SUBMISSION BY THE SOUTHERN AFRICAN CLOTHING AND TEXTILE WORKERS UNION (SACTWU) TO NERSA ON ESKOM S PROPOSED ELECTRICITY TARIFF INCREASES

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1 SUBMISSION BY THE SOUTHERN AFRICAN CLOTHING AND TEXTILE WORKERS UNION (SACTWU) TO NERSA ON ESKOM S PROPOSED ELECTRICITY TARIFF INCREASES Summary: 31 JANUARY The SA Clothing and Textile Workers Union (SACTWU) makes this submission as the representative of its more than members employed in the clothing, textile, footwear and leather (CTFL) manufacturing industry in South Africa. 2. SACTWU s members are ordinary poor workers in factories and other sites of production around South Africa. They are 99.9% black and about 80% are women, many of whom are single mothers and on average support five (5) dependents. 3. Our members are the lowest earning workers in the whole of the South African manufacturing industry, and live in the poorest communities in South Africa. 4. SACTWU makes this submission in response to Eskom s proposal to upwardly adjust electricity tariffs by an annual average 16% between 2013/14 and 2017/ SACTWU s interest in the above tariff increases is primarily motivated by our concern that they shall have devastating economy-wide implications, impoverishing working class South Africans by driving up the cost of basic goods, and by threatening their security of employment by causing job losses, retrenchments, and the closure of businesses particularly in the manufacturing sector. 6. In this regard, it is SACTWU s contention that the proposed tariff increases will force South Africa s working class and the poor, including SACTWU s members, into greater poverty, inequality and unemployment. 7. We have recently conducted a wide-ranging survey which SACTWU conducted amongst companies in the CTFL industry to evaluate the impact of Eskom s proposed tariff increases, on manufacturing establishments in our industry 8. In support of our position, we reflect on the manner in which Eskom s proposed tariff increases shall undermine South Africa s industrial policy programme (particularly focussing on the CTFL industry), and we present below the key findings of the survey below. 9. SACTWU rejects Eskom s proposal to increase electricity tariffs for the summary reasons explained above, and as further elaborated on below. 1

2 SACTWU s Research Findings: 10. That job losses will occur in the CTFL industry if Eskom s proposed tariff increases are implemented is supported by a wide-ranging survey which SACTWU conducted amongst CTFL companies in January The survey covered 93 different companies in the CTFL industry, employing almost workers. Thus far we have analyzed the survey results for 73 of those companies, employing about workers across Kwazulu Natal, the Western Cape, Gauteng, the Eastern Cape, and the Free State, and we present the results for these 73 companies below. 12. The purpose of the survey was to evaluate the impact of Eskom s proposed electricity tariff increases on the CTFL sector, and essentially on the stability of the industry and jobs within the industry. 13. Key findings (read in conjunction with paragraph 14 below): Electricity is a significant component of total monthly costs of enterprises. For instance, in textile companies electricity can constitute almost 10% of total monthly operating costs % of companies indicated that increased electricity costs of at the levels proposed by Eskom will negatively affect their cost of production. CTFL manufacturers are mainly price-takers, since power in the value-chain lies with retailers and buyer-power is extremely high, and hence CTFL manufacturers will experience extreme difficulty to pass the cost of electricity increases onto their customers. The result is that the Eskom proposed electricity tariff increases (and its negative social and economic consequences) will be borne by companies, and by the workers in those companies % of companies are considering downsizing their operations and retrenching workers should the tariff increases be passed at the very high levels proposed by Eskom % of companies will consider closing should the tariff increases be passed. 14. In addition to the above, the survey found that, in over 80% of companies surveyed, electricity is not supplied directly by Eskom but by municipalities. This shall have consequences for the actual electricity costs charged to enterprises as a result of municipalities charging a premium on Eskom s tariffs. Hence the tariffs being requested by Eskom are lower than the actual tariffs which shall be levied against enterprises. 15. Over-and-above the survey SACTWU conducted, we are also involved in a process of engaging workers directly on their concerns about the proposed tariff increases. To this end, those workers thus far polled 2

3 express serious concerns about their security of employment and about their ability to survive if electricity costs increase yet again SACTWU members already struggle to support themselves and their dependents. They live on vastly overstretched budgets as a consequence of the gulf between their very low minimum wages and the (escalating) cost of living. These costs include the cost of electricity, which has risen dramatically in recent years For example, the current legally prescribed minimum wage for a machinist in an area like Newcastle is R369 per week. (In reality, most employers in this area actually pay below the legally prescribed minimum wages with SACTWU previously having found that some pay as low as R per week). Revealingly, a survey on household-spending conducted by SACTWU amongst Newcastle workers in 2011 showed that workers spent on average about R70 per week on electricity. Electricity, evidently, is a major cost factor for workers. Need For Alignment of Policy and Practice With The State: 16. The threat which Eskom s proposed tariff increases pose to industrial stability and job security of workers in the CTFL industry is anathema to the country s imperative to create jobs, combat unemployment, and reverse deindustrialization. 17. In this regard, we note that South Africa is characterized by a context of chronic unemployment, inequality and poverty, and that emanating from this context the South African government has recognized that it needs to begin to guide the direction of economic development in a manner which stimulates job creation. This imperative is encapsulated within the concept of the Developmental State. 18. The task of the Developmental State has found expression in the formulation of various key economic development and industrial policies by the State, such as the New Growth Path (NGP) and the Industrial Policy Action Plan (IPAP2). These policies essentially require the State to actively intervene in the economy to support job creation through stimulating labour-absorbing industries, and in particular the manufacturing industry IPAP2 identifies the CTFL industry as a critical sector for the State to support, given its very high labour-intensity, the costeffectiveness of creating jobs in the industry, and its employment multipliers across the economy. 19. The success of industrial policies requires co-ordination across functions of the State, a fact acknowledged by the New Growth Path, which states: 3

