UNCLAS PRETORIA 002814

SIPDIS

SENSITIVE
SIPDIS

TREASURY FOR T.RAND
USDOC FOR 4510/ITA/IEP/ANESA/OA/JDIEMOND
AF/S FOR RMARBURG

E.O. 12958: N/A
TAGS: ECON ENRG SF
SUBJECT: BUSINESS VIEWS OF POWER CRUNCH

REF: (A) PRETORIA 1684 (B) STATE 99099


1. (U) Summary: South Africa's private sector is concerned
about the country's electrical power deficit. While firms
believe that the South African Government (SAG) has a plan to
address the problem, many are hedging their bets by buying
generators and economizing on power. Shortages are not yet a
"top concern" of investors, but electricity price hikes are
likely and could affect South Africa's competitiveness. End
Summary.

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The View of Business
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2. (SBU) Blackouts and uncertainties about electrical power
supply are a serious problem in South Africa, according to
Vic van Vuuren of Business Unity South Africa (BUSA), and
Bill Lacey of the South African Chamber of Business (SACOB).
The business reps recently spoke with Econoffs about the
country's power deficit and its implications for business
(Ref A).


3. (SBU) According to Van Vuuren, firms know that power will
be in short supply for the medium-term future, and many are
buying back up generators and taking measures to economize on
electricity. However, the BUSA executive took heart from the
fact that top levels of the SAG understand the gravity of the
problem and are resolved to add generating capacity. Van
Vuuren told us that the SAG has embarked on an urgent
remedial program overseen by Deputy President Phumzile
Mlambo-Ngucka, in close consultation with operating
departments, parastatal giant Eskom (the power utility), and
the business community. "A plan, the political will, and
financing" are all in place to add generating capacity in
coming years, he said. He was concerned, however, that
haphazard coordination between national and local governments
could delay implementation.


5. (SBU) Van Vuuren was also worried that Eskom's "reserve
margin" of power would remain razor thin for several years
until new capacity came on line. "If one plant malfunctions,
we won't have back up. It would compromise the whole system.
If someone drops a monkey wrench, we could be in trouble,"
he warned. His fear was echoed by SACOB's Lacey, who said
that Eskom's reserve margin could fall to as low as 3.75
percent in 2008, in contrast to the globally accepted reserve
margin of 15 percent. Lacey noted, however, that tapping
Mozambican power imports could augment Eskom's reserve.

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The Impact on Investment
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6. (SBU Lacey told us that the retail, light industrial and
small business sectors have been the hardest hit by power
shortages, since they are least able to afford in-house
generating capacity. Information and financial services have
also been affected, he said.


7. (SBU) Van Vuuren stressed that power shortages are not
yet a "top concern" of investors. Lacey agreed and argued
that due to the temporary nature of the power deficit, few
investments would be put off or cancelled permanently. Both
business reps did predict, however, that electricity prices
would increase by 15-30 percent over the next few years.
This could affect South Africa's competitiveness, as cheap
power has been a historical South African selling point.

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Comment
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8. (SBU) Robust economic growth coupled with inadequate
infrastructure investment and shortages of skilled labor have
led to infrastructure bottlenecks and supply constraints
throughout the South African economy, including the power
sector. The SAG has a $60 billion capital expansion plan to
alleviate these infrastructure bottlenecks over the next five
years. In the meantime, the lights will go out from time to
time.
Bost