How much is load shedding costing the economy?

The failure to solve Eskom’s strike suggests there’s no political will to solve it… Vested interests may be preventing a solution: Isaah Mhlanga – chief economist, Alexforbes.


FIFI PETERS: I read a note from an analyst earlier this week that said that [this is] one of the few times when going to a higher stage does not necessarily signal promotion or progression, and where going to that higher stage is actually a bad thing is when it comes to load shedding. As you know by now, Stage 6 started again today as some Eskom workers who were supposed to show up for work didn’t.

Eskom said this was making it really difficult to do the maintenance and other stuff that it needed to do to keep the lights on. We could probably get Stage 4 load shedding tomorrow, but that’s also pretty frustrating. We know that tomorrow Eskom is set to resume its wage talks with its employees.

But ahead of that we’re going to try to calculate the cost of load shedding and its impact on South Africa as a destination of investment choice. Helping us do that is the chief economist of Alexforbes, Isaah Mhlanga. Isaah, thanks so much for your time. I got my producer Kaldora to reach out to you after I saw your tweets earlier this week.

I know you personally and you have been, I suppose, optimistic in the sense of looking at the bright side of our economic situation, and you have backed some of the reforms that have been taking place. [But] I saw your tweet earlier this week about the fact that South Africa is now plunging into an abyss in front of our eyes, and that it’s really difficult to imagine serious investors considering South Africa as an investment destination. For me this is a significant change in tone from you. So help us get into your mindset and understand exactly what you’re thinking right now about South Africa.

ISAAH MHLANGA: Thanks, Fifi. I think you are right in terms of the views on reforms. We have seen some positive developments. Rating agencies Moody’s and S&P have affirmed that view by changing their outlooks. So I’m not alone in that perspective. But as far as where we are currently, a number of risks are all playing out at the same time. So a double-whammy, if you like.

If you look at Stage 6, what it means is eight hours of no power per day. That’s quite significant. If you have a small business you can be guaranteed that for much of the day you are not going to be able to operate, and your profits or revenues are going to be gone [with] that load shedding.

Now, if we try to quantify what is the equivalent loss or cost to the economy, if we use 2017 numbers of the cost of unsaved energy – these are numbers that have been verified by research from Eskom and Nersa – at R85 per kilowatt hour that is equivalent to R4.1 billion, which is quite significant if it lasts for 24 hours cumulatively, which might not happen in one instance but over a number of days. If you have 24 hours of Stage 6 load shedding, that’s a R12 billion loss to the economy. And that is quite significant.

Besides the direct costs, the perception or the signal that it gives to investors, we are doing reforms. There have been some positive developments – slow – but on the other side investors are looking at SA and saying, ‘Is this where we want to put our manufacturing plant, given that we are not going to have security of energy?’

I think if you are a serious businessman you are going to reconsider and look elsewhere where [you] can have energy. Those are the realities that we need to face up to and actually deal with our energy insecurity.

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FIFI PETERS: Sure. Your tweet was very insightful. As you said, Stage 6 happens for around eight hours [a day]. It’s R4.1 in terms of the economic loss. If you go to Stage 1 for even 1.5 hours, that’s a R100 million loss to the economy.

I’m not going to read through all the numbers, and for the listeners who are interested in seeing the numbers, ‘Isaah Mhlanga’ I think is your handle. But what I am going to ask is for you to explain further some of the things that you mentioned, because you said that a new economic consensus and approach is required for us to move forward. So unpack for us what that means, what needs to change, what needs to be improved for the situation to improve, as it were.

ISAAH MHLANGA: I’ll take you back to 2020 when the pandemic hit. We had a lot of debates at national level that we should use this pandemic to reconstruct a new economy that is going to include everybody, and in particular is going to include those that have been out of the labour market, so they can make a positive contribution and be able to spend on their own and have less dependence on the state. That was the debate.

