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Macro environment factors that may affect in the business eskom

The simulation results from the TSME model reveal that in the long run, major macro variables i. A weak transmission mechanism of the shock on the macro and sectoral economy is detected both in the short run and long run due to the relatively small share of electricity investment in total investment in the economy.

On the other hand, the simulation results from the CGE reveal similar but more robust positive impacts on the macro economy. Most of the short-run macroeconomic impacts are reinforced in the long run. C01, 32, 51-54, D58 1 Introduction Over the period 1994-2010 the South African economy sustained itself with the existing energy infrastructure built before 1994 without investing in additional capacity to meet the growing demands of the economy.

This development has created a huge constraint on the growth prospects of the country. However, the need to increase energy capacity in the country became very urgent fifteen years post-democracy. The state-owned utility company, Eskom, has drawn up a six-year capital investment programme to increase the energy capacity of the country.

In this study, the impact of Eskom's six-year capital expenditure on the macro and sectoral economy is explored. The TSME model quantifies the impacts of the Eskom capital expenditure on the economy under a dynamic framework while the CGE model seeks to examine this in a static framework.

Analysis micro market and macro environment of eskom

The static framework CGE in this instance may not be able to capture the structural changes that occurred over the years in the economy. On the other hand, the dynamic framework TSME may also not be able to capture the impact on the sub-industries component of the economy.

In addition, the CGE model takes into consideration the micro implications of any shocks in the system while this is not so explicit in the TSME.

These two approaches are expected to complement each other. However, the complementarity of these models is expected macro environment factors that may affect in the business eskom serve as a robustness check for the simulation results.

It is important to note that the econometric analysis presented in this study represents a comparative static analysis. This means that the models only take into consideration one particular shock capital investment to the system while every other thing remains the same. Therefore, the magnitude and direction of the response variables could have been cushioned by other shocks monetary and fiscal shocks in the system.

In detecting the 18 per cent shock, a base year was set at 2010 when Eskom's total asset value was R246 135 million Eskom, 2010. Therefore, the six-year capital expenditure programme after adjusting for inflation 6 per cent and depreciation rate 10 per cent is cumulatively added to the asset value leading to an 18 per cent average real growth.

The impact of the 18 per cent shock is less in the TSME model, due to its dynamic nature. The share of capital investment in the electricity sector to total capital investment in the economy is very insignificant over time. Therefore, an 18 per cent shock in this sector will not have a significant impact on major macro variables.

The rest of the study is structured as follows: Section Two provides a description of the cost of supplying sustainable energy in the South African context; Section Three provides the TSME and CGE models simulations design as well as an analysis of the capital expenditure project; Section Four provides an overall conclusion. For the period up to 2009, the South African economy had been sustaining itself with the stock of energy infrastructure built before 1994.

The failure to invest adequately has created a real constraint to the growth prospects of the country. However, the need to increase energy capacity in the country has become self-evident.

In response, Eskom has drawn up a six-year capital investment programme that will increase energy capacity in the country to levels in line with the expected rise in national electricity demand Table 1.

The options available in financing the required capex include: Each of these options has its respective pros and cons. Increasing user charges Financing Eskom's capex requires considerable increases in electricity charges if they are to earn an adequate return on their investment but the welfare effect may be negative Collier, 1984: Sudden and substantial increases, however, lead to disruptions for many business firms that had not anticipated such sharp increases.

Furthermore, business operations that are operating at the margins of profitability cannot absorb substantial cost increases, be it electricity or other costs. A good case in point is the marginal gold mining industries, or some of the manufacturing firms that are hard-hit by a mix of currency appreciation and unfavourable global economic conditions. For such firms, it is not the increase per se that matters, rather it is the quantum of increases in the short term that leaves them with little or no degrees of freedom to absorb the production cost increases.

In such cases, business firms have no option but to scale down operations, lay off workers and in some extreme cases even close down. Increasing user charges however has distinct benefits too. Key amongst them are the following: In the long term, this is a pre-condition for an efficient allocation of resources within the economy.

The country's dynamic global competitiveness requires that we ensure all resources used are as cost-reflective as possible.

  • The macro-economic challenges of building a new commons-based economy reinterpret the core values of the internet and somehow develop new ways to protect them in today's more complicated environment so what the some of the key macro-economic trends of our time;
  • Output GDP impacts Table 5 provides an impact range, with an upper- and a lower- bound impact, based on sub-industry impacts, of the capital expenditure increases in the nine Standard Industrial Classification SIC sectors;
  • Analysis of our external environment in the course of conducting our business, employees may also , uncertainties and other factors that may cause.

This in turn will diversify sources of energy in the country, and lead to further stability arising for diversification. Government capitalisation of Eskom This option has its own systemic implications. At face value, if government capitalises Eskom, it reduces the need for raising user charges.

Eskom macro environment factors

So in the short term, the economy operates along its business as usual trajectory. However, there are implications for this scenario over the medium to long term. Most importantly, the following issues arise: I Government capitalisation of Eskom entails either tax increases or a rise in government debt.

Both these developments have a medium- to long-term distortion impact on the stability of the economy. Whilst the arguments here are complex and interrelated, large scale capitalisation of Eskom will macro environment factors that may affect in the business eskom the government's ability in financing key requirements in socio-economic infrastructure.

