission. Distribution.

Eskom is the largest of South Africa's state owned enterprises. ... The company is divided into Generation, Transmission and Distribution divisions and together Eskom generates approximately 95% of electricity used in South Africa, and ~45% used in Africa.

There are warnings that continued load shedding will hamper South Africa’s economic growth, projected to modestly improve in 2019.

Chief economist at Old Mutual Investment Group Johann Els believes if SA experiences Stage 4 scheduled power cuts for the rest of the year, it could shave 0.5% off his forecast of 1.5 % gross domestic product (GDP) for 2019. The country experienced five days of consecutive load shedding this week and suddenly switched from Stage 2 to stage 4 on cutting 4 000 megawatts from the national grid after a further seven generation units tripped.

Els foresees occasional rounds of Stage 1 load shedding ahead and the broader impact of this is the dent in business confidence, which is difficult to quantify.

Eskom announced on Saturday however that the likelihood of load shedding over the next few days was unlikely.

Independent economic strategist Dr Thabi Leoka said that power cuts have the hardest impact on small businesses, planning and the manufacturing sector.

“Eskom is undermining his [President Cyril Ramaphosa’s] plans to ensure policy certainty”, Leoka told an investment conference in Sandton on Friday.

‘Cut the fat’

Leoka, a non-executive director at SA Express said she empathised with Eskom CEO Phakamani Hadebe amid the financial and operational woes he has to deal with at the power utility which was “at the centre of state capture”.

“I don’t think we are making the tough choices, the highest cost is labour, the fat has to be cut,” Leoka said.

She added that the unions opposing restructuring at Eskom by splitting it into three separate entities have not offered an alternative solution. Leoka said a future model could be a mix of partly privatised electricity generation methods, while government owns the transmission and distribution networks.

The National Energy Regulator of SA (Nersa) will keep energy costs in check according to Leoka, saying an urgent compromise is needed.

However, Els foresees real decisions being taken about Eskom only after the May 8 elections.

He predicts government will announce an approximately R15bn cash injection to Eskom in this week’s budget speech as there is some wriggle room with "significant underspending" in the past financial year.  

Els also warned that ratings agency Moody’s will only accept government taking on a portion of the power utility’s R420bn debt if there are plans for cost-cutting and restructuring.

Ramaphosa told parliament on Thursday that cost-cutting measures at Eskom will not result in retrenchments.

Eskom, one of the largest power utilities in the world employed 47 658 employees as of 31 March 2017.

A 2016 World Bank report found that the state owned company was potentially overstaffed by 66% but admitted to some limitations in its study. Research conducted by Nersa in 2017 found Eskom employed 6 232 more people than was required.