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Eskom should put house in order before a tariff hike - manufacturers

Nov 14 2017 14:42
Natalie Greve

Local manufacturers are energetically opposing energy utility Eskom’s most recent tariff hike application, arguing that the scandal-hit parastatal should first rationalise its internal inefficiencies and overweight headcount before appearing cap in hand before its industrial customers.

Eskom has requested that the National Energy Regulator of South Africa (Nersa) approve a 19.9% increase in electricity tariffs for the 2018/19 financial year, which it is currently reviewing. This follows Nersa’s approval of 2.2% average electricity tariff increase in the previous financial year.

According to André de Ruyter, Nampak CEO and chair of industry organisation the Manufacturing Circle (MC), the manufacturing sector could not afford an above-inflation increase in electricity price.

He told journalists at the release on the MC’s Investment Tracker (MCIT) for the third quarter on 8 November that Eskom’s motivation for the dramatic price hike was the result of poor governance within the parastatal and internal inefficiencies rather than a rise in operational expenses.

The MC has called on Eskom to “do what other manufacturing businesses do” and address its own efficiencies before it seeks to recover losses from its customers. De Ruyter also expressed confusion at indications by Eskom that the price hike request had been further motivated by low electricity demand.

“We don’t fully understand increasing the price of a commodity because demand is too low – it seems that they should drop the price to boost demand. We don’t see it as a sustainable model.

“An opportunity is rather to look at how Eskom can reduce its internal cost base, which has increased due to the number of employees, while electricity sold has decreased. It doesn’t make good business sense,” he remarked.

According to a report by the Eton Group, released in September, that analysed Eskom’s most recent financial statements, the organisation’s headcount increased by 45% since 2007/08, and has remained between 47 000 and 48 000 for the last four years.

In contrast, energy available for distribution has actually decreased by 2%.

“The total energy available for distribution, coupled with the decline in sales, raises concerns regarding the level of overstaffing at the utility,” reads the report.

According to a survey conducted by the MC to determine the extent to which its members are reliant on Eskom-provided power, almost 90% indicated that electricity was the primary source of power for their operations. A little under 10% indicated that they relied on gas.

Of the 90% of those that were electricity-reliant, around 30% received their electricity directly from Eskom, while just under 70% indicated that their electricity was provided by municipalities – which implied an even higher electricity tariff.

“The proposed electricity price increases are a source of significant concern,” De Ruyter told journalists. “The 20% price increase is likely to be significantly more, as municipalities use electricity as an important revenue generator and mark up this price.”

The organisation said in a statement to media that the proposed electricity price hike would severely impact operating costs, thus increasing the cost of production and the product cost while reducing profit margins.

“Manufacturing firms indicated that the increase in costs would not be fully recovered from customers. Therefore, manufacturing firms are likely to explore rationalising strategies that include reducing employment levels and withholding investment in expanding production capacity,” the statement read.

De Ruyter would not be drawn on the potential impact of a 20% increase in electricity prices on the sector’s 1.8m jobs, saying that the industry did not want to be seen as “threatening” Nersa and Eskom and that it was committed to continued engagement.

“Manufacturing is a very job-rich sector and should be contributing between 28% and 30% to GDP, but it’s actually contributing less than 13%. Around half a million jobs have been shed by the industry in the last decade, which is made worse by the sector’s job multiplier of between five and eight times,” he said.

The MCIT for the third quarter, meanwhile, dropped by five index points to 60, indicating a contraction in investment by surveyed manufacturing enterprises. The decrease in investment is driven by a contraction in expenditure on plant and equipment, as well as on salaries and wages.

Manufacturers surveyed by the index expected investment to continue to contract into the fourth quarter of the year, but most believed in an underlying resilience to the sector, despite political concerns undermining confidence and investment.

The MCIT surveys companies that employ a total of 86 919 employed with an annual revenue of R1.8m. Around 46% operate in Gauteng, followed by KwaZulu-Natal (22%) and the Western Cape (16%.)

electricity  |  nersa  |  eskom  |  manufacturing

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