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Eskom’s MYPD3 RCA ApplicationsAgri SA’s comments

Eskom’s MYPD3 RCA ApplicationsAgri SA comments

14 May 2018


Outline

• Who is Agri SA?

• General Context

• Government Context

• Economic Context

• Recommendations


Who is Agri SA?


• Agri SA is a federation of agricultural organisations.

• Established in 1904 as the Southern African Agricultural Union.

• Members include: 9 provincial organisations, 25 commodity organisations and 32 corporate members.

• Through its affiliated membership, Agri SA represents a diverse grouping of individual farmers regardless of gender, colour or creed.

Who is Agri SA?


32 Corporate Members


General Context


General context• Agri SA acknowledges the process in place for the Regulatory

Clearing Account (RCA) as a monitoring and tracking mechanism

that compares certain uncontrollable costs and revenues

assumed in the MYPD decision (made by the National Energy

Regulator of South Africa (NERSA)) to actual costs and revenues

incurred by Eskom.

• Agri SA realises the need for a predictable price path which will

contribute to long term economic growth and job creation.

• Like Eskom, Agri SA must holistically consider several factors

and external price shocks to form a calculated view on the

financial survival of the agriculture sector at large.

• The agriculture sector plays a crucial role to ensure that national

food security requirements are fulfilled.

Provider of food• Population grew by 56,1% from 1991 to 2017

• Agricultural production increased more than the population growth over the same period

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Population

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Volume index of Agricultural Production in RSA

Field CropsHorticultureAnimal ProductionFood Production

Challenges:

– Climate change (drought, floods)

– Availability and quality of water

– Improving productivity

– Maintaining and improving profitability

– Restrictive legislation

– High input costs (e.g. electricity)

– Limited government support


Food security

• Food security is a prerequisite to meet the dietary needs of all South Africans, specifically as part of a healthy and balanced diet.

• Over 25% of the country’s food is produced by irrigation-reliant and energy-intensive industries.

• Sharp increases in the costs of electricity would place tremendous liquidity pressure on agricultural enterprises, given that electricity constitutes a large proportion of their variable costs.

• Moreover, Eskom’s applications for the recovery of R66.6 billion can have an enormous adverse impact on food security and on the sustainability of agriculture.


Expenditure on intermediate goods and services (2017)

• More specifically, the potential negative impact on irrigation-reliant and energy intensive industries like the horticulture, dairy, poultry, grains and agro-processing industry is of crucial importance, when considering Eskom’s RCA applications.

• Electricity is a key production input and accordingly, increased tariffs can have a severe impact on agriculture.

• According to the department of agriculture, forestry and fisheries, the agricultural sector spent approximately R142 billion on intermediate goods and services in 2017, of which electricity amounted to R6.5 billion.

Source: DAFF

(R6.458 billion)

R141 959 billion

Maintenance and repairs

14%


Governance Context


Governance context

• At present, South Africa’s economy is facing deep challenges, stemming out of alleged corrupt activities and the misuse of tax-payer’s money(s) at hands of our SOEs, including Eskom.

• Rumoured irregularities and corporate governance issues have harmed the public’s perception and trust of Eskom.

• In this context, NERSA should consider the reality that the latest RCA applications could include the recovery of expenditures related to rumoured irregularities and corruption.

• The approval of any recovery amount should only be made when there is absolute certainty that the recovery amount does not include the recovery of expenditures related to irregularities or corruption.

• Regaining the public’s trust will require Eskom to show a clear commitment to reduce costs, improve efficiencies and strengthening corporate governance.


Economic Context


Economic context

• The agriculture sector has in the past two years been confronted with numerous challenges, including the most devastating drought since the early 90s, which took some farmers out of business and left some under enormous financial constraint.

• Through water restrictions, farmers producing essential foodstuffs are under severe pressure.

• The sector continues to face rising input costs and increased electricity tariffs will only add unnecessary pressure to an already constrained operating environment. These factors will no doubt echo through the agricultural value chain.

The following graph is indicative of the

cost pressures the fruit industry is

currently confronted with.

Source: Agri Western Cape


Economic context

• Some may argue that, by virtue of agriculture’s positive contribution to the country’s GDP in 2017, the sector has recovered from the drought.

• The agricultural fraternity, including Agri SA, is very pleased with agriculture’s growth and its broader positive impact on the economy, however, the reality is that the sector has not fully recovered as the drought in the Western Cape, Northern Cape and some parts of the Eastern Cape is continuing.

• The growth in agricultural output was largely attributed to a strong summer crop harvest in the dryland farming regions of the country.

• The electricity intensive irrigation areas of the West and Eastern Cape are still experiencing droughts associated with stringent water restrictions which constrains farmers production and liquidity.

2.9%

GDP growth and agriculture’s contribution

Agriculture grew by 26.2%, contributing 0.5 of a percentage point to GDP

First Quarter


3.1% 2.3%

- 0.5%

GDP growth in 2017 (1.3%)

Third Quarter

Second Quarter

Fourth Quarter



Source: Compiled using data from Stats SA


Economic context

• A (RCA) tariff increase will have an impact on agriculture through two channels:

1. Firstly, farmers will pay a higher tariff for electricity used; and

2. Secondly, pay a higher fee in terms of the electricity line fees, which will also increase in tandem with electricity tariffs.

• Effectively, farmers will be hit by a double increase in their electricity input costs. For 2017, farmers’ electricity input costs amounted to R6.5 billion.

