Electricity price rises are a silent killer of small businesses

INLSA

Steep increases in the price of electricity are knocking small businesses, which are battling to keep up. Photo: Dumisani Sibeko.

The effect of the proposed electricity increase on small and medium enterprises (SMEs) will be more drastic than most experts are predicting

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After analysing the actual numbers, it is clear that the proposed price increase and the increases that have already been put in place in recent years are crippling SMEs and that an electricity subsidy or rebate should perhaps be considered for qualifying businesses.

SMEs are often seen as the heart of our economy and make up nearly 50 percent of South Africa’s gross domestic product. They are also responsible for about 55 percent of the total people employed and 65 percent of all new jobs being created.

These contributions are definitely not to be sneezed at.

The South African Chamber of Commerce and Industry recently reported that a 16 percent electricity hike would force many of its medium and small member companies to move operations abroad and to shed jobs. Apparently, more than half of the chamber’s members indicated that operations would have to be scaled down. Less than 5 percent indicated they could handle a 16 percent increase.

We should be demonstrating that we treasure and support their key role in our economy, not burdening them with out-of-control electricity price increases.

Let us assess a case study to prove this point: Mr Small Manufacturer is manufacturing a South African product for the local market. The market in which he operates is very price sensitive and there are many competitively priced imported products available. This makes it difficult to increase his selling prices and to increase market share.

The business’s sales increase since February 2009 has been, on average, 2 percentage points above inflation. This is a positive sign as he is beating inflation and has managed, in real terms, to retain market share and even marginally improve it.

Mr Small Manufacturer also managed his costs very well and kept his salary bill and other costs in line with the inflation rate, except for the rental cost for the premises, which increases at 8 percent a year, as per the five-year contract.

In the February 2009 financial statements, his cost and profit ratios as a percentage of sales were as follows:

Since February 2009, electricity costs have increased four times – by 27.5 percent, 31.3 percent, 24.8 percent and 25.8 percent. Further to these increases, a proposed 16 percent cost is being discussed.

As Mr Small Manufacturer assesses his projected results for February 28, 2013, he realises that he will start to incur losses. He has also prepared his budget for the new 2013/14 year and projects that his losses will increase leading up to the year ending February 2014.

His accountant showed him the same cost and profit ratios to sales as he did for February 2009, and bearing in mind that his increases in sales since then were 2 percentage points above inflation year on year, he is shocked by the results, which can be summarised as follows:

It is clear that even with a 2 percentage point above inflation growth in sales, the business will still run into losses.

What can Mr Small Manufacturer do to counter the inevitability of going under due to electricity cost increases being out of control?

The first thing will be to assess the usage of electricity and options to possibly save electricity, which is easier said than done when business machines are producing a constant number of products a day to keep the turnover volumes intact.

Machines can, over time, be replaced by more energy-efficient ones, but this cannot be done if it is not economically viable. This solution is more than likely not an option for Mr Small Manufacturer.

The second option is salaries and wages, as this remains the highest cost component.

Although this seems like the more practical option, fewer employees cannot produce the same volumes by just being more efficient in the production process. This action will also add to the already dismal unemployment rate of the country.

This trend is not at all sustainable for small businesses and seriously hampers the viability of existing SMEs. It also discourages the establishment of new SMEs, thus inhibiting the creation of much-needed jobs in South Africa.

On behalf of the SME community, Business Partners is urging Eskom, the National Energy Regulator of South Africa and the government to reconsider the continued electricity tariff hikes, because the scope of small and medium-sized businesses to reduce their electricity use is limited and their long-term viability is under serious threat.

An option that the government could consider when it comes to the increase of electricity tariffs is an electricity subsidy or rebate for qualifying SMEs.

Although this may not be sustainable for all businesses, such a policy will almost guarantee that we do not encounter unnecessary job losses for small businesses.

We acknowledge that increases are inevitable, but these increases should be managed so that they remain within a more reasonable margin around the overall inflation rate.

Christo Botes is the executive director at Business Partners, a specialist risk finance company for formal small and medium enterprises in South Africa and selected African countries.