Can South Africa Generate Growth in Manufacturing?
On a hot day in late January 2008, the nation of South Africa was silenced by a historic power outage. Rolling blackouts shut off electricity to houses, traffic lights, office buildings, factories, and mines, paralyzing the continent's largest economy. To prop up the tottering power grid, Eskom, the government-owned electric monopoly, ordered the mining industry to halt underground operations, a move that sent precious metals prices to new highs. The "load-shedding" would continue for several weeks as Eskom imposed a rationing program on industrial electricity users. Worse, the company made clear that shortages would go on for years unless new power generating capacity could be brought online.
The impact of the load-shedding crisis of 2008 is still being felt in South Africa. The cost to the economy of the blackouts that rolled across the country for three months is estimated at R50 billion ($6.5 billion). Under the combined weight of global recession and the self-inflicted wound of massive power cuts, GDP growth slipped to 2.1 percent in the first quarter of 2008 and ended the year below 4 percent for the first time in five years.
The collapse of the grid in 2008 should not have been a surprise. As early as the mid-1990s, analysts had warned that without additional investment South Africa's demand for electricity would surpass supply within a decade. Signs clearly pointed to rising demand from both consumers and industry. A rural electrification program and extension of electric service to the black townships after the adoption of majority rule brought large numbers of people onto the grid. At the same time, expansion in mining and manufacturing and the emergence of a vibrant service sector added to commercial demand.
For years the country prided itself on the lowest electric power prices in the world. It's easy to understand how power costs stayed low. Abundant coal supplies and strong local demand from the mining industry prompted major investments in power generation in the 1960s and 1970s. Today, 90 percent of the country's electricity is generated in coal-fired stations. Another 6 percent is produced at a nuclear facility. The balance comes from a combination of synthetic liquid fuels, imported oil, and hydropower. As a state-owned company, Eskom was encouraged for both political and economic development reasons to hold rates down and avoid costly investment.
Even so, by the standards of the developing world Eskom has been a reliable supplier of electricity. A World Bank survey found that electricity was the second most important obstacle to investment in South Africa, though a much larger share of respondents felt that electricity supplies were a far more serious problem in other countries in sub-Saharan Africa. As the figure illustrates, South Africa stacks up well against others in the region in terms of both the number and duration of outages; however, the Bank's survey was conducted in 2007, prior to the major load-shedding episode and before repeated warnings that more severe blackouts could be just over the horizon. It is unclear if the same rosy view prevails today.
Following the blackout crisis, the initial rate increases required to pay for necessary generating capacity were quickly approved, but they have since been gradually reduced. Facing an estimated bill of R400 billion ($52 billion) to build two new power plants, improve transmission lines, and make up for deferred maintenance, Eskom asked the national regulatory agency for annual increases of 35-45 percent for three years. The body approved rates that stepped up from 24.8 percent in 2010-11 to 25.9 percent in 2012-13. But in March 2012, the regulatory agency cut this year's increase to 16 percent at the request of the government.
Slow economic growth, labor strikes in the metals and mining sector, and mild weather have combined to stave off the need for a return to aggressive load-shedding. But the specter of power shortages continues to loom over the South African economy. The voluntary measures being used to curtail demand for electricity involve cutbacks by large industrial power users. Moreover, the planned additions to capacity are running well behind schedule. Long-deferred maintenance of generating plants that have exceeded their expected useful lifespans must now be conducted during peak demand periods. If the economy begins to heat up—even modestly—some analysts fear that a compromised power grid will restrain future growth.
In spite of construction delays, the government and Eskom remain publicly upbeat about the prospects for increasing electricity output. In addition to new coal-fired generators and a hydroelectric facility, the government has talked vaguely of building up to six nuclear power plants. Private investment financed by "undisclosed Chinese firms" for a hydropower plant in Lesotho could make electricity imports more practical. Finally, a U.S. Geological Survey report issued in April 2012 estimates that the southern coast of South Africa could hold 2.13 billion barrels of recoverable oil and 35.96 trillion cubic feet of natural gas. Exploitation of that field would be decades away, but it holds the promise for continued economic growth in the long run.
In the near term, policy reforms that should play a role in solving South Africa's ongoing energy crisis have been given short shrift. Eskom provides 95 percent of South Africa's electricity and the company's failure to manage risk and plan for the future has become a glaring national vulnerability. Individuals are "privatizing" the grid with home generators and solar water heaters, but a more viable approach might be to open the market to large-scale private investment in electricity generation—whether nuclear or coal-based—or break up the state monopoly on power generation. Until such dramatic steps are taken, the structural weaknesses inherent in dependence on one supplier will continue to cripple South Africa's enormous potential.