Electricity is a multilayered challenge for our country. Most obviously, when the lights go out in our homes and businesses, it ranges from annoying to expensive to dangerous.
Politically, power generation is an even more fraught issue, subject to heated debate in government and the making or breaking of political careers.
However, the economics of load shedding go beyond the immediate challenges facing families and businesses.
International credit agencies have put South Africa on notice:
As a result of downgrades last year, South Africa has already been removed from the FTSE World Government Bond Index and if we receive the second credit downgrade in two years, it will force the country even further into junk bond status.
South Africa is at a turning point as the world moves into the post-Covid-19 age and electricity is a huge factor. Economic growth will return over the next 12 months, but the continued electricity crisis will constrain that growth.
That growth could be negative if our national credit rating is pushed even lower – and the impact on our economy could have long-lasting if not permanent negative effects. Our economy is already on a tightrope with entrepreneurs and new businesses relying on investment and business loans to open their doors.
The lower our credit rating the less likely new and existing businesses are to receive the necessary start-up capital to grow and expand their services. This in turn limits their ability to create new jobs for South Africa, which already has the highest unemployment rate in the world.
There are choices facing the country over whether our current challenge is a one year, five years or a decade or more of trouble.
The current load shedding simply cannot continue.
Part of that is ending the cycle of tender failure which has blighted South Africa. The current subject of debate – the RMIPPPP – should not go the same way as a nuclear tender in the last decade.
The RMIPPPP is far from a complete solution for the country as 2 000MW is a fraction of what is needed, but it is progress in the right direction. It is a partial solution to the immediate load shedding crisis – meaning it is a route to stability upon which South Africa can build. The programme is a foundation for the future that fosters renewable technology in the country.
It is also a symbolic point for the rest of the world and failure again would undermine our political capital among allies and economic capital with the international banks and markets.
South Africa’s credit rating, already junk bond status of BB- with Fitch Ratings, is held up by a commitment to ease the energy crisis. The latest Fitch update cited affirmed South Africa’s BB- rating but placed us on notice by adding a “negative outlook” for future ratings.
Failure to deliver on all the preferred bidder projects in the RMIPPPP could very well mean a downgrade. A downgrade from BB- takes South Africa from a weak position on the markets to nigh on junk status.
Not only would it be a disaster for our local financial institutions, but it would also hang a sign on the door of our country that we are not “investment grade”. This is not just jargon or a rich-world banking system arbitrarily flexing its muscles, but it has real impact on South Africa’s small and large businesses alike.
Look elsewhere in Africa to see the real impact. Morocco tried to borrow during the Covid-19 crisis to fund its response to the pandemic, but because it’s credit rating was already junk the cost was prohibitive. Other countries didn’t even try to borrow and have been left struggling with a tiny fraction of the public investments spent in the West to resist the pandemic.
That means crumbling infrastructure, lower growth for years to come and perhaps a return to recession. That will cost jobs, livelihoods – even lives if economic turmoil slips back into public disorder.
We need to build up and out from recent difficulties. Delivering more reliable electricity is the foundation of that and there are no good alternatives.
While the tender, the preferred bidders and the fuel mix have been criticised, it is important to weigh failure to move forward with the consequences. International markets and credit agencies have said clearly, the status quo is no longer on the table: if we don’t secure the current electricity tender and deliver more power, South Africa risks losing so much more than its ability to keep the lights on.
Nxumalo is an energy and general resource exploration expert and co-founder of Magni Investment Holdings and Lurco Group