Public hearings NERSA. Impact of the proposed increase in electricity tariffs on the agricultural sector Presentation to NERSA

Transcription

1 Impact of the proposed increase in electricity tariffs on the agricultural sector Presentation to 16 November 2017

2 Outline Agri SA: Background South African economic outlook Economic Assessment of the sector The effect of drought on the sector Impact on commodities Vision 2030 and agriculture Comments

3 Agri SA: Background

4 Who is Agri SA? Agri SA is a federation of agricultural organisations Agri SA has 9 provincial and 24 commodity organisations, 20 cooperate members Through its affiliated membership, represents a diverse grouping of individual farmers regardless of gender, colour or creed For 2016/17, a total of emerging farmers benefitted from development programs such as training courses, mentorship programs, recapitalisation projects and social development initiatives

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6 20 Corporate Members

7 South African economic outlook

8 Background: South African Economic Outlook Economic growth: Economic growth projections revised downwards from 1.3 per cent to 0.7 per cent for 2017 IMF forecast for 2018: 1.1 per cent (South Africa) IMF forecast for 2018: 3.4 per cent (Sub-Saharan Africa) Economic constraints: GDP per capita has declined for two consecutive years Millions of South Africans are living in poverty Unemployment is 27.7 per cent the highest level since September 2003, and is most harshly felt by our youth Shortages in tax revenue of R50.8 billion for 2017 and R69.3 billion for the biggest since the 2009-recession R13.7 billion SAA and Post Office guarantees will result in a consolidated budget deficit of 4.3% of the 2017/18 GDP against this year's expected 3.1% By 2020/21, approximately 15% of the budget revenue will have to be use to paid off debt and the country's deficit will be projected at 61% of GDP by 2022 Electricity: Lower demand higher prices lower demand higher prices Source: MTBPS (2017)

9 General government services 17% Finance, real estate, business services 22% South African GDP by sector (2016) Personal services 6% Agriculture, forestry, fisheries 2% Transport, storage, communication 10% Mining 8% Agriculture 6% Mining 3% Manufacturing 14% Electricity, gas, Construction 4% Trade, catering, accommodation 15% water 2% Sectoral contribution to total employment (2016) Finance, other business services 14% Community, social services 22% Private housholds 8% Transport 6% Manufacturing 11% Utilities 1% Construction 9% Trade 20% Key points The South African economy is dominated by services-related industries 70% Of the five largest sectors in 2016, four were services-related Take note that manufacturing remains one of the largest individual sectors, contributing 14%. With other energyintensive sectors (mining, electricity, gas, water and agriculture), 26% of GDP Some sectors are more labour-intensive (high employment to GDP ratios) than others, e.g. agriculture, construction and trade Agriculture, Construction and trade make a much larger proportional contribution to employment than to GDP. A combined contribution of 35% Other sectors finance, real estate, business services contributed 22% to GDP (2016) but accounted for only 14% of employment (2016) Source: SARB, Stats SA

10 Economic assessment of the sector

11 * 2016* 2017* 2018* Population ( 000) Farming units Public hearings South African Farm Structure Farming unit/population Ratio Number of farming units Linear (Number of farming units) Total Population Linear (Total Population) ** Source: Stats SA (2007) Source: DAFF * Estimate ** Farming unit/population ratio

12 Economic importance of agriculture Agriculture also creates strong demands for goods and services, especially in rural areas. Impact of agriculture on other sectors in terms of forward and backward linkages is considerable, with the impact of irrigated agriculture being relatively large. Backward linkages Purchases of goods such as fertilizers, chemicals and implements Forward linkages Supply of raw materials to industry and the food supply chain in general Approximately 70 percent of agricultural output is used as intermediary products in other sectors 12

13 Value chain Contribution to GDP, if the entire value chain of agriculture is taken into account Primary contribution to GDP Key points RSA growth rate 0.7 Unemployment 27.7% Government deficit between 3.1 and 4.3% of GDP Contribution to GDP approximately 2.4% Contribution to entire value chain approximately 10-12%

