Load-shedding crushes private investment

The increased severity of load-shedding during the second half of 2022 and early 2023 is “greatly impeding the business environment” in South Africa, pushing business confidence and investment to near all-time lows.

This is according to the Business Pulse report from Momentum Investments which documents the operating environment for businesses in South Africa.

Load-shedding over the last six months of 2022 increased in severity and duration, with 1,944 hours of load-shedding during the fourth quarter alone.

Of the 1,944 hours, stage 5 load-shedding was in place for 159 hours. Stage 6 was in place for 118 hours.

This is the worst load-shedding South Africa has ever experienced.

Momentum expects load-shedding severity and duration to be even higher during the first quarter of 2023.

It has resulted in businesses having to spend increasing amounts of capital to mitigate the impact of load-shedding in two key areas:

• Diesel to run generators
• Backup power systems.

These costs have steadily increased through the second half of 2022 and the beginning of 2023, eroding businesses’ profit margins, potentially escalating inflation, and forcing them to reallocate capital.

However, large businesses have proven resilient to such shocks as they can withstand margin pressure and allocate capital to mitigate the effects of load-shedding.

Small businesses, on the other hand, cannot afford to mitigate the effects and are not in a position to benefit from the government’s solar incentives.

Effects on confidence and investment

As a result of load-shedding, business confidence has plummeted, declining for the fourth consecutive quarter at the end of 2022 to 36 points.

Three of the five industries tracked are pessimistic about the business operating environment in South Africa with manufacturing registering only 17 points on its sub-index – the lowest recording since Covid-19.

The two drivers of business pessimism were identified by Momentum as the increased load-shedding severity and the poor quality of infrastructure in South Africa.

The upshot of plummeting business confidence is a decline in investment in South Africa from the private sector.

Gross fixed capital formation (GFCF), a measure of investment, from private businesses declined by 1% quarter-on-quarter at the end of 2022 to a near all-time low.

This is concerning as private-sector investment makes up the bulk of investment in South Africa.

The decrease in private-sector investment was driven by declining investment in machinery and equipment by businesses, which outpaced capital outlays.

However, over the long term, private-sector investment is still above its average of 9.3% as a proportion of GDP and, according to Momentum, “may be supported by reforms announced to address the energy crisis”.

Momentum estimates the pipeline of private-sector electricity generation projects to be around 9,000MW with over 100 projects.

The positive effects of increased private-sector investment in electricity generation will not be seen immediately but only over the medium to long term.

GFCF will only grow by 1.3% this year, according to the National Treasury, increasing to 3.8% growth in 2024 and moderating to 3.5% growth in 2025.