Colloquium on Impact of Administered Prices, including energy, on the Manufacturing Sector

Meeting report

Colloquium on impact of administered prices on the manufacturing sector
The Chairperson announced that this meeting was a continuation of what the Committee had started in the previous year, debating the impact of administered pricing and energy on, in particular, the manufacturing sector. It was hoped that this colloquium would enable the representatives from various departments and entities to engage, and to state what measures had been taken to address the identified challenges.

Department of Trade and Industry presentation
Mr Lionel October, Director General, Department of Trade and Industry, noted that the manufacturing sector was one of the leading trade sectors and competitiveness was key to enlarging and strengthening it. Administrative prices were vital. The industrial policy of the Department of Trade and Industry (dti or the Department) was starting to show improvements in the sector, and on the previous day, KPMG had delivered a report in which South Africa was ranked fifth (ahead of most European countries) in the motor sector. This showed that the country had the ability to become globally competitive. However, it was necessary to look at the factors that negated competitiveness. At the micro level this could include port and electricity charges. Macro factors, as confirmed by the OECD report, included high interest rates and the over-valued currency, and in both, more stability was needed.

Mr Garth Strachan, Deputy Director General, dti, said that the strategic issues tabled last year, such as the Eskom revenue strategy and municipal revenue, would not be debated again. Instead, dti wanted to concentrate on some proactive proposals. He briefly noted that shocks on the manufacturing sector included the protracted global recession and changing demand from the traditional trading partners. Successive iterations of the Industrial Policy Action Plan (IPAP) had highlighted the impact of sharply escalating administered prices, which were basically electricity prices, especially where high municipal premiums were added, and port charges, since those in South Africa were amongst the highest in the world, and were also hampered by significant port and rail logistic inefficiencies. Several sectors were under threat.

The industrial policy was a complex set of interlocking and transversal interventions. Electricity and port tariff setting and regulations did not fall within the mandate of dti, although they had a profound impact. The National Energy Regulator of South Africa (NERSA) had recently awarded an electricity tariff increase of 8% over the next five years. However, where municipalities added further on to that, this could give rise to further complications and disparities such as two businesses on opposite sides of the street being charged different tariffs.

The short term policy options were to strengthen the Manufacturing Competitiveness Enhancement Programme (MCEP) and to scale up support for cleaner and more efficient energy projects. This should take the form of an increase in the capex for energy efficiency and / or an increase in the matching grant formula. An appropriate approach was needed to expedite implementation of the Eskom Integrated Demand Management (IDM), with prioritisation of the manufacturing sector. Dti, for its part, would scale up support to the National Clean Production Centres, in both energy and audit implementation. In the last two years, dti had worked with companies and had managed to save 185GwH by introducing energy efficient methods. There also should be engagement with the South African Local Government Association (SALGA), metros and municipalities on the position of vulnerable and strategic sectors in municipalities, to encourage a coordinated approach in assisting the sectors and in moderating municipal tariff increases. If manufacturers were to go out of business because of the high costs, it would ultimately decrease the municipal revenue base.

Dti believed it was urgent to roll out, in the appropriate places, Smart Grid and Smart Metering technology, and it was working with municipalities already, whose efficiency and billing systems also needed improvements. It would be important to ensure local manufacture of at least some components of the Smart Grid technology. Labour-intensive IDM approaches had been used in other countries.

Mr Strachan again noted that South Africa had amongst the highest port charges in the world. Container and automotive cargo owners faced price premiums, sometimes between 710% to 874% above the global norms. This was compounded by significant port inefficiencies, which presented a constraint to the export of manufactured and tradeable goods. South African manufacturers were perceived as subsidising other operations. Tariffs for export of bulk commodities seemed to be lower than global averages although the export was also below global average. Foreign-owned cargo trans-shipments through South African ports benefited also from lower prices. This was in direct contradiction to government policy in the New Growth Path (NGP) and IPAP. Dti had met with the Transnet National Port Authority (TNPA) on the draft pricing strategy, and suggested that alternative or independent asset valuation should be used as the basis for cost recovery. A rigorous inclusive assessment and economic cost benefit analysis was needed, and dti also proposed that there should be international bench-marking of ports pricing strategy, efficiencies and other value-adding revenue generating activities in the ports pricing model. He finally noted that, despite significant effort, dti had not yet managed to get the upstream oil and gas industry off the ground.

Department of Energy (DoE) presentation
Mr Tsheliso Maqubela, Deputy Director General: Petroleum Regulation, Department of Energy, tendered an apology for the Deputy Director General responsible for electricity, and for the Director General. His presentation would deal with both petroleum products and the electricity pricing policy.

He noted that South Africa was heavily reliant on liquid fuels, and even Eskom and Botswana were increasingly making use of these in diesel generators. South Africa was currently dependent on imported oil and petroleum products. The price of crude oil and finished products was increasing, globally, and was impacted upon by events beyond this country; for instance, the latest fuel price increase was due to problems in Yemen (explosion of oil pipeline) and Algerian unrest. The EU sanctions on Iran also had a steady impact on the petroleum-products price. Although there were some promising indictors for gas, there were as yet no proven reserves. Unlike other countries such as South Korea, there was no significant footprint of crude externally. South Korea had spent a great deal buying equity in oil-producing countries. This was something that South Africa may need to consider, after looking closer to its own shores.

The liquid fuel industry supported 10 700 direct jobs, excluding the Sasol Coal-to-Liquid facilities, whereas the whole sector provided 70 000 direct jobs. There had been a suggestion that South Africa should not pursue refining capacity, but the impact of this on job losses must be considered. Other jobs were also indirectly supported, such as manufacturing of feedstock in the chemical industry. If the refineries did not produce those, South Africa would have to increase its imports.

He set out some slides showing the supply and demand balance, and noted that South Africa had an import parity pricing system, which DoE suggested must be maintained. It would also need to keep up the levels (currently at 110 000 barrels of finished product) of imports, which were resourced from refining centres that met South African fuel standards. However, this did mean that South Africa was exposed to external factors, such as global pricing and the rand/dollar exchange rate. Retail pricing was the basic fuel price (BFP) plus levies and margins.

