Loadshedding is becoming a significant root cause of financial distress

Over the past two years, we have seen how external risk factors can become a root cause of financial distress. The problem is that some of these external factors are so great that it is either near impossible to effectively address them or it takes significant cash, and innovative thinking, to address them.

Last year was the worst year of loadshedding to date. With over 200 days of managed blackouts, many companies were forced to look for alternative survival methods to preserve precious value within their companies.

In this article, we will take a look at the economic impact of loadshedding and provide some guidance on what can be done to address this from a business perspective.

Significant investment

A City Press article points out that, Anthony Thurnström, CEO of The Foschini Group (TFG),  in November 2022 that their loss of income during just the two weeks of stages 5 and 6 load shedding in September was estimated to be R400 million.

Shoprite estimates that in a Stages 5 and 6 load shedding scenario, the group will have to spend an additional R100 million monthly on diesel for generators.

In its interim results for the six months to the end of September 2022, Tsogo Sun Gaming says that, during the severe rolling blackouts in August and September, its casinos paid R23 million for diesel.

CEO Chris du Toit told Moneyweb in a radio interview that, in the previous results period, that amount had been R2 million per year.

The article points out that, according to the Council for Scientific and Industrial Research (CSIR), load shedding in the month of September was worse than in the whole of 2020. So far this year, South Africans have experienced one stage or another of load shedding for almost half of the year.

A survey in August by Sakeliga, an independent business community lobby group, on how much more expensive it is for small and medium-sized enterprises to do business amid load shedding, showed that 35% of respondents were still totally dependent on Eskom power, compared with 60% three years ago.

About 62% are mostly dependent on Eskom (75% previously) and about 20% are completely independent of Eskom (similar to previously).

The City Press article points out that the survey, carried out among 478 small and medium-sized enterprises with a median income of R300 000 per month, also showed:

• R8 000 average monthly loss of income per enterprise;
• R5 000 per month additional spending on alternative power sources; and
• R1 250 per month in damage related to load shedding and power surges.

The damage or direct losses for the median enterprises amounted to about R15 000 per enterprise in the past year, according to Sakeliga.

Most respondents said they used generators and small uninterrupted power supply systems as a backup. About 22% use solar power systems and only 12% use large battery systems.

The margins are also stretching large companies’ wallets for alternative power generation systems.

The article adds that Shoprite said in an operational update for the quarter to the end of September that the increase of about 56% in the fuel price compared with a year ago is affecting operations in general.

Rage against the machine

A News24 article points out that owners of manufacturing businesses are losing up to 50% of their productivity due to the extent of load shedding and the impact on running their machines.

Warren Waterston is the owner of Robiq in Cullinan outside Pretoria. He manufactures various items for the security and dog markets.

“My business is on the brink of collapse after 33 years of success. How do you pay staff full wages when they [can only] work less than half the day? How do you pay rent and insurance when you turnover less than half you did five years ago?” asks Waterston. “Surely big industry should be putting more pressure on government to resolve the electricity issue?”

The article adds that Lyndsay Cotton’s business near Pretoria designs and manufactures roof trusses and employs 50 people on-site and about 100 subcontractors.

“Load shedding means that we need to find alternative methods to supply electricity to pump water for drinking, toilets, and operations, to keep machines running, servers running and, and keep the lights on. Without electricity, we must shut the business down,” he says.

The R60 000 a month to run a generator is not sustainable for his business, he says.

The owner of a plastics manufacturing business in Pretoria explains that the machines take hours to heat up, so require a 24-hour operation, which is not feasible. Load shedding has reduced his productivity by 50% and increased the amount of scrap material he has to throw away.

“I do not have the money to buy a big generator to supply the 150kva we need to keep running. Even if I did, the size factory I am in has no space to place a generator, let alone the diesel required to run it,” he says.

The article points out that even armament manufacturers are not spared. The owner of a small business in Gauteng involved in weapons manufacturing says load shedding has even impacted the ability of the relevant government department to issue the necessary permits to manufacturers.

A furniture designer and manufacturer says he has now had to learn “ancient woodworking techniques” to move away from tools which require power. It now takes him more time, but he does not dare increase his prices.

A panel beater writes that it now takes double as long to get a job done due to load shedding, leading to having to work weekends just to get things done.

Ghost town

The News24 article points out that load shedding is taking its toll on the hospitality industry as well.

Nhlanhla Mabaso of the Elizagrace River Lodge in the Tonga settlement of the Nkomazi Municipality in Mpumalanga started with just two rooms in 2008 and grew his guesthouse to 26 rooms, a conference hall, bar, music recording studio, and other amenities in just a few years.

“At that point, I felt like a responsible citizen who was not only creating wealth for myself and my family but also helping ten [employees] put bread on the table and their children through school,” says Mabaso.

The guesthouse was popular with locals and visitors from Mozambique and Eswatini, especially over weekends when they came to enjoy the air-conditioned thatched rooms.

“This is now a distant memory as my establishment is beginning to take the form of a ghost town thanks to load shedding,” says Mabaso, who might be forced to sell his property.

“It’s merely pride that I will lose with the possible closure of the business, but it will be devastating for my employees with whom I have developed a great family bond. There’s hardly anything I can do now,” he says.

The article adds that the owner of a small restaurant writes that, due to load shedding, they can only offer half their menu as their backup battery supply is only enough for 90 minutes.

“The financial model of restaurants has been under pressure for some time now. Load shedding is the death blow,” he says.

Important steps

How can distressed companies negotiate this challenge and what advise can turnaround professionals give their clients.

An independent business review is a good place to start. Not only does it give you a 360° view of your company, but it will also allow you to find out where your current operational inefficiencies are, what are the challenges that your company is facing, and how you can address these challenges in the best way.

Cashflow management will be key during this time. Companies need to sit with experienced turnaround professionals who will be able to guide them on how to improve their cashflow management. This may require some capital investment, but it will allow you to automate some company processes to improve efficiencies.

Finally, change management may be necessary. This may include looking at diversifying the company’s operating model or changing it to adapt to changing market conditions.

In the end, there will be an increased need for turnaround professionals to consult with companies on an ongoing basis, not only when they face financial distress. While early intervention may not completely avoid financial distress, it can be an effective way to manage financial distress and increase the number of companies that show a reasonable prospect of exiting business rescue. We cannot continue to be a country where liquidations are the only option left to some companies. 

Phahlani Mkhombo is the MD of Genesis Corporate Solutions and is a Senior Business Rescue Practitioner.