The poor in the South African townships are feeling the brunt of it already, a growing electricity crisis that will squeeze already meagre household incomes, spur inflation, add to the costs of essential foods, and raise transport costs in a country whose mass transport systems are utterly inadequate. Already saddled with a more than 30% hike in metered power costs for this year, they were told to expect a hike of a further 150% over the next three years.
At the centre of this crisis is a state-owned electricity utility which is amongst the largest in the world and is certainly a giant on the African continent – Eskom, the power producer. Eskom generates 95% of South Africa’s electricity and an astonishing two-thirds of the electricity for the African continent. The utility has 36,200 megawatts (MW) of net generating capacity, most of which (32,100 MW) is coal-fired. The electricity goes out to consumers through a network of more than 300,000 km of power lines, 27,000 km of which constitute the national transmission grid of South Africa.
This June, the National Energy Regulator of South Africa (NERSA) approved an average price increase of 31.3% for Eskom on the standard tariff for the period 01 July 2009 to 31 March 2010 (nine months). This has resulted in an increase in the average standard tariff from 25.24 South Africa cents/kWh to 33.14c/kWh. In its June decision on approving the price increase the regulator had stated: “The approved price increase on the average standard tariffs includes a limited price increase of 15% to both Eskom and municipalities’ poor customers. It must be noted that this is an interim measure until the implementation of inclining block rate tariffs for protection of the poor.”
Before arriving at its decision to approve, the regulator had received objections and submissions concerning Eskom’s planned tariff increase. NERSA summarised some of the key objections in the ‘impact on the poor’ category of objections as:
- “The poor cannot afford a price increase of 34% [which is the hike Eskom had proposed]. The current global financial crisis is already impacting on the poor, further price increases in electricity will only add to their burden.”
- “An affordability framework to address the impact on the poor should be considered. One stakeholder even suggested the use of inclining block rate tariffs to protect the poor.”
- “The current free basic electricity allocation of 50 kWh/month is insufficient and should be increased to 100 kWh/month.”
- “An increase in electricity prices will lead to more disconnections for the poor which only adds to the problem as many of these residents operate small businesses from home.”
- “Illegal connections will increase.”
South Africa’s per capita GDP (in USD at purchasing power parity (PPP) using IMF estimates, for 2008) is 9,456 which is far more than its neighbours in southern Africa such as Mozambique (1,264), Zimbabwe (whose hyper-inflation has made the comparison meaningless) and Namibia (6,122), with Botswana (12,948) being another story and an economic and governance outlier for the entire continent. Its population of 49.66 million is sharply stratified by income inequalities which on the ground presents a picture very different from that of the official per capita income. South Africa produces 17% of the continent’s GDP (2008 data – USD 461,767 million).
What was Eskom’s justification in June to its millions of consumers for the proposed increase? It appealed to NERSA to say that the proposed 34% rise is driven partly by huge increases in the utility’s primary energy costs, which were estimated at around 15% increase from the previous financial year 2008-09. Eskom said its existing power stations are operated at higher than the normal load factors and as a result long-term coal supply contracts need to be supplemented with additional coal procured on a short-term basis (less than five-year contracts) as no long-term contracts are available. Eskom asserts that coal procured on a short-term basis is significantly more expensive than contracted coal.
The power generation and management crisis then also has much to do with the political economy of coal in South Africa. In 2007, South Africa produced 256.7 million metric tons, and consumed 184.1 million metric tons. The vast majority of consumed coal is used in electricity generation and the synthetic fuel industry. Almost one-third of coal produced in South Africa is exported, with the primary buyers being Germany, Spain and Japan. The coal-mining industry is highly concentrated with six companies – Anglo Coal, BHP Billiton, Sasol Mining, Eyesizwe Coal, Kumba Coal, and Xstrata Coal – accounting for 90% of coal production. Production and consumption of coal in South Africa have grown steadily over the past two and a half decades, at an average annual rate of 2.7%. In 2007, about 113.2 million metric tons was burned by Eskom in its power stations
To what extent are the big six of coal in South Africa pressurising the monopoly state power producer – or acting in concert with – to set power consumption tariffs? South African media, although very forthright about social justice issues (and this is one), had little to say on the industry dynamics during October, when I spent most of the month there. However what did happen on 13 October outraged all classes of South Africans.
Eskom announced that it wanted three annual increases in power prices of 45% each, with the first of these proposed hikes to take effect on 01 April 2010! The state power producer then went on to say that it could have applied for an increase of 151% to an average price of 83 cents (Rand 0.83) a kilowatt-hour (kWh) with effect from April next year. “It is acknowledged that such a significant correction in one year may have a severe impact on customers and the economy,” Eskom’s chief executive was quoted as saying (he quit early in November).