Mr Maqubela said that there had been positive sentiment about the prospects for economic growth in China and the USA. China recorded the third highest import of crude oil, ever, in the last year, which had affected the crude and petroleum prices. In China, refineries came on line, pushing up demand and prices. There were planned and unplanned refinery shutdowns in the USA and Europe at the end of 2012, and, bearing in mind that they would then source from the same markets as South Africa, this also increased demand. December was the tax year end in many jurisdictions, such as USA, and many players there would run inventories for as long as possible leading up to December, pushing up demand and price when they started to re-stock in January. Blumberg's survey of fuel prices in 60 countries ranked South Africa at number 41. South African fuel prices were around half of the cost in Norway, and about 15% less than Australia. However, DoE realised that fuel prices did not have a constant impact everywhere, and the population in South Africa spent a larger proportion of their income on travel costs.

DoE was currently reviewing the import parity framework. It believed that, although tweaking may be necessary, South Africa still should avoid only importing finished product, because of the impact on other sectors and jobs. The refining sector was beneficiating crude oil. At the same time, however, South Africa must accelerate its efforts find its own crude oil. There were ongoing engagements with the Department of Mineral Resources (DMR) as there was apparently potential for large hydro-carbon finds along the shores. If this could be realised, the competitiveness could be improved.

Mr Mthoxozisi Mpofu, Deputy Director: Electricity, Department of Energy, said that the electricity sector objectives were drawn from the 1998 White Paper on Energy, and briefly outlined that they included the fact that tariffs must cater for the low income group, enhance efficient and competition by providing reasonably priced power to all sectors, provide non discriminatory access to the transmission system and facilitate participation of the private sector in power generation. Various supply options should be considered to reach the best economic cost to the supplier and consumer.

The electricity sector challenges included the need for about 60% expansion, and the backlogs. People had to understand what they were paying for, and understand the impact of consumption on the grid. There was a huge build programme necessary in the sector, but it was recognised that this should not unduly burden the fiscus, and there was a need to move the electricity sector to a self-funding position in future. Financial viability of the sector was paramount, but there was also a need to ensure no discrimination between categories and to have fair tariffs. Free Basic Electricity (FBE) to the indigent was pursued, but users must also respect the resources and use electricity efficiently, to smooth the pricing. The industry had not funded its own development properly in the past, with the result that the developments necessary now were coming at a higher cost.

Social support was based on a prudent operator earning a reasonable return, and reinvesting into the sector, to avoid maintenance backlogs. The licensees should be able to get a fair and reasonable return for the service they supplied. Although there were some challenges around various licences, NERSA was trying to deal with this. Prices must be transparent and unbundled, with no hidden costs. Mr Mpofu concluded that the three main concerns were the cost of the build sector, limited funding (either from borrowings or tariffs), as well as the choices made on how to use the energy, and from where it would be sourced. The whole life-cycle would need to be considered.

Transnet National Ports Authority (TNPA) presentation
Mr Tsu Morwe, Chief Executive, Transnet National Ports Authority, noted that the TNPA pricing strategy was aligned to the regulatory framework. It attempted to dovetail with the Industrial Policy and beneficiation programmes. The methodology looked at how much revenue the TNPA should be allowed to generate, whereas the pricing strategy looked to which group of port users paid.

The Ports Act of 2005, in section 72(1)(a), described the approval process and types of charge, and required the TNPA to annually publish a tariff book. The Directives of 2009 set out the tariff requirements, which included a consistent, fair, non-discriminatory methodology providing tariffs that were simple, transparent, predictable and that avoid cross-subsidisation, unless this was in the interests of the public. TNPA should promote access to ports and efficient management and operations.

The Chairperson interjected at this point to say that the Committee wanted to hear about the pricing strategy impact on the manufacturing sector.

Mr Morwe said that he would deal with that. The current tariff structures was a carry-over of historic practices. Up to 2002, the wharfage was determined "ad valorem", or as a percentage of cargo value, but this had led to manufactured goods being charged at higher tariffs. From 2002, TNPA had charged “per unit” and the new strategy would take this further, to dovetail into IPAP and other requirements.

Mr Mohammed Abdool, Chief Financial Officer, Transnet, said that TNPA, as part of the exercise on the pricing strategy, had interviewed key stakeholders. The current tariffs were not backed by a clear set of principles, cargo dues did not prefer exports over imports, and the structure had not supported industrial policy. Certain cargo owners complained that costs were excessive, particularly on the manufacturing lines. Shipping lines were calling for efficiency and increased tenure on leases. TNPA was currently, in this week, sharing its new strategy with the stakeholders. The objective was to find tariffs that would be sustainable, comprehensive, defendable, simple, competitive against international ports, and implementable as well as complementing IPAP.

There were four key principles. There should be cost-recovery, at port system level, not individual ports. The user-pay principle would apply. The revenue must be sustainable, and competitive, to position the South African ports internationally.

The cost allocation would drive the user-pay principle. For ports, there were three users – shipping lines, cargo owners and tenants. TNPA faced a challenge, unlike other port authorities elsewhere, that it also had to fund infrastructure, such as sea walls, channels, breakwaters and key walls, whereas in other countries this was done by local or central government, so that those ports’ charges did not account for infrastructure costs. This point must be borne in mind when comparing TNPA’s tariffs. However, it was looking to bring in funding from cargo-owners.

He tabled a number of slides showing that the new proposals would achieve a shift in revenue apportionment. Under these, the proportion falling to the shipping lines would be 21%, that to tenants would be 33% and that for cargo owners 46%, a substantial drop from the previous 60%. TNPA believed that this proposal was fully implementable. Because vessels coming into South Africa currently faced lower costs than elsewhere, they could pay more. In South Africa, rental currently only accounted for 19% of TNPA’s income, yet at other ports it was between 40% and 60%. This shift in proportions would still allow shipping lines and terminal operators to grow, and cargo operators’ dues would fall. The container business largely carried manufactured goods. Comparative figures were set out in slide 14. There would be a reduction of container charges and increase of dry bulk. A significant point was that the new proposals were reducing the costs to the automotive industry, from 8% to 5%. This was very much in line with the new strategy also to reduce containers and increase dry bulk, which were unprocessed goods or raw materials.

