The recent drastic actions taken by Clover and Astral Foods could be followed by more companies as crumbling municipalities fail to provide basic services, making it increasingly difficult for them to run their businesses and raising fears over the government’s stated effort to revive the economy with private sector-led investment spending.
Clover announced this month that it will move its cheese production from Lichtenburg in the North West to eThekwini. In April Astral got a court order compelling the government and the Treasury to intervene and develop a financial recovery plan for the Lekwa Municipality in Mpumalanga, which has been unable to supply the company with reliable water and electricity.
For many companies, moving is not an option, forcing them to look at bypassing municipalities through self-generation of electricity and water and at redirecting future investment decisions elsewhere, according to industry sources.
For the government, which has made private sector-led investment spending the cornerstone of its economic revival plan, weak performance of municipalities threatens to complicate its efforts.
Astral’s court order was obtained in April, and the MD of commercial affairs, Frans van Heerden, said that a government-appointed administrator, Johann Mettler, started on June 7. “Although this took a bit longer than was envisioned, it is good that we are at least at this point,” he said.
Astral met with Mettler on June 18 to discuss the way forward, including the municipal recovery plan that the government is compelled to come up with and approve for implementation by the end of October in terms of the order. Mettler emphasised revenue collection and resolving the outstanding debt with Eskom but said “it’s too early to see any results”.
Van Heerden said the situation in Standerton (Lekwa) is still “dire”, with the main challenge being electricity supply with Eskom and load-shedding. Water and electricity supply in the town have recently shown some improvement, “but only because Astral arranged and paid for the repairs”.
“Last week alone we lost 50% of our production time due to not having electricity. On average [without Eskom load-shedding] we do not have electricity for 12 hours per week currently. The financial consequences are dire.”
With three plants in Standerton, moving is not an option.
“The current situation is, however, influencing investment and business growth opportunities for the foreseeable future. We have also shifted 10% of our production volumes to our plant in Gauteng, which has more reliable water and electricity supply. We are, however, forced to look at becoming self-sufficient with electricity and water supply,” Van Heerden said.
Clover refused to comment other than to refer to a previous announcement, which said that poor service delivery made it unfeasible to operate its cheese production in Lichtenburg and was the main reason for its decision to move it to Durban, where the eThekwini Municipality “has proven to be supportive”.
Should companies close operations or limit investment, municipalities face a looming nightmare, as large companies support their economies and are the major job providers in many areas. As mines are in many cases the main providers of revenue and jobs in smaller municipalities, the inability of these municipalities to service mines has become critical.
Sibanye-Stillwater CEO Neal Froneman said the plight of municipalities and lack of service delivery is only getting worse, leading to an increase in social unrest.
“We continue to engage with government to try to get changes, all we get is talk about how we’re going to spend money on infrastructure. We can’t fund that. Business cannot just keep on giving and giving. Business must flourish in its own right, otherwise investors won’t allow you to use their hard-earned cash to reinvest. The economic consequences are exorbitant,” he said.
Apart from not being globally competitive due to malfunctioning basic services, “Sibanye experiences the effects of poor service delivery in terms of social discontent spilling over into protest action, with mines being looked to by communities to make good on shortfalls in municipal service delivery”.
This disrupts operations and compromises safe passage for some operations and affects production and competitiveness, “which in turn will also affect profit generated and less taxes accumulated to the state”, he said.
He adds that the financial strain on municipal balance sheets from poor administration and service delivery “leads to attempts to impose excessive rates charges on the mines through exorbitant property valuations”, which Sibanye is challenging in courts.
Increasing the supply of goods and services from local suppliers can only be achieved if there is an enabling environment for the establishment and growth of local business.
Froneman says the majority of municipalities in areas around the group’s SA operations — including Free State (Matjhabeng and Masilonyana), West Wits (Merafong and Rand West) and North West (Madibeng and Rustenburg) — are unable to deliver basic services.
While operations are largely supplied with electricity directly from Eskom, many employees, communities and suppliers are supplied directly by municipalities. “Challenges include water supply, electricity supply and roads maintenance. On occasion, we also had to step in and undertake the work of the municipality, such as waste removal or clearing of sewage lines, so that we can prevent the prevailing health and safety risks. The recent sinkholes experienced in the Merafong area is another example.”
Sibanye spends “an inordinate amount of time and money trying to fix up the mess we find in local government, that could be spent on creating value. We’re having to deal with community issues based on a lack of service delivery that is not our responsibility, all of which leads to us being uncompetitive,” Froneman said.
Minerals Council SA chief economist Henk Langenhoven said mines generally purchase electricity from Eskom directly and a small number of smelters and refining operations are dependent on local authorities for their electricity, so power interruptions due to breakdowns in local authority transmission infrastructure have only indirect consequences for mines. Indirectly, “mines often face demands, sometimes through the use of coercive methods, to provide the services that local authorities are not providing to their residents”.
Eugene Brink, strategic adviser: community affairs at AfriForum, which recently launched a local government research centre, said many municipalities are faring extremely badly on water, electricity, sewerage, the maintenance of roads, refuse removal and municipal clinics.
While large companies can render some services themselves, small businesses, especially in rural areas, are hard-hit and struggle to survive. “The whole local economy suffers because of it, not only because of people losing their jobs and livelihoods when businesses close down, but because lost income reduces spending in the local economy and this creates a vicious cycle”.
Brink says concerns voiced by companies mostly fall on deaf ears, with the exception of municipalities in the Western Cape, Midvaal and perhaps the Tshwane Metro, which are much more responsive and effective.
While the government acknowledges the problem, local politics, corruption, cadre deployment, incompetence and the requisite skills not being available in certain places continue to play a role.
“The objective state of municipalities as well as ‘hard data’ such as the auditor-general’s reports all indicate that nothing is being done to remedy the situation and that in some cases it is even worsening. Big plans get announced and promises are made about future interventions, but there is honestly no real improvement.”
Froneman said that while the economic effect of the pandemic has exacerbated the situation, “it is generally an issue of lack of resources, skills, funding and corruption at the municipalities that impact on delivery of the required services”.
While Sibanye has welcomed public statements of intent by the government to eradicate fraud and governance issues of the dysfunctional municipalities, “there is dire need to see actions that result in basic services being delivered to the people of this country — in all areas”.
The government’s decision to raise the cap for self-generated power has been seen by companies and business organisations as an admission of its inability to provide power reliably and an opportunity for companies to become self-sufficient in at least one area where the state is unable to.
Sibanye is expediting the deployment of renewable energy to access lower-cost, lower-carbon alternatives to grid supply and not because of municipality supply issues. Its strategy is to become water independent, or less dependent on municipal water supplies.
The Minerals Council welcomed the announcement on self-generated power, saying it is aware of plans for at least 1.6GW in largely renewable and private sector funded embedded generation projects by mining companies leading to additional short- and medium-term investment by the industry of about R27bn.
Brink says improved municipal services “will eventually not come from government because they clearly do not possess the will or the means to rectify the situation. The real solutions will come from civil society and the private sector and government must get out of the way to allow them to find and implement solutions.”
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