II This approach also delays energy charges becoming cost-reflective, and as such it is not favourable for the long-term efficient utilisation of the country's resources. Nor is it helpful in promoting the economy's dynamic global competitiveness. III Government's adequate capitalisation of Eskom, if it leads to the subsidisation of electricity charges, will also entail social welfare implications.

It is likely that it will exacerbate the already highly skew distribution of income in the country. Private-sector investment Whilst this option is clearly part of the medium- to long-term solution, it is constrained by the following factors: I There is no guarantee that private-sector investment would entail lower increases in user charges. In fact, the contrary might be true, at least in the short term.

II It is safe to argue that in the short term the regulatory framework for private-sector participation is not in place. As such, this option remains a viable one over the medium to long term.

III In general, private-sector investment should be encouraged with a view to diversifying the sources of national energy supply. In the process, care should be taken that costreflectivity is not compromised and market contestability is encouraged.

A mix of all options In reality, Eskom's investment programme is partly financed via National Treasury's capitalisation and partly with the help of user-charge increases.

Whilst politically this might be inevitable, it is important that the key elements of long-term sustainability are not undermined in the process. It takes into consideration the dynamic adjustment processes and provides a contemporaneous feedback of any shock to the entire system. A more detailed explanation of the model specification and closures, data and methodology can be seen in Appendix 1.

The analysis presented in this study reveals the impact of a shock in a particular variable capital investment on the entire macro economy. The estimated coefficients in each of the behavioural equations as presented in Appendix 1 represent an average value over the period covered in the macro model which has captured the entire dynamic features embedded in the system.

There is a high expectation that these dynamic features will reoccur in future. In other words, it is assumed that there will be no major change in the structure of the economy in the short- to medium-term period that will cause a huge change in the magnitude of the estimated coefficients. The estimated coefficients, however, show both the short-run and long-run path of the economy and, therefore, a shock on a particular variable will be reflected through them. Given the trend path of the economy, the impact of any present and future shocks to the system will be captured.

In order to capture the impact of Eskom's capital expenditure on the entire economy, fixed investment in the electricity, gas and water sector is assumed to be exogenous in the model - over 80 per cent of fixed investment in this sector comes from electricity.

The idea being that capital expenditure will translate into some form of capital stock over time and given the fact that the current capital stock is the sum of existing capital stock taking into consideration the rate of depreciation and current investment. The short-run and long-run simulations are tested by shocking fixed investment in electricity, gas and water sector by 18 per cent per year over a six-year period.

Due to the lag values included in the short-run dynamic equations error correction modelthe entire model simulations covers 1974-2009. However, the six-year 18 per cent per year dynamic shock on fixed investment was applied from 1974 through to 1979 while its impact on the macro system filtered through the entire period covered in the model 2.

All the results are reported as percentage changes elasticity from the baseline scenario. In other words, the results are not forecasts of various economic variables, but rather deviations from its short-and long-run path due to increases in the capital expenditure. Macro environment factors that may affect in the business eskom elasticities are computed by comparing every response variable's baseline simulation path with its shocked simulation path.

Elasticity is defined as the percentage change in the response variable relative to the percentage of the shock applied. The dynamic elasticities are determined along the simulation path, whereas elasticities at convergence are the long-run elasticity Klein, 1982: Given the small sample size it is difficult to ensure convergence within the sample. To facilitate the detection of convergence, Hodrick-Prescott HP filters were applied and the smoothed dynamic elasticities were graphed.

The time paths of elasticities of the major response variables for a particular shock are presented in Appendix 1. To test the stability of the macro-econometric model and whether the behavioural equations estimated are robust, the actual and fitted estimated series of the major macro variables are plotted in Appendix 2.

Close to a perfect fit was detected, suggesting that the estimated coefficients in the model are robust and accurate for predicting the impact of any policy actions 3. Economy-wide econometric sensitivity analysis In this section, the short-run and long-run impact of an increase in capital expenditure by Eskom on some major macro variables in the economy is analysed. As mentioned earlier, the explicit assumption made in this study is the exogenous nature of fixed investment in the electricity, gas and water sector.

Table 2 presents the short- and long-run impact of an increase in capital expenditure by 18 per cent per year over a six-year period. As expected, the impacts are positive on the major macroeconomic variables except for some short- run impacts, which could be attributed to the slow adjustment processes embedded in the system.

The positive impact of an increase in capex was found to be less significant than the negative impacts of an electricity price increase 4. The reason for this is that the price increases have a direct impact on inflation and serve as a linkage between the demand side and supply side of the economy. On the other hand, the capex increase has an indirect impact on inflation via excess demand difference between domestic expenditure and production in the economy.

In the long run, total investment will rise by about 0. Due to this, employment and real wages will increase by about 0. Consumer inflation will deviate from its long-run path by about 0.

Macro environment factors that may affect in the business eskom

This is attributed to the much higher impact on GDP than domestic expenditure, which resulted in a declining excess demand. As inflation shrinks and GDP rises, the exchange rate rand will appreciate by about 0. Given the net impact of falling inflation and rand appreciation the long-run exports will remain unchanged while imports will rise by about 0.