Mr Abdool said that TNPA had introduced the beneficiation programme, focusing on value added goods and beneficiation, and was looking to discount tariffs further where beneficiated commodities were being exported. For instance, there was 0% discount on iron ore in the raw form. However, if it was being exported as finished goods, such as washing machines, a tariff discounted by up to 80% would apply. To accommodate this reduction in export tariffs, the import tariffs would be increased. Slide 18 of the attached presentation showed comparative prices for dry bulk, break bulk, liquid bulk, containers and road to rail.

Mr Abdool reiterated that this pricing strategy was under discussion in this week, and although the time lines for implementation might shift, TNPA believed that quick wins could be achieved. Some of the tariffs could apply in the next financial year. The Ports Act could accommodate changes in rental arrangements.

Ports Regulator comments
The Chairperson noted the presence of Mr Riad Khan, Chief Executive Officer, Ports Regulator, who stated that although he did not have a formal presentation, he welcomed the opportunity to make comments.

He noted that in the past, the working relationship with TNPA had been somewhat strained, and the Ports Regulator had intervened to stop excessive price escalations, as a first step, and to target port pricing in accordance with national directions in the longer term. The Regulator agreed with the principles behind the initial movement by TNPA, although it was not necessarily in agreement with the outcomes. In the last year, there had been a R1 billion rebate on export of vehicles. However, the Regulator was concerned that this did not necessarily return to the manufacturing sector. Some containers may also have been filled with un-beneficiated materials. However, generally, the cost of a box had dropped from R1 500 to R343, and that was a significant step.

In relation to the tariffs, the Regulator and TNPA had held engagements over the last three years. Bulk had, traditionally, been preferred, with the vessel owners, who were generally foreigners, also preferred over local owners, with foreign cargo preferred over domestic. For instance, a Chinese manufacturer moving goods to Brazil would, in a South African port, pay well below the global rate, but a South African manufacturer following the same rout would pay around 700 times the global rate. There were, however, more nuanced instruments being put in place. There were serious concerns about the absolute numbers but the general direction was correct, and the TNPA was moving to supporting the economy.

Mr Khan emphasised that no matter how much was reduced in the supply chain, it would be meaningless unless the supply chain was efficient. The Regulator was trying to work out solutions to some of the current problems, such as a vessel waiting three to five days to get a berth at Durban, which would obviously increase prices for the vessel owner, who would then load prices to the consumer. The Regulator was also concentrating on efficiency, and he stressed that although Port Elizabeth, a small terminal, showed great efficiencies, Cape Town faced a huge problem in that incorrectly-specified equipment was slowing down operations. Although people had blamed labour, even overseas specialists brought in to address the problems had ended up taking even longer. There was not a simple solution, and an integrated approach and nuanced perspective was needed.

Mr Brian Molefe, Group Chief Executive Officer, TNPA, noted that new equipment had been ordered for Durban and was being installed in phases, but this also required the harbour walls to be strengthened, so the delays were indeed occurring, but would be addressed through the improvements.

Discussion on Ports and Regulatory issues
Mr G Selau (ANC) said that the exercise done on value-add against bulk simply seemed to shift the revenue, without affecting the total flow, and asked for more clarity on the point.

Mr Abdool agreed that this was indeed a new apportionment, and the shift was in line with the user-pays principle. TNPA was busy with total numbers and the final number would be based on the total revenue that TNPA needed to earn. That issue was addressed with the Ports Regulator. In reality, TNPA had ended up getting only a 4% increase in tariffs over the last four years.

Mr Selau asked for more clarity on the difference of imports and exports, particularly in relation to automobiles.

Mr Abdool said that the beneficiation programme proposed that there could be up to a 80% discount for vehicle exports, or around R60, whereas the import would cost about R600. This was a proposal still under discussion. Imports would cross-subsidise exports. TNPA believed the principle was correct, although the quantum would still need to be finalised.

Dr W James (DA) asked if there was a merit to the claim that TNPA might be able to improve efficiencies  if the cities or regional authorities ran the ports, as happened in the USA.

Mr Molefe said that it was difficult to compare  South African ports to others with very different institutional arrangements, who capital expenditure was budgeted for by a local authority. It must be remembered that Transnet was not subsidised at all by provincial or national government and that was the reason for its structure. The several billion rands worth of spending on the ports over the next few years would have to be generated from operations. If the prices of containers were cut, as dti suggested, yet increased capital spending was ongoing, the money would have to come from somewhere, and the same applied if bulk were also to be cut. The numbers must add up.

Mr G Hill-Lewis (DA) said that there was mention of a 77% increase in rent tariffs, which was probably acceptable. However, he was concerned about increases in break bulk, liquid and dry bulk, because these were the majority of South Africa’s exports, and the economy was largely dependent on them. The flip side to this was that it would represent a massive increase in revenue for TNPA. He asked if there were any figures on the projected increase in revenue, under the new tariffs.

Mr Abdool commented that TNPA was trying to operate under revenue neutrality, which was why user-pays and competitiveness were being applied. The revenue itself would not increase, but apportionment would be shifted. It was important that dry bulk be increased, but the current context would be considered and the approach phased in. Coal was currently high in percentage terms, but there would not be a significant rand value difference. Coal was paying under R3 per tonne, and TNPA’s new determination may result in R6 per tonne. However, that must be seen against average global prices of around US $100 per tonne. The drive behind the pricing was that TNPA would like to see break bulk commodities that could be containerised to be put into containers. Some may not be able to be boxed, but then it was likely that the break-bulk commodity had largely been beneficiated, and it would not attract substantially higher prices.

Mr Hill-Lewis said that more detail was needed on the numbers for the future, and an indication of whether this would be sustainable for those businesses.

Mr Khan noted that each year the Ports Regulator would determine how much revenue the TNPA could make, and could adjust the entire pricing regime, to achieve revenue-neutral changes. However, the Regulator would also not allow TNPA to get into trouble financially. Committees decided on the process, the impact on investments, and the prices generally.

Mr Molefe added that the TNPA’s profits were always used to reinvest into infrastructure.

Mr Hill-Lewis agreed that tariffs and efficiency were interdependent. He asked what plans there were to exploit the significant oil and gas industry on both of South African's coastlines, as South Africa was largely missing out at the moment.

