Power hikes may scare investors

Johannesburg - South Africa's days as a cheap investment destination for power-intensive industries such as mines, smelters and manufacturing plants are numbered.

After this week's 31.3% increase, South African electricity tariffs for industries are more expensive in dollar terms than those of China, parts of Eastern Europe, certain states in the US, as well as parts of Australia and New Zealand, among others, says Economists.co.za director Mike Schüssler. Prices to households are already above the global average. Although Eskom is giving a much larger discount to industrial clients - industries here are paying about 39% of what households are paying, compared to 60% in the US - we no longer offer a cheap alternative.

Thus far South Africa has achieved reasonable success in attracting power-intensive investors, including chrome and aluminium smelters. "These industries are perhaps not so important in terms of job creation, but a product like aluminium is tremendously important for the South African motor industry and the balance of payments. It's not simply a question of jobs," Schüssler points out.

Abel Malinga, head of the Industrial Development Corporation's business unit for mining and processing, says their partners that are heavy power consumers have not yet indicated that high energy costs will be a "serious concern".

"If you compare the tariffs [for industrial consumers] with those of developed countries like Japan, we are still relatively cheap," reckons Malinga. "The increases that Eskom is requesting will also enable IPPs [independent power producers] to earn almost market-related prices.

"This will make the environment much more attractive for IPPs to invest here, and also for companies to begin joint generation projects. It will improve the security of the power supply, and attract new investment," he continued.

But it is not only heavy power consumers that could be frightened off by the higher tariffs.

Schüssler says services businesses will also examine what they have to pay for services, and what they get in return. "If services are very cheap but delivery is not perfect, people tend to forgive you. But if services are expensive amid continuing power cuts and the roads are still in poor shape, that's another story. It is also important to remember that this is clearly not the last of the big hikes, he notes.

Not only will it be more difficult to attract foreign investors, but companies that are already operating in the country could decide to shift their investments.

"The bigger picture is that South Africa has very cheap coal and sufficient reserves for 200 years, while the mines are situated very close to power stations. Why, then, is our electricity expensive, when we actually should have cheap electricity?"