The announcement, coming on top of the 31.3% hike approved for July 2009 to March 2010, provoked a massive outcry in the country. The biggest of the South African labour unions, Cosatu, said it was “extremely angry” at the “outrageous and insensitive request for a whopping” 45% a year electricity tariff hike for the next three years. “Cosatu rejects it outright, especially given the continued absence of clear and effective measures to protect the poor.” Trade union Solidarity warned that Eskom’s proposed electricity tariff increases could result in more retrenchments in the mining industry, where close on 40 000 people had already lost their jobs.
Business Unity South Africa, an industry association, said the proposed tariff hike of 45% per year for three years will administer “a serious shock to the economy just when it should be coming out of a recession”. BUSA said the proposed increase would be “bad for inflation, growth and small business in particular. Although the quota of free electricity would be raised to assist the poor, they would not escape the rise in costs elsewhere if inflationary pressure rose generally. It is clear from recent consumer price inflation data that electricity costs are playing a major role in preventing inflation from falling faster. This keeps interest rates higher than they otherwise need be and hampers economic recovery.”
South Africa’s National Consumer Union attacked the proposal, saying it had come at the worst time for consumers. Ina Wilken, vice-chairwoman, was vitriolic: “It’s nice for everybody to climb on a podium and tell us what they have got to do, but the problem is why didn’t they do it a year ago when things went bad and we had load shedding? They are saying if you don’t pay we will not be able to give you electricity. We ask the government why must the consumers now stand in and pay extra for the next three years? And we say to consumers they must start using less electricity. Get yourselves a gas stove and get yourself another form of energy. The cost of everything we use is going to increase and we are going to have an inflation figure that is right through the roof.”
National Consumer Forum chairman Thami Bolani placed the new proposed tariff hike in household perspective: “We are horrified because these increases are going to be unaffordable for many consumers. Can you just imagine for a family of four on a salary of Rand 10,000 a month with the electricity prices more than doubling in less than three years? A lot of families right now simply can’t cope and if you are going to increase electricity, people are going to be paying more for food and transport.”
The government is certainly between a rock and a hard place. On the one hand there is the tightening global monetary environment which began in the last quarter of 2008. “Increased inflation rates in Africa have complicated macroeconomic management and contributed to a reversal in the achievements made over the last two decades in terms of poverty reduction,” said the UN Economic Commission for Africa (UNECA) and the African Union, ‘Economic Report on Africa 2009’. The average poverty rate in sub-Saharan Africa is now back to its early 1980s level of 50%. The impact of soaring food prices is particularly large for oil-importing, low-income African countries, said the UNECA report and in this segment should be included a significant number of those who live in South Africa’s 231 local municipalities. “The poor in these countries lack adequate safety nets, while high inflation rates always have a stronger impact on the price of basic consumer goods.”
The provision of basic services – housing, water, electricity, sanitation and waste removal – has been faltering at best, as an eye-opening report from the Economic Empowerment Rating Agency tells us. Some of its more alarming findings:
- Less than 1% of households receive waste removal services from the five worst performing municipalities for this particular service. Two of the bottom five municipalities provide no waste removal at all.
- Nkandla local municipality, birthplace of President Jacob Zuma, only provides basic services to 32% of its population, although its improvement index scores higher than the national average.
- Mbhashe local municipality, in which former President Thabo Mbeki’s home town is situated, has been identified as needing urgent attention because only 21% of its residents have access to basic services.
- Moreover, the survey found that more households use electricity for lighting than cooking or heating, which simply means that South Africans living in the under-serviced townships can already not afford electricity tariffs for cooking (electric stoves) and have turned to alternate fuels (biomass is certainly amongst these, which has a direct an immediate impact on settlements’ CO2 emissions).
Next year, South Africa hosts the 2010 Football World Cup and has committed itself to a huge programme of infrastructure upgrading. That level of government spending – new railway lines on which mass transit trains will run, for example between Johannesburg and Pretoria, and modern new stadia which will serve a sports-proud country – will keep unemployment levels steady and assure working households of monthly incomes. “But what’s going to happen once the football is over?” was the rhetorical question from Jagdish Makan, proprietor of an SME based in Pretoria. “If they continue to make it difficult for small businesses like mine, I’ll have to sell out or close down. Then what happens to the people I employ?” His worry is justified. A debt counselling company, Consumer Assist, warned that “If you overtax the productive classes they will begin finding it too difficult to increase their businesses which mean job creation will stagnate.”
Urban crime rates in South Africa are high and there is widespread concern over rising levels of corruption – in Transparency International’s Corruption Perception Index South Africa’s global ranking fell from 43 in 2007 to 54 in 2008. The South African Reserve Bank’s recent Financial Stability Review showed that eight of 13 indicators signalled that the country’s households were in distress. Household incomes on average have dropped 4.3% and there had been an 8.7% decline in household net wealth. Worse, household debt is 47.1% of GDP.
At 5.30 am on the district roads of the province of Gauteng, small groups of women and men walk towards the industrial zones surrounding Johannesburg, looking for lifts from early drivers. Next year, if all goes well, they should be walking to modern new suburban train stations instead. The question is, will they still have the jobs to commute for?