Mr Molefe said that TNPA had designated Saldanha as the port where services would take place, because of the availability of land, although the other ports were also considered. TNPA would put up infrastructure and ring-fence activities around oil and gas.

Mr Hill Lewis asked to what extent profits, and to what extent revenue, would be used for infrastructure.

Mr Molefe explained that everything was “pulled together” into a single balance sheet, and this was used as the basis to generate borrowing at a lower rate. Money would be allocated from the "Transnet treasury" to all divisions.
 
Mr G Radebe (ANC) noted that there were attempts to support local manufacturing and beneficiation. Developmental policy made it clear that all inputs would help and tariffs must be lowered. Fundamentally, he thought it useful for imports to support exports. However, he cautioned that this should not be overweighed, since pharmaceutical ingredients, for example, all needed to be imported.

Mr Abdool reminded Members that shippers could apply to the port authority for exemption on what was in a container, but there would have to be verification from SARS. This would apply to imports needed for manufacturing of pharmaceuticals in South Africa.

Mr S Njikelana (ANC, Chairperson, Portfolio Committee on Energy) asked about the 40% increase in liquid bulk. He asked if this referred to imports or exports. He said that this would impact on import of finished goods from crude oil, such as bitumen.

The Chairperson noted that this point could be debated later; for the moment she asked that the Committee concentrate on port charges.

An ANC Member of the Portfolio Committee on Public Enterprises noted that when this Committee had paid a visit to Venezuela the South African ambassador commented that huge silos were unused. Venezuela held amongst the highest oil reserves in the world. There had been an offer that crude oil be shipped to South Africa for storage and then redistribution, yet nobody seemed to have picked up on it.

Mr October said that the announcement by Transnet on reduction of tariffs on manufactured goods must be commended. A question was raised on whether rebalancing would prejudice other sectors. To date, South Africa had been subsidising the mining sector, using other sectors that were better able to bear the costs. In other countries, the mining companies had to build ports and rail infrastructure, but in South Africa this was done at the expense of the two sectors offering the most jobs. Brazil had only 6% unemployment compared with South Africa’s at the mid 20%. He noted that the agriculture and manufacturing sectors needed to be considered, and Transnet rebalancing should only affect mining exports, since the high profits of mining houses would be able to cushion the increase.

Mr Strachan said that dti would welcome the strengthening and expediting of the process, to take forward the opportunities. This should not be only at Saldanha Bay, as opportunities also existed at Richards Bay. Many large investors had shown interest. Dti was doing a Ports Offering Study, with the Department of Public Enterprises (DPE). There were also significant opportunities in the metal fabrication industry and upstream to oil and gas, and ship repair and ship-building, especially for small working craft.

The Chairperson noted the point that “manufacturing” must include all production, which emphasised also the agro-industry.

National Energy Regulator South Africa (NERSA) presentation
Mr Charles Geldard, Senior Regulatory Electricity Advisor, NERSA, outlined its legislative context, and said that NERSA was an independent body, with four full time and five part-time regulators. It regulated electricity, gas and petroleum pipe and plants. Its decisions must be based on reasons, facts and evidence, gleaned through its own research, public hearings and meetings. The regulatory principles that guided NERSA included honouring the rule of law, displaying transparency, neutrality and consistency. It was independent from stakeholders and politicians. Its internal accountability followed the Public Finance Management Act.

Electricity supply and pricing was covered by the Electricity Regulation Act, as well as the Electricity Pricing Policy (EPP) and Regulations on new generation capacity. Insofar as electricity was concerned, NERSA carried out regulatory functions in licensing, setting of tariffs, setting of conditions of supply and standards, monitoring compliance with licence conditions, responding to non-compliance, investigating complaints, mediating disputes and storing information.

The tariffs must enable an efficient licensee to recover the full cost of its licensed activities, including a reasonable margin or return. The tariffs had to avoid undue discrimination between customer categories, although cross subsidy was allowed, and comply with the EPP principles. NERSA used a Revenue Requirement Methodology when setting tariffs for Eskom. The required revenue must be equal to cost of supply plus the value of the qualifying plant, less depreciation and allowance for working capital, and the return.

NERSA had published its Multi Year Price Determination (MYPD3) application and received over 200 comments. Public hearings were held in nine provinces. Most of the comments and submissions, from individuals, companies, and commercial organisations, had not disputed the methodology but had said that the requested increases were unaffordable. The Regulator made a decision on the average price increase on 28 February 2013. Eskom would now have to submit tariff tables for approval, in line with the decision so the final tariffs were still under discussion. NERSA, in addition to setting average price increases, also requested that Eskom must have an alternative tariff to the Time of Use (ToU) tariffs for municipalities with predominantly residential load. This would help municipalities that had cash flow problems because of the ToU tariff. The ratio between Winter Peak and Summer Minimum must also be reduced to 8:1 (compared to international norms of around 5:1). There were concerns that changes in the structure would result in the change in the load profile.

The Eskom price history was summarised (see slide 11 of attached presentation), showing the requests and what was applied. It was noted that the increases excluded the impact of the announced Carbon Tax, which would result in a further increase in 2017.

After Eskom tariffs were published and finalised, NERSA would then publish a Municipal Tariff Guideline and benchmarks for the municipalities to apply. Mr Geldard noted that in terms of the Municipal Systems Act, municipalities were allowed to add a surcharge for commercial and industrial customers. Although NERSA provided general guidelines it looked at each case individually. It wanted to move to a revenue requirement methodology similar to Eskom’s, but this would require that municipalities had a properly ring-fenced electricity business, and up to date and correct asset registers, with which most municipalities could not comply at the moment. NERSA was aware of the specific problems that foundries had raised and was busy addressing that.

NERSA was also concerned about the general price of electricity and its impact on industry, especially within the municipal areas. It suggested that the whole funding model of municipalities needed to be addressed. All Metro budgets forecast a steady increasing reliance on revenue from electricity, rising 2% to 3% over the next three years. If that was not addressed, there was little that NERSA could do. It was particularly concerned about the impact of rising prices on the poor, and the effect on unemployment.

The Chairperson noted that this Committee had delayed its colloquium to allow stakeholders first to engage with the NERSA processes.

