MICHAEL AVERY: The high cost of state failure

Most economists know Milton Friedman’s maxim that “inflation is always and everywhere a monetary phenomenon”. But Covid supply shocks, the Ukraine war and now Reserve Bank governor Lesetja Kganyago’s comments about load-shedding being inflationary, are presenting exceptions that disprove the rule.

What the governor was also doing by moving so far away from consensus on economic growth was making a powerful point — to those sleeping MPs especially — that the restraints holding this economy down are not found in the Black Tower but Luthuli House.

I cannot recall a central bank governor anywhere in the world being so out of step with consensus economic growth forecasts. And the Bank’s predictions that GDP will in effect stall at 0.3%, 0.5% and 1% over the next three years thanks to the government’s ineptitude at finding a solution to the electricity crisis, is intended to shake the baobab.

Rather than tinkering with the Bank’s mandate, a red herring as tired as it is flawed, the ANC government could take a leaf out of the Cape Town playbook and make it more attractive for citizens to install their own power and feed it back into the grid, as well as contracting with independent power producers (IPPs) to ensure Eskom’s failure won’t mean municipal revenues disappear along with it, eventually.   

The signs of state failure are writ large everywhere apart from the Western Cape. As I write this column, I have had to endure yet another water outage of over 24 hours to go along with persistent blackouts. Water infrastructure is only starting to be attended to but the backlog is huge and the work largely reactive, causing maximum pain at damaging cost.

But my experience in middle-class suburbia is still largely bliss. Wildlife photographer and bush musician John Varty shared his recent ordeal of being attacked by a violent and angry mob near Bushbuckridge en route to a gig just outside Hoedspruit. The protesters say they are tired of roads that are so poorly maintained that many are now impassable. They have been abandoned by the governing party. Mobs and mafia now hold sway over these communities outside Kruger National Park, where the police and rule of law are largely absent. Tourism is the casualty.

The terrible impact of state failure on business is illustrated across a snapshot of company trading updates. Chicken producer Astral says load-shedding is playing havoc with operations in the poultry division. The upshot? Rising costs and production reductions of at least 12-million broiler placements for the first half of the year. In other words, because there is no room for chicks it must keep its mature chickens longer. More feed is consumed by older, heavier birds. In an effort to reduce the backlog in the group’s integrated broiler supply chain more shifts are being implemented, which results in “excessive processing costs”.

The cost to produce a chicken now exceeds the selling price by about R2/kg. What do you think the residents of Bushbuckridge are going to do when those costs start being passed down the line? Astral is now holding back on most of its capex commitments totalling R737m that were described during a recent results presentation. The group has committed funds to solutions for backup power in an effort to lessen the negative effects of load-shedding, but again, where is growth going to come from if firms are holding back investment due to local government collapse and service delivery failure?

Blackouts cost retailer TFG, which owns 30 brands, about 260,000 trading hours in the first nine months of its financial year. That’s 2.6 times as many lost trading hours as during the same time last year. Since TFG has backup power 1,455 (70%) of its stores in SA may have been better equipped to reduce load-shedding than competitors. It plans to have all stores outfitted with backup power over the upcoming few months. Obviously stores with the highest levels of load-shedding had higher costs for security and diesel.

Kap management has said while the business has not yet been affected materially by load-shedding, secondary effects are starting to emerge. Its equipment life cycle will be shortened due to erratic power supply. Safripol and PG Bison are the heavy electricity users in the group. Kap has just completed the Sasolburg renewable energy project (10MW) at great cost.

Landlord Attacq spends R170,526 a day to keep the lights on in its retail space during stage 2 load-shedding. This skyrockets to more than R511,500 when rolling blackouts reach stage 6, and that is before accounting for lost revenue from foregone sales and business.

The nexus between energy and water (after repairs reservoirs take hours longer to fill due to load-shedding) amplifies the dysfunction. Ahead of the president’s state of the nation address he might want to consider this: without reliable water and power and rail and the rule of law, what do you have? This societal emergency calls for skilful, courageous leadership, not more histrionics about transformation and political grandstanding as we saw when ANC MPs walked out on Eskom management on Friday, trying to distance the ANC government from this mess.

Will Captain Consensus be able to rise above his party and instincts and seize the moment?

• Avery, a financial journalist and broadcaster, produces BDTV's Business Watch. Contact him at Badger@businesslive.co.za.