4 19.1. A developmental state is not simply hostage to market forces and vested interests. Through careful alliances, clear purpose and by leveraging its resource and regulatory capacity, it can align market outcomes with development needs. Achieving this aim, however, requires that it identifies economic challenges clearly and develops innovative solutions... A key challenge in this light is to improve the state s efficiency, effectiveness and responsiveness in the face of new opportunities and risks... The growth path must step up the integration of national, provincial and local policies and collaboration around implementation of developmental policies and programmes. To this end, work is needed to align growth and development strategies adopted by different spheres of government and to establish knowledge-sharing and collaboration across the state. The New Growth Path will require some re-orientation from all state agencies, not just the national departments. Critical actors include... regulatory, standard-setting and accreditation bodies including... Nersa... (emphasis added) 20. An industrial policy approach includes the provision and maintenance of suitable infrastructure (including electricity) in a manner that encourages industrial development and job creation. 21. It is clear that Nersa (and Eskom too) are mandated by the NGP to align themselves with the greater economic development and industrial policy goals of the country, and to reverse the trend of de-industrialization in South Africa. 22. One of the major industrial policy tools proposed by the NGP and IPAP2 is the leveraging of the financial power of the State to help local industry transform, modernize and achieve sustainability and fulfill the potential to create jobs In this regard, we note that the Department of Trade and Industry (the dti) and the Industrial Development Corporation (IDC) have developed competitiveness enhancement funds to help build the industrial base of South Africa by developing the productivity and competitiveness of local industries. For instance, the dti runs the multibillion rand Manufacturing Competitiveness Enhancement Programme (MCEP) intended to enhance the productivity of the local manufacturing industry, while the IDC has also set aside many billions of rands for industrial development purposes Within the CTFL industry specifically, a productivity-linked incentive is available in the form of the Production Incentive (P.I.) The P.I. provides incentives to companies for investments made for modernization and competitive-improvement purposes. The value of this incentive is equivalent to 7.5% of a company s Manufacturing Value-Addition. Essentially this translates into a reduction of a company s total costs by about 3.75%. 4

5 The impact of the P.I. has been positive for the CTFL industry and for workers employed within this industry. In this regard, the industry is showing signs of becoming more competitive and robust a fact supported by the massive decline in rate of job losses in the industry over the past two years. Indeed, the success of the Production Incentive has been noted by government, and illustrates the potential which an active industrial policy approach to economic development could have for the entire economy if implemented successfully in different industries. 23. Clearly, the imperative exists for State entities such Nersa and Eskom to take decisions which are aligned with, and which support, industrial policy actions (such as the provision of these incentives) already being rolled out by the State. Yet it is evident, however, that the tariff increases proposed by Eskom threaten the achievement of these industrial policy programmes, and shall compromise and waste the investments being made by the State in its industrial policy programmes. We provide the following simplified example from the CTFL industry to illustrate this point: Amongst textile companies, the average monthly cost of electricity is currently roughly 10% of total monthly costs Hence if, for example, a textile company currently has total monthly costs of R100, its monthly electricity bill will be about R If this textile company receives the P.I. from the dti, it is effectively receiving a R3.75 reduction in its overall costs Yet if Eskom s proposed tariff increases of 16% are granted, the company s electricity bill will rise by R1.60 to R11.60 per month in 2012/ 2013, increasing the company s total monthly costs by almost 2% (and this excludes pressures from other likely cost increases) In other words, for every R3.75 which the company receives from the State through the P.I. in 2012/ 2013, Eskom will claim nearly half for its increased electricity tariffs This electricity cost component will increase over time as electricity constitutes a greater part of the company s total costs every year as a result of the annual 16% tariff increases compounding over time Hence, while the State provides strategic financial incentives to companies through its industrial policy on one hand (through the dti or IDC), it shall be clawing back a great part of those incentives with the other hand (through Eskom). Job losses, retrenchments and factory closures will follow. 5

6 24. The outcomes described above illustrate a massive instance of contradictory and disjointed State action which is in conflict with the mandate of the NGP and the general thrust of South Africa s industrial and economic policy. Clearly Eskom s proposed tariff increases will undermine and mitigate the advances being made by the State to address questions of South Africa s economic base, and our ability to drive a successful campaign against unemployment and poverty. Way Forward: 25. In light of the above, SACTWU aligns itself with the positions taking by COSATU and its various affiliates on this matter, and we reject Eskom s proposed 16% increases and the proposed 5-year Multi-Year Price- Determination (MYPD). For sake of brevity, we will not repeat herein all the other positions taken by COSATU and its affiliates, particularly since these positions have been tabled before Nersa on this matter. 26. Nevertheless, it is important that SACTWU notes that instead of considering a tariff increase at present, we believe Nersa should have made no adjustment to tariffs for a year, postponing this increase while it conducted an investigation into the very need for a tariff increase. Short of this measure, we believe that if a tariff increase is granted to Eskom, it must be pegged at inflation, or below inflation since even if this happens, in reality the eventual tariff imposed on enterprises will be higher as a result of additional municipal surcharges. 27. Furthermore, we call for the alignment of Eskom s role as a State entity with the broader developmental role being pursued by the State in recent years, in particular the promotion of job creation and job protection. In this regard, Eskom should position itself to support active industrial policy rather than undermine it. 28. In addition, like other COSATU affiliates we highlight the necessity to increase the Free Basic Electricity allocation to households. This is a matter of life and death for working class families for whom the 50kWh per household per month is simply insufficient to meet their basic needs. 6