Eskom presentation
The Chairperson noted an apology from the Chief Executive Officer, Eskom, Mr Brian Dames.

Ms Hilary Joffe, Group Spokesperson, Eskom, noted that the decision on the increase had been made by NERSA on the previous Thursday. Eskom had applied for a 13% increase to meet its own needs and 3% for the independent power producers (IPP). NERSA, after a robust process, had determined on 8% per year, over the next five years, or 6% for Eskom's needs plus 2% for the IPP. Eskom’s application would have brought in total revenue of R1.1 trillion, but the Regulator’s determination reduced this to R900 billion. Eskom’s request had also applied for R13 billion over the next five years for integrated demand management, but only R5 billion was allocated. Eskom would now have to study the ruling in detail and assess its impact. Today, the Eskom top executives were looking at every line of the budget, and considering how they could be adapted, as well as the corporate plan. It could be while before Eskom could make an announcement on the next steps, so Eskom representatives today may be constrained in what they could answer. However, Eskom’s presentation would focus on two areas of concern; municipal tariffs and Eskom tariffs for manufacturers.

Mr Martin Buys, General Manager: Pricing and Sales, Eskom, said that many economic studies had been done to determine what the impact of electricity prices were on the different sectors, and Eskom itself conducted modelling exercises. The mining and manufacturing sectors were likely to suffer the largest decline in output, with construction, finance and general business being least affected. However, there was also a second-round impact, as mining and manufacturing would pass on their increased costs to the service industries. It was necessary to look at profit vulnerability. Chemical, manufacturing, paper and other industries with low profit margins would see a greater impact. In some industries the quality of supply of goods was dependent on a continuous and steady supply of electricity.

He tabled a slide showing possible impacts, which showed also the total costs of electricity as a percentage of operational costs (see attached presentation). Those with a higher relative proportion were more affected.

An external study some years ago had concluded that South Africa was very inefficient in the way its used electricity. Much of that was because plants were outdated, but it was impossible to replace them. Eskom recommended that once-off incentives should be provided to industry to replace plant, not subsidised through electricity prices, but another source. Municipalities accounted for about 45% of Eskom sales. It was not possible for all distributors to have the same tariffs because of their differing cost structures. Customers taking similar voltage may have quite different prices, depending on the variables. In this regard he noted that the value chain ran from generation at power station, to transmission, through the transmitters. Every time there was a change in voltage, transformers were needed, and the lower the voltage, the greater use of transformers and therefore the greater costs. Location of supply also affected the cost, as well as when and how the energy was used, as peak periods were more expensive because of the need to run more expensive plant to deliver. Size of supply was another factor, as larger suppliers got more individualised service.

Eskom had designed its tariffs based on the principle of cost reflectivity. NERSA gave Eskom some rules around the tariffs and what had to be taken into account. Eskom would also try to promote efficiency, and offer different rates for summer and winter. It encouraged industry to do maintenance in winter months. It supported the intent of the Inclining Block Tariff (IBT) to provide relief to the poor. The tariffs were designed not around the customer class, but cost to supplier. It did not set a standard tariff for a specific industry, because its charges were based on “cost to supply”, as set out above, so that an industry close to a power station would pay less than one several kilometers away. Eskom did not deviate from the NERSA-approved tariffs, except for one customer with a negotiated price.

Mr Buys explained cross-subsidisation, saying that if a particular tariff was not cost-reflective it must be recovered from elsewhere, to achieve a point where Eskom was revenue-neutral. Inter-tariff subsidies took into account rural and geographical factors, whilst intra-tariff subsidies were tied in with geographic, voltage and load factors. Mr Buys explained that for the purposes of transmission, there were four zones, but because the prices in each zone was averaged out, a user at the start of the zone was effectively subsidising one at the end of the zone. External subsidies included Free Basic Electricity.

Eskom supported localisation wherever possible. When it built a new power station, it would use local suppliers for services such as goods and catering, and had developed many local suppliers using the integrated demand management (IDM) process. It held regular discussions with industry leaders and with its suppliers, specifically coal suppliers, to see how it could support suppliers, both within and outside the borders. It would assist municipalities with tariffs and other initiatives. Municipalities were not in the "top customer" category. Industries with some flexibility in their manufacturing plant would be asked to reduce their load at certain times, for a financial benefit, to assist Eskom in its demand-response.

Eskom could not support industries by subsidising one and loading another, but it could support it with integrated demand management. Eskom suggested that a national cross-subsidy framework, in line with the government economic policy, was needed, and that must include the funding of subsidies and criteria for subsidisation. Eskom proposed that industry and government should agree on measures to protect sectors, focusing on those where South Africa had an advantage, and develop a framework.

Mr Buys noted that all countries had a goal to move to cost-reflective tariffs. Most were adding or replacing ageing infrastructure. Nearly all had policies to protect some sectors of society. The State was significantly involved in determining sectors and types of support needed, and the most successful initiatives were those where the State would also coordinate support and ensure that funding was available. It was critical therefore for national government to determine the sector and how funding must work. Eskom recommended that an internal governance task team must be set up. The focus would be those sectors where there was a benefit – such as platinum, ferrochrome, and ferro-alloys. This task team had to agree on measures to align municipal and Eskom tariffs, and to support municipalities. A national cross-subsidy framework to be drawn. 

South African Local Government Association (SALGA) presentation
Mr Mthobeli Kolisa, Executive Director: Municipal Infrastructure Services, South African Local Government Association, noted that the Association (SALGA) had been invited to answer eight questions by the Committee, and his presentation would be geared to those specific points.

The first point was what factors influenced the divergence of electricity prices charged by municipalities in relation to Eskom. He said that it was important to ensure cost recovery through the tariffs. There were 189 utilities in the country, and each was unique in terms of its financial requirements. The main drivers were the cost structures of the distributors, the sales volumes, the costs of the networks and the varying socio-economic requirements in a particular area. Municipalities did not purchase electricity from Eskom Transmission at a price that was comparable to the Eskom distribution. They purchased at the same rate as Eskom direct customers, with similar use patterns, despite the fact that Eskom distribution operated under a separate distribution license. To allow for better alignment between Eskom and Municipal tariffs, Eskom Distribution and distributing municipalities needed to be brought in line. A municipal distributor would have to raise the costs, when distributing to a customer. Currently, only the consumers supplied by municipalities did cross subsidise other municipalities, by way of a surcharge contribution to the general rates account. Customers supplied by Eskom did not make a similar contribution. Consumers supplied by municipalities cross-subsidised low income residential consumers in the municipal area of supply, but also in the Eskom supply area, in an indirect way.