• In some cases, following efficiency and energy saving measures, farmers pay more for their line fees than for the actual electricity consumed.

• A further increase in tariffs will likely compel some farmers to move off-the-grid.

• This will have a spill-over impact on rural communities that depend on farmers’ contributions to line fees, which help to secure the availability of electricity in rural areas.

• For these reasons, the allowable revenue increase should only be in terms of electricity (kWh) sales.


Economic context

• In addition, agricultural initiatives aim to create jobs and improve competitiveness.

• For example, the cotton industry has started with a government funded cluster initiative to shape a new future for the South African cotton industry to promote competitiveness and job creation.

• Hundreds of millions of rand have already been invested by farmers to kickstart local cotton production and the cotton value chain.

• This includes the development of textile and manufacturing industries, towards the beneficiation of homegrown raw cotton to replace imports of cotton textiles and clothing.

• Further electricity tariff increases will have a detrimental effect on further growth of the sub-sectors in the cotton value chain, which is so badly needed for job creation.


Cotton SA Case Studies

• Cotton SA currently provides training and mentorship to 718 farmers.

• These farmers organised themselves into 18 co-operatives in the Nkomazi area in Mpumalanga.

• Soil quality is not suitable for crop cultivation, but perfect for cotton cultivation.

• In the 2016/17 financial year, the Department of Rural Development and Land Reform (DRDLR) contributed R7.7 million and Cotton SA, R1.2 million to this project.

• In 2016, 2 767 ha of land was cultivated of which 1 460 ha was planted by hand.

• With the assistance of Cotton SA’s team, an average yield of 724 kg per ha was produced which resulted in a gross income of R16.4 million or R5 936.80 per ha.

• The Nkomazi area is about 11 000 ha in size, so there is ample opportunity for expansion and development.

• However, this is subject to the availability of funds for more agricultural implements, installing proper irrigation systems and further training.

• Cotton SA plans to build a processing plant in the area and to create even more employment opportunities.


Economic context

• Essentially, Agri SA believes that, the potential negative impact of granting Eskom’s RCA applications (totalling R66.6 billion) far outweighs the economic realities mentioned above and that the economy cannot absorb the RCA applications without negative consequences.

• Granting Eskom’s RCA application will undoubtedly have a dire effect on the financial positions of farming enterprises, the agricultural value chain and the economy as a whole.

• Importantly, these negative impacts will trickle-down to the household level and will have a negative impact on the financial security of the main breadwinners.

SARB engagement with Agri SA

Stakeholder engagement

The agriculture and food value chain

Input companies

Food companies

Farmers

Traders

Retailers

Consumers

• Seeds

• Fertilizer

• Crop protection

• Animal health and nutrition

• Crop insurance

• Food ingredients

• Field crops

• Horticulture

• Animal production

• Aquaculture

• Forestry

• Game

• Crops

• Meat

• Oils/meal

• Biofuels

• Meat

• Snacks

• Beverages

• Bakery

• Dairy

• Hyper markets

• Super markets

• Small/spaza shops

• Rural

• Urban

Objective: To produce profitably while facing

• Drought

• Climate change

• Rising input costs

• Predation

• Theft/Crime

• Diseases

• Market conditions/Labour

• Policy uncertainty

• Changing consumers preferencesEmp

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Recommendations


Recommendations

Considering the rumoured irregularities, corruption and inefficiencies within Eskom, Eskom should rather focus on improving its corporate governance and management structures.

Furthermore, cost saving, and efficiency improvements should be the focus, rather than burdening South African consumers with further (RCA) tariff increases.

In the current environment, consumers are highly price sensitive. Increasing electricity tariffs will incentivise consumers to consume even less electricity or to switch away from Eskom to alternative options such as gas (LPG) and solar panels.

A sustained increase in electricity tariffs will only push more consumers away from Eskom, lowering demand and increasing the need for more tariff increases. In such a scenario, vulnerable lower income consumers, who cannot afford to switch or substitute Eskom, will be faced with increasing tariffs that are not sustainable.


Recommendations

Agri SA recommends that Eskom’s RCA application not be approved until such time that the power utility improves

on its inefficiencies and corporate governance. Inefficiencies and poor governance has contributed to Eskom’s illiquid circumstances, and therefore it should

not be allowed to rectify or boost its liquidity position at the expense of other industries’ liquidity positions.

We recommend that any consideration of Eskom’s RCA applications should only occur where NERSA conducts a

full due diligence assessment of the validity of the figures used in Eskom’s RCA application to ensure that only

legitimate costs are recovered through the RCA process and ensuring that any elements arising from irregularities

and corruption are excluded from the application.


Recommendations

Recommendation: No increase in fixed costs and line fees. The allowable revenue increase should only be in

terms of electricity (kWh) sales.

Eskom needs to adjust its business model to adapt to a changing environment where alternative energy sources are becoming more affordable through improvements in technology. If Eskom does not adapt its business model, the need for continuously higher electricity tariffs will be

unsustainable and this could price Eskom out of the market.


Thank you


Contact Details

Dr Requier Wait

Head: Economics and trade centre of excellence

T I +27 (0) 12 643 3400

E I [email protected]


Disclaimer

Everything has been done to ensure the accuracy of this information, however, AGRI SA takes no responsibility for any loss or damage incurred due to the usage of this information.

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