14 Population ( 000) Public hearings Provider of food Population grew by 54.4% from 1991 to 2016 population growth does not include unregistered immigrants Increase in per capita income Agricultural production increased more than the population growth over the same period Population Volume index of Agricultural Production in RSA Challenges: Climate change Drought Availability of water and quality of water Increasing productivity Maintain and improve profitability Restrictive legislation High input costs Limited government support 120,0 110,0 100,0 90,0 80,0 70,0 60, Field Crops Horticulture Animal Production Food Production Source: DAFF

15 Support for Agriculture The Producer Support Estimate (PSE) is shown as a % of gross farm receipts. The OECD defines Agricultural support as the annual monetary value of gross transfers to agriculture from consumers and taxpayers arising from government policies that support agriculture, regardless of their objectives and economic impacts. Ukraine Viet Nam Australia South Africa New Zealand Chile Canada Israel United States Mexico OECD Brazil European Union Norvay Russia Japan Costa Rica Kazakhstan Iceland Switzerland Colombia Korea China Philippine Turkey Indonesia OECD Producer Support Estimate (PSE) for selected countries, ,5-2,9-3,2 2 2,3 0,9 2,8 4,9 10,7 17,1 8,7 8 18,8 10,4 16,1 13, ,5 21,1 27,9 29, ,2 60,4 59,6 58, Source: Agricultural Policy Monitoring and Evaluation, OECD (2017)

16 R Million Public hearings Agricultural trade balance, 2008/ / Agricultural exports Agricultural imports Agricultural trade balance Source: DAFF

17 Rand million Number (000) Public hearings Electricity revenue versus employment R R R R R R R R R - Revenue (Rm) Employment INDUSTRY Jul-Sep 2016 Thousands TOTAL EMPLOYMENT Agriculture 810 Mining 446 Manufacturing Utilities 153 Construction Trade Transport 988 Finance & other business services Community & social services Private households Source: Eskom, Stats SA Quarterly Labour Force Survey (2017 Q3) Source: Stats SA, Quarterly Labour Force Survey (2017 Q3)

18 Expenditure on intermediate goods and services (2016/17) Farm Feeds 29% Insurance 3% Other 1% Farm services 12% Seed and plants 7% Building and fencing materials 4% Packing materials 5% Fertilisers 5% Maintenance and repairs 14% Electricity 5% Fuel 9% Dips and Sprays 6% (R6.306 billion) Source: DAFF

19 2009/ / / / / / / / = 100 Public hearings The agriculture sector has in the past two years been confronted with numerous challenges, including the most devastating drought since the early 90s, which took some farmers out of business and left some under enormous financial pressure Through water restrictions, farmers producing essential foodstuffs are under severe pressure Furthermore, they continue to face rising input costs as a result of the depreciation of the local currency and higher fuel prices Increased electricity tariffs will only add unnecessary pressure to an already constrained operating environment Price index of farming requisites (2009/ /17) Machinery and implements Fixed improvements Intermediate goods & services Source: DAFF

20 Percentage (%) Public hearings CPI vs Price increases Considering the basic tariff in 2008/9 was R0.25 per kwh, the proposed tariff increase for 2018/9 would translate into a tariff of R1.06 per kwh Comparing the 2008/9 and the potential 2018/9 tariffs indicate a 324% relative increase in tariffs The proposed 2018/9 tariff increase threatens the sustainability of agriculture and places food security under severe pressure This is especially true when considering irrigation farming s role in stabilising production Making irrigation production unsustainable with high electricity cost could impede on our ability to produce sustainably and could impact negatively on food security Tariff increase % CPI % Source: Stats SA, Nersa

21 The effect of drought on the sector

22 Maize Public hearings Estimated losses for farmers: 2015/16 Drought The 2015/16 maize harvest amounted to approximately 7 million tons, down from an average annual harvest of 11 million tons Loss of revenue by maize farmers of at least R15 billion in 2015/16 Sugar Drought-induced revenue losses in the 2015/16 season have been estimated to reach over R1.1 billion. Livestock Thousands of livestock losses have been reported, leading to revenue losses that are yet to be estimated.