There were a few options for municipalities, but most were not viable, such as selling electricity at exactly the same prices as it purchased from Eskom, or not charging any surcharge to cross-subsidise, which would work only if property rates were increased significantly, something that consumers would not welcome, or not charging customers for any network-related costs, which was unsustainable.

He noted that SALGA believed that NERSA was responsible for considering the broader economic impact of the approval of electricity prices. At the local level, SALGA recognised, however, that it was necessary to implement energy efficiency measures. Urban planning and building controls could promote energy efficiency in new developments, and criteria could be set for applications by developers, including conditions for development densification, building design, implementing SANS 204 standards and promoting solar water heaters. SALGA was encouraging better street lighting and energy efficiency in municipal buildings, and noted that some were already using sewerage to produce energy for electricity, whilst management overall of energy was improving. Insofar as the policy legislation and regulatory impediments to maintaining low cost electricity were concerned, he suggested that perhaps consideration should be given to generating in the 100-plus MW range, but said that ironically, low prices may be an impediment to entry of IPPs at this level. Another possibility was to facilitate more competition in the national system. There was a belief that prices were so low that increased competition may not have an effect, but he noted the facilitation of the Independent System Market Operator (ISMO) Bill, which would enhance competition.

He noted also that local level municipal distributors could start contributing by attracting local IPPs at a cost lower than Eskom. Currently, policy did not allow for this, but with metro distribution there may be more opportunity. If prices were increased, some people (such as industries, business and high-income households) may be able to “opt out of the grid” and in this case the cross subsidy base for poor households would be reduced.

The Committee had asked SALGA to indicate what it felt the challenges were that inhibited provision of low-cost electricity to the manufacturing sector. Low-cost electricity was below-cost, or subsidised, and that raised the question of who would be subsidized.

There were currently two components to municipal costs: the first being the variable energy costs purchased from Eskom, which were generally passed through from municipality to consumer, and the second was the fixed cost of maintaining the network, which may include asset charges, and which was not dependent on usage. This applied to large commercial consumers, as most residential costs would be calculated on a simpler basis, covering energy and demand components. Coastal towns tended to charge a fixed charge as well, because of patterns of use.

Mr Kolisa said that it had been suggested that municipalities added huge surcharges on to Eskom electricity prices. In fact, it must be noted that municipal electricity prices were approved by NERSA after careful scrutiny, and sometimes municipalities were not permitted to recover what they had asked for. In the main, most municipalities were charging within the NERSA guidelines and benchmarks. The current guidelines, published on 9 November, were applied in all eight metros.

Mr Kolisa noted that SALGA did not have a direct role to capacitate municipalities; it was not an authority, but merely supported, advised and facilitated knowledge sharing. SALGA did encourage all municipalities to ensure that there were appropriate structures, to avoid consumers being charged on the wrong tariffs. Many smaller municipalities only deviated from the structures because they lacked capacity to deal properly with the tariffs. Metros took up about 80% of reticulation and complied with the structures.

SALGA had already proposed to NERSA, and now repeated it to the Committee, that NERSA should try to manage the transition to cost reflective tariffs in tandem with industry adjustments to high electricity prices. This could be facilitated by continued provision of government guarantees and even equity investment by national government as a shareholder of Eskom. The industry adjustments should largely be towards energy. The energy efficient component of the MYPD must not be seen as an Eskom resource. A different administrative arrangement was needed to allow all distributors to support energy efficient changes and facilitate demand management.

The Committee had asked what immediate short-term measure were proposed to address the current challenges. Mr Kolisa stressed that there was a misperception, and that the NERSA announcement did not simply mean an 8% increase across the board. Municipalities still had to compete with the residential price increases set by NERSA. Because NERSA had only approved 84% of the amount that Eskom requested, it must be decided who would contribute to the shortfall in revenue, and if municipalities were expected to subsidise this, they could not keep their tariffs low. He suggested that tariffs should be posted on the NERSA website, to let all South Africans know and understand what increases they would pay.

Mr Kolisa concluded that municipalities were also concerned about escalating electricity prices, as this affected them directly. However, it must be recognised that municipalities were transporters, but not generators, of electricity, and therefore had no control over bulk energy costs. A decision was needed on which consumers would cross-subsidise others, and on what basis could a municipality decide not to provide subsidies to similar sectors.

He questioned if electricity tariffs were really the best method of addressing economic challenges. It was not only the manufacturing sector that was negatively impacted by the increases, and he stated that a comprehensive framework was needed to deal with all of these issues, including how to deal with price increases and how they impacted on the poor.

The Executive Mayor, Machibeng Local Municipality, noted that his input had already been incorporated into the SALGA presentation.

Discussion
The Chairperson stressed that the reason for calling this colloquium was to try to allow the different stakeholders to focus on finding solutions, and she reiterated that the debate was not only confined to the manufacturing sector, but also to agriculture and beneficiation, and all impacts must be considered.

Mr Hill-Lewis asked DoE why it was that South African companies seemed to dominate in a number of industries, except for oil and gas, and asked if this was on the agenda for DoE.

Mr Hill-Lewis commented, to SALGA and others, that there seemed to be fundamental problems with the way that incentives were structured in municipalities. If it was true that municipalities were heavily reliant on electricity income, they had little incentive to promote energy efficiency and green resources, as less reliance on the grid would impact negatively on their revenue. There seemed to be a fundamental disconnect. He also questioned whether the opportunities were being pursued to allow residential customers to generate own electricity and add it to the grid, which, on the one hand, would allow municipalities to supply other parts of South Africa, but on the other would affect their revenue stream. He did not think energy efficiency would actually happen as long as municipalities remained reticulators.

Mr Hill-Lewis said that the largest users have repeated that municipal tariffs were a huge problem, despite what SALGA said, and he fully agreed that there had to be further discussion on how local government was funded. The municipal electricity tariffs were not sustainable.