Where are we now? The economy has recovered to where it was before the pandemic, and the amount of jobs has recovered, [but] they’ve not fully recovered. But if you look at the quality of the jobs that we have regained, if you look at the quarterly employment statistics published by Stats SA this week, that shows that 42 000 have been added in the first quarter of this year but 41 000 of those are part-time jobs.

It shows you that the business environment is quite uncertain as far as the future prospects of the economy are concerned.

So they’re not crystalising the full-time wage costs, because they don’t know [what] the economic environment is going to be. But, even within that part-time job component, government is the biggest employer – which is unsustainable.

Here is an economy that is coming out of Covid, that is making workers more vulnerable, which means they are not even regaining the same type or quality of employment they had, they are more vulnerable now. And still, those that had no jobs before the pandemic still don’t have jobs. Meanwhile we have an increase in cost base, talking of inflation at 6.5% headline.

But if you look at what people face in most cases at a personal level, they will tell you that every time they go to the grocery store their costs are actually much higher than that. That means this is an unsustainable situation. So we need a policy environment that is going to say, who are our true constituency? It is those that are outside the labour market, I would argue. But if you look in terms of our policy posture, it does not respond to that.

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Let me give you just one example. I read the other day that the Gautrain was going to be extended to the West Rand, passing through Randburg, going back to Sandton. Now, if you look at our public transport system, people can’t get trains to Soweto, they can’t get trains to Mabopane for instance, the can’t get trains to Daveyton. Those are people who need the infrastructure the most. But the debaters are saying, ‘Let’s extend that infrastructure to people – who already have cars – to move from the West Rand to Sandton. Who are our true constituencies?

I would argue we need to uplift more the poor people who are not participating in the economy by providing efficient transport networks that can enable them to go into places of work at a cheaper cost in a safe way. So far we are not responding to that.

FIFI PETERS: I think a lot of people would agree with you and also agree with the point that you made [regarding] their personal inflation rates being a lot higher than what is being reported and calculated by Statistics South Africa. Those are the correct figures. I’m not throwing any water against the national figures of inflation at 6.5%, but the reality on the ground is that people’s cost of living has increased a lot more than that, which is probably the motivation that the unions have right now in going ahead with their wage demands. I believe that they’ve turned down, reportedly, the 7% wage increase being offered by Eskom, which kind of makes things really difficult given the situation that Eskom is in itself, with the fact that its business is also not financially sound. It’s sitting with a huge debt profile that is a worry, not only to the business but to the economy.

The wage talks are resuming tomorrow. I’m interested in what a reasonable solution and a reasonable outcome looks like because, if Eskom goes above 7%, then there are worries about its financial stability. Perhaps you guys are going to start telling us about downgrades and, and and. If it goes below 7%, then probably there [will be a] continuation of what we’re seeing right now – workers still not reporting to work and still striking because of unhappiness with their pay. What do you see the reasonable outcome being?

ISAAH MHLANGA: The reasonable outcome is one where labour, government and Eskom management come to a decision to resolve the current strike, but to end the operational challenges that Eskom has, because it’s not really helpful for the economy.

Where it matters is [that] we were able to deliver the infrastructure projects for the 2010 World Cup. Why have we failed to solve Eskom for more than a decade?

It’s really a question that I can’t respond to, but for me it says there’s no political will to solve it. If we had political will Eskom could be solved, but the vested interests that exist perhaps are preventing that solution to be there, which I think is the man-made problem which can be resolved to the benefit of the country as a whole.

Read:
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So that’s the new consensus – that we need to actually fess up to say, ‘Let’s sit around the table, let government business, labour and civil society craft how we engage going forward, what we put as our most important steps to resolve the issues that we have’ – failing which we are going to end up with the scene that we saw last year in July in KZN and in parts of Joburg, which are not something that we want to repeat.

FIFI PETERS: Yes, and which I’m hoping that you are wrong about in terms of that being the eventuality. But thanks so much for your engagement. Isaah Mhlanga is chief economist at Alexforbes.

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