23 Impact on commodities

24 >25% of SA food produced by energy intensive industries IRRIGATION AGRICULTURE Maize Wheat Sugar cane Horticulture LIVESTOCK Dairy Pork Poultry

25 Percentage Public hearings Value of Commodities under irrigation as percentage of total gross income of agriculture 12,0% 10 Commodities 40% 10,0% 8,0% 6,0% 4,0% 2,0% 0,0% Flowers and bulbs Vegetables Dried fruit Deciduous & other fruit Citrus fruit Viticulture Tobacco Soya beans Wheat Maize Source: DAFF Source: DAFF, Agri SA calculations

26 Electricity costs must been seen in context Water Tariffs (increasing every year) Fertilizer Chemicals Fuel R:$ exchange rate affects these predominately imported major inputs Labour costs national minimum wage to be implemented Costs of risk management insurance Price volatility Hedging added costs Electricity Tariffs adds to the above Unlike Eskom (price setter), farmers are price takers Negative economic impact on agriculture

27 Vision 2030 and agriculture

28 NDP: Agriculture and agro-processing Agro-industrial cluster Key proposals Agriculture still one of the most labour intensive goods production sectors Substantial employment linkages Relative (to other regions) small share of rural population engaged in agriculture Optimistic scenario 1 million direct and indirect jobs Substantial investment in irrigation infrastructure Investment in market linkages for small scale farmers Preferential procurement for new agricultural entrants Policy to increase intake of fruit and vegetables Source: National Development Plan

29 Agriculture 1 million new jobs by 2030 Expansion of irrigation by hectares Convert some under-used communal land Select and support commercial agricultural sectors and regions with the highest potential Job creation up and downstream Creative combinations between opportunities Develop strategies that give new entrants access to product value chains Source: National Development Plan

30 New farmers cannot afford new installations 25 kva R R /km to lay new line (pay up front) Risks of failure Exorbitant fixed costs (service & network charges) exceeds energy charge for smaller users Serious barrier to entry for new smallholder farmers as envisaged by NPC Electricity price increased add on to this barrier

31 Comments

32 Agri SA recommendation Reality If the tariff increase is granted, electricity costs in the agricultural sector would increase from the current level of R6.306 billion to R7.561 billion over the next year an increase of approximately R1.3 billion Longer-term impact on the financial stability of Eskom Immediate negative impact on the economy Recommendation Eskom s revenue application for 2018/19 should not be approved If an increase is approved, it should be in line with CPI Considerations for Eskom The depreciation write-down can be reduced in the following accounting period and adjusted upwards when the economy is performing better, whilst Eskom could achieve better results from increased electricity sales in a scenario of improved economic growth. This would reduce the amount needed for the coming financial year Integrated Demand Management (IDM) was initiated to advise clients on reducing their electricity consumption and to finance energy efficiency practices. In the current environment of dampened electricity demand, the need for IDM has been reduced. This presents Eskom with a potential cost saving opportunity IPPs may produce more electricity than the required output to which Eskom is contractually committed. Energy produced in excess of the required output should not be purchased at the same high fixed tariff that is assigned to the contractually committed IPP output Consider the benefits of embedded generation to add renewable capacity rather than more IPPs Failure to consider aggressive cost cutting measures Ongoing poor governance and corruption Regain public trust

33 Contact Details Requier Wait, PhD Head: Economics & trade centre of excellence Hamlet Hlomendlini Chief Economist: Economics & trade centre of excellence T I +27 (0) C I +27 (0) E I requier@agrisa.co.za T I +27 (0) C I +27 (0) E I hamlet@agrisa.co.za

34 Thank you