Johannesburg – Massive electricity tariff hikes by Eskom with heavy top-ups by municipalities will force industries – particularly light industries – to shut up shop, with a potential contraction of gross domestic product (GDP) and thousands of job losses being among the consequences of “a perfect storm”.
This was the warning yesterday from the Department of Trade and Industry (dti).
While acting dti deputy director-general Garth Strachan stopped short of calling on MPs to stop Eskom’s proposed 16 percent hike each year over the next five years in its tracks, he painted a gloomy picture for the economy if these increases – allied with up to 700 percent mark-ups by some metropolitan municipalities – were allowed to proceed.
The dti was also concerned by the “sharply escalating and bunched-up” electricity prices on the viability of the manufacturing sector. He warned the National Assembly trade and industry portfolio committee that the increases might have already reached a pivotal “tipping price” for companies.
The consequences had already been felt sharply in the Eastern Cape where manufacturing jobs had already been lost where the Nelson Mandela Bay metropolitan municipality was further charging a 548 percent mark-up on the Eskom price in 2011/12.
Already “upwards of” 300 companies – mainly in light industry – had closed.
Next week Nelson Mandela Bay foundries would be presenting their concerns to the committee. These include Autocast, an iron cast foundry, and Borbet, which manufactures parts and accessories for motor vehicles.
Autocast consumes 45 600 000 kilowatt hours a year – the largest power user in the province – and it has publicly acknowledged it has lost its competitive advantage to its German competitors because of recent energy cost increases. It produces exhaust manifolds, catalytic converter cones, axle components, bearing caps and crankshafts.
Strachan, a former Western Cape ANC economic affairs minister, said there was “a grave danger” of escalating administered and power prices “especially with municipal premiums added”, creating “a perfect storm” in the manufacturing sector.
His warnings are in stark contrast to the energy and public enterprises ministries, which argued that the increases were necessary.
The Manufacturing Circle put the consequences of high administered pricing bluntly.
“Electricity costs have rocketed by over 170 percent in South Africa over the past five years, while administered prices in [Brazil, Russia, India and China] have decreased by over 36 percent in the last decade,” said executive director Coenraad Bezuidenhout.
At the same time, the South African domestic market was under-protected against unfairly incentivised imports.
South Africa had seen a 171.7 percent growth in administrative prices – defined as a goods or service price as dictated by a governmental agency rather than market forces – between 2000 and 2010. In India, Russia, China and Brazil, these had contracted by 36.5 percent, 15.6 percent, 2 percent and 8.5 percent, respectively.
Brazil had announced a power cost cut next year.
Bezuidenhout warned that there would be a further manufacturing decline in South Africa over the next two years “unless key domestic policy issues and the unfair trade… are addressed immediately”.
One immediate step would be to implement power discounts for manufacturers.
Unless steps were taken, “more companies will close down, more jobs will be lost, the manufacturing contribution to GDP will contract further and the balance of payments situation will weaken”.
Citing academic studies, Strachan said that if there was a 2.8 percent cut in power demand for basic and fabricated metals, this would equal a 0.7 percent loss to GDP and the loss of 86 304 jobs. “Some municipalities… are using electricity tariffs to generate revenue and for cost recovery [for] inefficiencies. This may lead to closing down companies… it might be a case of killing the goose that lays the golden egg.”
ANC MP Bheki Radebe suggested that it was not Eskom which was to blame as the basic electricity price was competitive. The problem lay with local government mark-ups.
In contrast, DA MP Geordin Hill-Lewis suggested the government should instruct Eskom not to raise prices beyond inflation, noting that Eskom itself reported tariff increases of above 25 percent since 2008.
ANC committee chairwoman Joan Fubbs suggested that manufacturing sector discounts for electricity should be studied further.