Adv A Alberts (FF+) was pleased to hear that South Africa was looking into offshore oil. HE asked the DoE how the possibility of shale gas exploration touched on its future plans. He also asked DoE if it had looked into alternative technologies for storing solar power in batteries, to add back into the grid. At one stage, South Africa had this technology but it had been bought out by General Electric, so it was necessary for South Africa to develop this technology again.

Mr Selau noted that little had been said about petroleum.

Mr Selau asked the dti to give more clarity on how it would relate the disparities in municipalities to the manufacturing sector.

Mr Selau also queried the subsidies for electricity, and said that there did not yet appear to be clear proposals on who must subsidise, what role government would play, and whether NERSA must determine subsidies. He urged that all role-players must work together to mitigate the effect of rising prices on consumers, especially manufacturers.

Mr Selau applauded the presentation on the ports and the attempts to resolve the existing problems.

Mr X Mabaso (ANC) asked if the stakeholders had met with each other in other forums, to try to find collective solutions, or whether there was still a silo approach.

Mr Mabaso noted that in some countries, sensors would switch the services on and off when a person entered or left a building, which translated into considerable savings. He asked if South Africa had considered manufacturing similar devices locally, and whether such devices could be cost-effective.

Mr Mabaso asked SALGA and Eskom whether it was able to identify those who were responsible for electricity leakages, illegal connections, and efficient use.

Mr Mabaso wondered what, and how far, South Africa was doing to expand into the Continent, and whether economies of scale principles would apply if Eskom was able to expand more.

Mr Radebe noted that South Africa’s unemployment rates matched those of Spain, a country that was very different in resources, and this fact seemed to indicate that South Africa was not using its resources properly. He appealed for all departments and entities to tell the Committee how they intended to  contribute to raising levels of employment. Another important factor was that there was simply not enough local manufacture; unless that was addressed the problems would not be corrected. Manufacturing contributed substantially to employment, and those employed would be able to pay for electricity. Mr Radebe noted that some countries used their natural endowment of gas to generate free electricity. South Africa, despite having high quality coal, was exporting it, instead of using it for the benefit of consumers locally. He also stressed that the cost of doing business in South Africa must drop, and he was pleased to see what the TNPA was doing.

Mr Njikelana agreed with his colleagues’ comments. He shared the concerns about municipalities' charges for electricity. He was aware that this Colloquium was focusing on the impact of administered prices on the manufacturing sector, but wanted to note that the Portfolio Committee on Energy had resolved, as it was discussing the ISMO Bill, to request the Minister to look at the restructuring of the electricity sector, and to deal with distribution prices as part of the process.

Mr Njikelana said that whilst it was important to stress energy efficiency, more information was needed from municipalities, and it was necessary to copy good practices. The Council for Scientific and Industrial Research (CSIR) had done some excellent work that resulted in considerable savings, and this would in turn help to maintain manufacturing levels. He also stressed the need to train energy-efficiency engineers and technicians.

Mr Njikelana said that the gas industry needed to be transformed from the current 5%, up to 20% penetration. New technology would be needed, but this would have a spin-off as there would be a need to build infrastructure. He wondered how the structure of administered prices would influence the infrastructure build programmes in the country. He noted the references to other pricings, but said that it was not always meaningful to try to make comparisons, as structures of the economies differed. Finally, he welcomed the opportunity to be involved in the Colloquium and encouraged Members to be involved in the exchange of ideas at the BRICS Summit.

Ms F Mathibela (ANC, Member of Energy Portfolio Committee) noted the mention of labour-intensive approaches used in other countries, such as replacement of light bulbs. At some stage, there was a similar initiative in South Africa. However, she was very concerned that the energy-saving bulbs were not widely available at many supermarkets, and urged also that they must be produced locally.

The Chairperson again urged all the presenters to come up with solutions and work together. She asked that any responses given in the meeting could be supplemented also in writing.

Mr October (dti) welcomed the presentations by Eskom, NERSA and SALGA in particular. He noted that for many years, the low cost of electricity had been seen as a competitive advantage for South Africa, but rapidly rising prices were now a the previous five to seven years. The talk of subsidies was really a red herring. He reminded Mr Radebe that coal prices were increasing and coal had been designated a strategic mineral, which made it important to grant more licenses. Sasol produced its own electricity, and beneficiated it. Coal licences for other State Owned Companies would be important.

Mr October commented, to SALGA, that dti felt that at more cost increases by municipalities would be unaffordable. The whole reason for having public utilities and regulating prices was that in the free market, individual producers would be constrained by competition from raising prices, and so monopolies like municipalities and Eskom must be regulated and keep increases below inflation. The dti could, in the long term, review the models, but in the short term was seeking to limit the increase to 8% only. Despite the impression that there was a division between manufacturing sector, invididuals and workers, any impact on the manufacturing sector would be felt by all, as it could increase unemployment and result in a smaller number of people being able to afford electricity. He called upon SALGA to commit to ensuring that there would be no additional increases by municipalities, over and above the 8% awarded already to Eskom by NERSA.

Mr Strachan (dti) reminded Members that during the previous hearings, a company from the Machibeng Municipality had shown the Committee its electricity bill, which was way above the approved tariff, and suggested that it had had no support from NERSA. The billing had been shown as proof and it was important that this be investigated. He suggested that dti’s work with the Industrial Development Corporation perhaps needed to include the real practices of billing to the vulnerable sector. He told Mr Njikelana that dti was giving funding to the CSIR research and wanted to scale up the work. He agreed that partnerships were ideally needed. In relation to the question on light bulbs, he noted that Eskom had put out a tender for these bulbs, which was awarded to a foreign company, and the importing company had then asked dti to fast-track the import letters. There was, meanwhile, a company in Lesotho who could produce the same product. He stressed that not only should partnerships be considered, to lower prices, but also to support South Africa and regional economies. Both the Lesotho company, and the one mentioned earlier in Machibeng, were threatened with closure.

Mr Strachan said that integrated demand management and job creation were not a core function of dti, but dti had noted these points because there were, for instance, expanded public works programmes that could emulate examples used elsewhere.

