Special Feature: Accounting for darkness (Part One)

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SA CFOs reveal the impact the country’s power crisis is having on people, business, and the economy.

CFOs around the country are concerned about ongoing rolling blackouts that, according to Eskom’s now-former CEO Andre de Ruyter, will likely be around for a while. The grid’s failure is badly affecting productivity, especially at heavy industries, and resulting in the need for massive investments, which are eating into cash flow reserves.

During his State of the Nation address on 9 February, president Cyril Ramaphosa declared the power issue a national state of disaster and shortly thereafter appointed Kgosientsho Ramokgopa as Minister of Energy. Ramokgopa has since said that South Africans should be patient with the power crisis plaguing the country. Measures to right the situation are urgently required, as the economy is losing as much as R900 million every day when stage 6 is in effect, according to the South African Reserve Bank.

Loadshedding is taking its toll in terms of lost productivity and are adding additional costs to the balance sheet, many CFOs point out.

Nedbank CFO Mike Davis says that Ramaphosa’s State of the Nation Address was right to focus on the energy crisis as the challenges in electricity supply remain a binding constraint to growth and job creation. “However, this has been the case for several years and, like far too many of the critical structural reforms, we have plans in place but many of them remain on the to-do list and implementation and delivery is poor. The State of Disaster may provide some additional impetus for implementation and delivery but needs to be well-managed and monitored to prevent wasteful expenditure.”

Mike says the green bank welcomes any intervention that has the potential of stabilising our electrical supply. “Importantly though, the mandate and tasks of the Minister of Electricity will need to be clearly defined and well-coordinated in order to stabilise Eskom’s financial position and energy supply, whilst the country’s need to simultaneously transition to alternative cleaner energy generation.”

In the retail sector alone, companies like Woolworths are losing as much as R30 billion a quarter, while Pick n Pay is gearing up for permanent loadshedding; installing technology such as solar panels and inverters in their stores. At the same time, customer demand is dampened because customers are concerned that frozen foods may have spoiled from inconsistent power.

Sheldon Friedericksen, Fedgroup CFO, says that continuous loadshedding is a disastrous situation in South Africa. “The continual nature and disruption takes its toll.”

He explains that there is a direct impact on business, with many being unable to operate unless backup facilities are available at an affordable cost. “Business over the years has had to adapt to these challenges, and it remains the most important aspect of running a business to be prepared for various risks to your operating model.”

Yusuf Bodiat, CFO of The Federated Employers Mutual Assurance Company, which specialises in workmen’s compensation insurance, points out that customers will be hard hit as there will be a trickle down effect. This, he explains, is because small businesses may not be able to obtain alternate power sources, which means they will battle to operate.

“For those who are able to procure alternate power sources, whether in the form of generators or solar, the impact is still negative as they would have both cash flow and financial difficulties in ‘keeping the lights on’.

“If we unpack this part a bit further, the challenge with generators is that it requires a continuous supply of fuel (whether petrol or diesel), a resource that is relatively expensive due to its low supply and high demand. As reference, the fuel price has almost doubled in the last 10 years, priced at R12.69 in March 2013, and has increased to R22.65 by March 2023 – an increase of 78 percent, as a result of fluctuations in the price of brent crude oil, the ZAR/US$ rate and fuel taxes, to name a few. With respect to solar, as much as it may be the better longer-term solution, the initial capital outlay is too expensive for many small businesses currently.”

There’s a secondary impact, says Yusuf, in that those small companies that can’t afford to find alternative power sources to fuel their operations, will need to cut costs to keep the doors open. “For some, unfortunately, the reduction in costs may not be enough and these businesses are likely to shut-down. For those who are able to cut costs effectively, it may, likely, result in a reduction in staff and/or staff salaries.”

In terms of productivity, Implats is finding the load curtailment agreement with Eskom, “disrupts our production rhythm as we must shut down equipment where necessary, and stop certain production activities” according to CFO Meroonisha Kerber.

The impact also includes its ability to smelt platinum because there is more wear and tear and, thus, help the country earn money from exports. “This limits capacity use of our assets, results in additional working capital management and negatively impacts our refined metal capacity," says Meroonisha.

The potential price hikes

Businesses will be paying more for power if Eskom successfully wins court cases that seek to stop the implementation of 18.65 percent for the 2022/23 financial year and 12.74 percent for the next being granted. Former Optimi CFO Rajan Padayachy, currently a consultant to the CEO, says the recent tariff hikes would not necessarily be an issue if it improved the stability of the power feed. “If the price goes up and the amount of hours of load shedding reduces, the net impact may well be a cost saving as currently the cost of alternative power sources does, in the short-term, exceed the higher tariff.”

Eskom, according to an affidavit filed by its CEO (then CFO), Calib Cassim, which was summed up by Moneyweb, has basically said that tariff increases are vital when it comes to keeping the lights on.

However, should this not be the case, businesses will be affected by higher costs, which means the money to keep the lights on must be taken from R&D and growth initiatives, says Rajan.

Meroonisha sees recent tariff hikes as adding significant inflationary pressure to its input cost base, making electricity one of the fast-rising unit-cost elements. “Our cost base has already experienced significant pressure from currency depreciation and the well-documented global inflationary pressures due to constrained supply chains and rising input pricing. Over the past two years, these factors have led to material increases in our total cost base and negatively impacted the overall profitability of our operations.”

Sheldon, however, is optimistic, pointing out the hikes are expected and will continue and can be incorporated into most business models. However, the knock-on impact of these is a cycle of further inflation pressure, interest rate and exchange rate management, which will continue to put pressure on the consumer. He adds that tariff hikes will encourage investment in off-grid projects.

This article was originally published in the first edition of the 2023 CFO South Africa Magazine. Read it here.

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