High energy costs threaten survival of enterprises

Andy Bryant, executive director of Chester Finance warns that the continued escalation of business costs associated with the rising costs of electricity, petrol and diesel will lead to businesses cutting back, or closing as the cost of doing business threatens viability.

"South Africa has seen significant cost increases for the two primary sources of energy - electricity and fossil fuel. In addition, businesses are also facing the introduction of road tolls, which will all have serious implications for the running costs of businesses, and particularly smaller businesses," says Bryant.

Electricity and fuel increases

South Africa's cost increase in electricity was mapped out in 2012 when NERSA approved the multi-year price determination plan. This plan resulted in a 24.8% increase for the 2010/2011 period, a further 25,8% increase for the 2011/2012 period, and a final 25.9% increase for the 2012/2013 period. The final increase was cut to 16% as NERSA stated that government requested the adjusted increase due to the effects such price increases were having on private and industrial consumers.

In addition, the cost of petrol and diesel has also risen steadily and substantially, which also has a direct impact on almost every business's running costs. A review of the March (to date) fuel pricing for the period 2009 to 2012 reveals that the cents per litre price for 93 unleaded increased 60%, for 95 unleaded increased 58.8%, and the price for diesel increased a staggering 68%.

"Taking into account that businesses are subject to the need for power, these substantial increases are having, and will certainly have a further impact on businesses' bottom line. This is even more evident for those businesses that are power intensive, requiring larger amounts of power for production or manufacturing purposes, and those which include transportation as part of their business processes," says Bryant.

Exports will be less competitive

Professor Neil Rankin, associate professor at the School of Economic and Business Sciences at Wits University also states that energy intensive industries will be subject to a negative financial impact. "Those who use energy intensively - for example ore smelters, will be hard hit. The ongoing increase in energy prices will also raise transport costs, which makes South African exports less competitive.

"Given that we generally have a longer way to go to main markets than our major competitors and thus final prices have a relatively large transport component included. What relatively high transport costs do is to favour the production of relatively high-value products where transport costs are a lower proportion of final price. These types of products generally require more skilled labour - precisely the type of people that we do not have enough of," professor Rankin says.

Bryant further explains that in order to offset this price increase, the costs will have to be passed onto the consumer. "This has implications for both consumers and businesses. Smaller businesses competing against larger businesses will have far less of a competitive advantage, and would in real terms possibly be more expensive than large company's that are able to negotiate better prices and benefit from scale in production and distribution particularly."

High costs will offset reliefs

"The introduction of certain financial reliefs for small businesses may have aimed to assist SMME's to reduce certain costs and improve cash flow through less frequent tax payments, and to provide a greater degree of working capital for growth opportunities. These measures will however largely be offset by the ever increasing costs facing businesses," says Bryant.

"What is for certain, is that as the price of petrol passes the R11.00 per litre mark, and as the price of electricity increases by the proposed 16% this year, businesses across the board will once again face the situation of tightening belts, recalibrating growth plans and restricting employment," concludes Bryant.