It is not common for a large listed company with thousands of employees to publish a formal announcement warning shareholders that up to 40% of its production is under threat due to interruptions of basic services.
In the rare cases it does happen, it is usually a mining company working in remote areas close to countries embroiled in civil war.
Nobody expected a chicken farm near Standerton to announce that its operations are under threat due to a lack of water, especially not with the Vaal River running through the middle of the town. Yet Astral Foods had to warn shareholders last week that its operations in the area are suffering as the Lekwa Local Municipality is incapable of supplying enough water to its farm and processing facility close to the town.
Food security impact
The situation not only affects Astral shareholders or employees who might lose their jobs, it is also important in the context of food security in SA. Astral is one of the biggest producers of chicken in the country and the operation in Standerton usually contributes 40% to its production.
Andy Crocker, Astral’s managing director of commercial operations, says the plant in Standerton has the capacity to supply two million chickens per week. Astral’s total broiler production amounts to five million every week.
The plant needs five megalitres of water a day to operate at full capacity, but suffers from regular interruptions in supply. “We are only receiving 1.8 megalitres per day, resulting in the operation only being able to operate a singe shift,” says Crocker. “It produces less than half of the normal output.”
Astral even obtained a court order to try and force the municipality to fulfil its obligation, but said in the announcement last week that the situation had deteriorated further: “The substantial undersupply of water has escalated notwithstanding a permanent order of the court requiring the municipality to secure a minimum necessary supply.”
Crocker says that Astral applied for and was awarded an urgent order on April 4, which required the municipality to provide the plant with water at the level of pressure and at the quantity it had done for the period prior to the interruption. “Following further interaction with the municipality it was agreed to replace this order with a mutual agreement ensuring Astral a minimum supply of four megalitres per day, pending repairs to municipal infrastructure, but this order has not been adhered to,” says Crocker.
Astral warned that the problems with water supply will have a significant effect on profitability and calculates that it will reduce profit by at least R85 million.
The company estimates that additional costs to try to manage the water problems will amount to R19 million, while the forced reduction in production will see R31 million evaporate, trying to slaughter chickens at different facilities adds R25 million to costs, and chicken feed and related costs due to delaying slaughter will add another R10 million to the losses.
Crocker says Astral is prepared to take further action to enforce the court order and do whatever else necessary to minimise harm to the Standerton operation, as well as recover costs that have resulted from the municipality failing to meet is obligations.
Municipality seems oblivious
It seems the municipality does not take into consideration that Astral is by far the biggest employer in the area. Crocker told Moneyweb that the plant employs 2 425 people and creates employment for at least another 600 people at local suppliers to the farm.
The problems are already affecting workers; with the plant only operating at 50% capacity, the company had to reduce working hours by half. Astral will be forced to reduce operations permanently if the situation does not return to normal, says Crocker.
A closer look at Lekwa municipality sheds more light on Astral’s problems. The Municipal Financial Sustainability Index by Ratings Afrika ranks it as one of the worst in SA.
Lekwa was one of the first stops when Zweli Mkhize, then minister of cooperative governance and traditional affairs, visited distressed and dysfunctional municipalities in Mpumalanga during August 2018.
The visit was prompted by reports of sewerage running down the main street and the municipality dumping refuse on open plots.
Lekwa is also on the list of municipalities that does not pay Eskom for electricity.
It is one of Eskom’s biggest debtors, with arrears of R563 million at the end of Eskom’s last financial year.
It seems the recent period of load shedding aggravated the deterioration of infrastructure in Standerton, with water pipes and pump stations failing when electricity supply recovers after an interruption, especially in the absence of proper maintenance.
A summary of the Lekwa municipality’s financial statements published in the Local Government Handbook: South Africa shows the municipality has deteriorated year after year during the last five years. The operating deficit increased to R383 million in the year to June 2018 compared to R335 million the previous year and a deficit of R195 million in 2014.
In the process, the municipality has destroyed the ‘community wealth’ with liabilities currently exceeding assets to the tune of R106 million compared to a positive R1.5 billion in 2014.
Unauthorised, irregular and fruitless and wasteful expenditure during the period exceeded R645 million.
A recent donation of R35 million by Sasol – ironically towards a water supply project – was delayed when two senior ANC councillors were involved in an alteration during a council meeting in April at which Sasol was to present the donation. An argument between council speaker Miriam Khota and chief whip Mapaseka Molaba led to a few slaps and charges of assault against each other.
Astral has investigated the possibility of building its own water treatment plant and pumping water from the Vaal River directly, but it will be costly. Obviously the cost of such a project will be compared to the cost of moving the plant elsewhere, which will come with job losses.
“The deterioration in municipal infrastructure is not supportive of the economic growth so desperately needed and sought after in the country, especially in rural areas where jobs are most needed,” says Crocker.