Mr Maqubela (DoE) commented that the main constraints for South African companies becoming involved in the oil and gas industries were the cost of the vessels, which could be US$1 million to $3 million per ay. However, there were some operating it the oil and gas space. Sasol's work was not widely-known, but there was quite a lot of gas from Mozambique being used in the petro-chemical and power sectors. The DoE was hoping that the work on shale gas, spearheaded by the DMR, would accelerate. The Mossel Bay plant had a one-trillion cubic foot capacity, but the Karoo reserves were about one hundred times more. DoE considered that shale gas could be a game-changer. Petro SA and other partners, and also Eskom, were working on other modes of bringing gas into petroleum and electricity generation.

Mr Maqubela noted, in relation to fuel prices, that the Central Energy Fund provided predictions on the fuel price and said that “all indications were looking favourable for next month”. Coal and coal prices had to take into account China’s position, both long and short term. China had many coal resources and its investment in nuclear and other forms of energy gave an indication that when the time was right, it could well enter the coal market as a supplier, which would affect the position of South Africa in mining and electricity.

Mr Maqubela finally noted that although there were meetings held between entities at cluster level, there had not been many meetings similar to the Colloquium, but this would be useful.

Mr Geldard (NERSA) said that NERSA was aware that it had to look at details of billing, getting examples from industry, and see how the tariffs were being applied. NERSA would approve a tariff based on a standard industry understanding, but may find that the tariffs were being applied in an unexpected way. NERSA had made it quite clear that the 8% now approved was an average, and that had to be translated into actual tariffs. Public hearings would be held on 15 March, in relation to the guidelines, and there would also be public hearings in relation to municipalities’ applications, so that nothing was hidden. However, there was a problem in that municipalities would apply their tariffs on 1 July although Eskom did so from 1 April. The increases balanced out but created problems of perception that were outside NERSA’s control.

Ms Joffe (Eskom) commented on Eskom’s take on job creation, reminding Members that no sector of the economy could grow without supply of electricity, so the prime mandate of Eskom was to ensure security of supply. However, Eskom also had an active intervention programme (audited each year), through procurement and the new build programmes, to develop industries. In relation to meetings with other entities, she agreed that Eskom had worked with them, but there was scope for more formal engagements on cross-subsidies in the electricity space.

Ms Joffe said that she would give a written response to the questions on the energy-efficient light bulbs. In relation to questions of expansion into Africa, DoE had made some comment, but Eskom was also interested in seeing development of a focused Southern African grid, which would tap into and benefit neighbouring countries, some of whom had natural resources of gas and hydro-electric power that South Africa lacked, and who could provide cleaner power to feed into South Africa. Eskom already imported some power from Mozambique.

Mr Buys (Eskom) spoke to the issue of losses and illegal connections, saying that Eskom had made some inroads into containing losses, and its new split-metering programame would help Eskom solve the problem of illegal connections, which not only led to losses, but also posed serious safety concerns. It would, however, take a long time to roll out a programme to several areas, so Eskom was trying at the moment to target the high density areas where substantial benefits could be gained.

Mr Kolisa (SALGA) agreed that the current fiscal framework of local government was unsustainable, and that was weighing heavily on the electricity industry. SALGA was happy to note agreement on the need to change this, or even to create incentives. When there was grid parity, some consumers would opt out, so municipalities were aware that they must change. SALGA was managing to raise more awareness, and promote more sense of usage by consumers. He noted the dti challenge, but said that SALGA could not, at the moment, commit to only an 8% increase, because it did not yet know what would be charged to the municipalities by Eskom. The municipalities would have to pass on whatever they were charged, and it would have to wait and see what increases NERSA would give for bulk.

Mr Molefe (TNPA) said that Transnet planned a R300 billion capital investment programme over the next seven years. This would allow it to create 15 000 direct jobs and other indirect ones, but this was a conservative estimate that did not factor in the differences made through the tariff structures. Over and above that, Transnet would be engaging in aggressive training campaigns, reintroducing training of artisans, and it would, over those years, have 2 000 artisans in training each year. This was in excess of its own requirements for about 600 artisans, but the rest would be provided with skills to start enterprises or be employed elsewhere. Part of the current unemployment problem was the mismatch of skills. Transnet had also changed its former Rail Engineering Division into Transnet Engineering, which had agreements with CSIR for research and development. Transnet would continue manufacturing equipment, acquiring close to 3 000 new locomotives. Its acquisition conditions insisted that these be built in South Africa, so that by the end of the period Transnet should be an original manufacturer of locomotives. It was industrialising the rail and port sectors, and building capacity to maintain ports equipment. Over R1 billion would be spent also on research and development on engineering, in partnership with CSIR, over the next seven years.

The Executive Mayor, Machibeng Municipality, noted the questions and dti’s comment on the billing of the company in his municipality and said that although he had not been made aware of the case, he would investigate it and report back.

The Chairperson commented that all stakeholders at the meeting were appreciative of the opportunity to participate, as they seemed not to have many other opportunities to engage with each other. The main challenge lay in how long it would take to resolve electricity and administered price issues; some could be addressed speedily but others would take longer. The Committee was not yet entirely satisfied with all responses, had noted the progress since November 2012, but still wanted to see more drastic improvements. Creation of jobs was vital, and this would happen mainly in the mining, beneficiation, agro-processing and manufacturing sectors. The concerns could not be allowed to remain on the back burner. Administrative prices had contributed to South Africa’s relative lack of competitiveness, and these prices, together with domestic inefficiencies, represented a real risk to the agro and manufacturing sectors, whilst high port charges had an impact on beneficiated goods. All entities needed to commit to moving faster to address the issues. She also stressed that localisation was very important, and she expressed concerns that South Africa often imported, so that jobs went outside the country. She thanked Eskom for its commitment to take up the matter of the light bulbs with dti, and looked forward to a further report, as she was concerned that dti had been asked to expedite the licence, which was seemingly in contradiction with South Africa’s policy for regional integration, although the Committee did not have all the facts. The Committee Secretary would be drawing a report on the discussions, which would be forwarded to all those making input, to ensure that all views were reflected correctly. Finally, she stressed that this Colloquium must be seen not as an isolated event, but as part of the whole process to implement policies, plans and work.

The meeting was adjourned.