‘Feathers for rural plants if Eskom acts’
Vulnerable chicken operations may not survive utility’s hard line with defaulting municipalities, says CEO
THE CEO of South Africa’s largest poultry producer, Astral Foods, says if Eskom cuts electricity to non-paying municipalities it will hasten the demise of businesses in rural areas that are struggling to survive in an environment of dysfunctional local government.
The cuts were to have begun on January 23 but Astral and other businesses brought an urgent application to stop them. Eskom has agreed to wait for a hearing scheduled for February 22 in the High Court in Pretoria, but it has made it clear it is intent on going ahead with the cuts.
Astral CEO Chris Schutte says the national government needs to intervene.
“There is no hope unless there’s an intervention by the cabinet,” he says. “Nobody else is going to resolve this. We’re not getting any assistance from the [Mpumalanga] provincial government. They’ve made it clear they will not intervene.”
Non-paying municipalities should be put under administration, he says.
Public Enterprises Minister Lynne Brown announced on Tuesday that she had asked Eskom to hold off until the end of this month, but this is “a bit Johnny-come-lately”, says Schutte.
He is equally critical of Finance Minister Pravin Gordhan’s statement that he would penalise nonpaying municipalities by taking away their grants.
“Please explain how it is going to help me and other businesses if the municipalities are going to have even less funds with which to pay Eskom. I simply don’t understand.”
Astral has its largest feedmilling and poultry-processing operations in Standerton in Mpumalanga’s Lekwa municipal area. It is dependent on electricity from Eskom.
“We attracted international investment of R1.5-billion into Standerton in 2011 on the back of our business after a guarantee from Eskom and Lekwa that there would be a sufficient supply of electricity,” he says.
Since 2013, when Lekwa started defaulting on payments and Eskom threatened to cut its electricity, Astral has “engaged regularly” with the municipality and power utility to find a solution.
“We said we will buy directly from Eskom and pay Lekwa the margin they would normally put on top of our electricity bill. We were told there was absolutely no chance of doing that.”
Lekwa eventually offered Eskom a repayment plan. At the time its arrears were R100-million. Now they’re R297-million.
Schutte says there was little he could do to ensure Lekwa stuck to the plan.
“You don’t have insight into their books. All you can do is have meetings and meetings and meetings. Every time they told us they’d agreed on a repayment plan with Eskom.”
Could Astral have offered technical assistance to ensure the repayment plan was adhered to?
“How can a private company go and manage a municipality?”
Astral repeatedly offered to build its own electricity distribution plant at a cost of R25-million. Eskom would have had to bypass Lekwa and build an electricity line directly to it at a cost of R200-million. It refused.
“There was hardly anything else we could do except keep paying Lekwa for our electricity on time and hope they were paying it to Eskom and sticking to their repayment plan,” says Schutte.
But he says Lekwa’s financial management is so bad that “they can’t even service their current account”.
Couldn’t his company have seconded someone to help them?
“In all fairness I think you are going too far,” he says. “Where in South Africa would a private company be allowed to go and put a financial manager in a local government structure? All we can do is pay on time and engage.”
Astral offered to pay the money it owed for electricity into an escrow account on which Eskom could draw. This was turned down by Eskom, which said it was only allowed to deal with Lekwa.
“We would like to turn that around. The basis of our legal argument is that we can’t operate like this. Every second month they don’t pay their bills and then we are threatened with a cut.”
Eskom continues to insist it will cut electricity to the nonpaying municipalities and will not write off their debt, which is R10.2-billion.
“I don’t understand the logic or psychology behind cutting electricity. Then everybody will use less electricity and the municipality will have less money to try and pay it back,” says Schutte.
“You’re going to shed jobs and affect the whole economy across the country. It’s going to make food more expensive because I’m going to have to drive 11.5 million chickens around to try and manage the situation.”
Running a business in a rural area is becoming increasingly difficult because of dysfunctional municipalities, he says.
“It is not only electricity. We frequently don’t have water. The water reticulation system in Standerton has almost collapsed.”
If it was not for Astral and its operation in the town, “most of the time it would be without water”, he says.
“We replace water pumps, we get people to fix and maintain the water reticulation system. We do most of the maintenance, and respond to water shortages in the town using our own people at our own cost to ensure there is water because we need water. If we could get along without water the whole town would be without water.”
In the long term, a greater challenge than dysfunctional municipalities may well be cheap chicken imports.
The EU this week accused South Africa of unfairly protecting the local poultry industry after it imposed a temporary 13.9% import duty on chicken pieces in December.
What’s unfair, retorts Schutte, are EU attempts to block South African exports.
“We don’t have a problem with imports. Our problem is with the unfair part of that. We cannot export to the EU because of phytosanitary measures that they impose on us that are not valid.”
Ever since “a couple” of ostriches were identified with avian influenza a few years ago the EU has used this to block poultry from South Africa.
“We do not have avian influenza. They do,” he says.
He accuses EU countries of dumping chicken parts that no one in the EU wants to eat at prices that are crippling the local industry.
“It is a waste product to them and they’re prepared to dispose of it anywhere in the world that will accept it.”
South Africa is the only country that does not protect its poultry industry, he says. The 13.9% import tariff is laughable. The industry would be threatened even with a 37% tariff, which is what it has called for.
But chicken is the main source of relatively cheap protein for the majority of South Africans and the argument is that raising tariffs will make it less affordable.
Schutte says the chicken is sold
Every second month they don’t pay their bills and we are threatened with a cut I don’t understand the logic behind cutting electricity
cheaply to importers in South Africa “but never reaches the end consumer at a cheap price. The price at which imported chicken is sold is similar to my price.”
So why does he feel so threatened?
The imported chicken is “offloaded to traders at a low price and sold at a price just below the local price”, he says.
He has to recover his input costs, mainly maize feed, which are much higher than in the EU or US because of our drought and their subsidies.
In order to compete with imports, local producers have kept their prices flat although input costs have risen 40%.
Astral made a profit of 3.8% last financial year but is currently running at a loss of 2%.
It employs 13 000 people. Unlike his competitors Schutte has not cut jobs yet but has cut back on production and put workers on short time, meaning lower incomes.
In three months he’s going to
It is a waste product to them and they’re prepared to dispose of it anywhere that will accept it
have to decide whether to close some of his companies, which will mean job losses. He foresees a “significant structural change” in the industry and says small black upcoming farmers will be the first to suffer.
“We’ve warned government for three years that this is going to happen. I think they thought it was an idle threat. Now it’s fact, it’s in their faces.”
Running a R6.4-billion poultry business at the mercy of cheap imports and a dysfunctional municipality has taken its toll.
Schutte, 56, who started in the industry 35 years ago as a shed worker and became CEO nine years ago, had a heart attack during tariff negotiations in France in 2015.