Load shedding driving small businesses to bankruptcy

Load shedding is driving small businesses to bankruptcy, with statistics already showing an increase in liquidations in the three months ending in November last year with an increase of 2.1% compared to the three months up to November 2021.

Statistics from Statistics SA shows a year-on-year increase of 4.4% in November 2022, with 166 filings for company and close corporation liquidations in this month. This included 51 filings in finance, insurance, real estate and business services, 35 in trade, catering and accommodation and 17 in community, social and personal services.

However, Saul Levin, executive director of Trade & Industrial Policy Strategies (TIPS), says the sector rebounded and is now surpassing the pre-Covid numbers of enterprises.

“We have not seen a similar fall in numbers due to the electricity crisis, although the problem is lack of sufficient growth and the likely impact on profitability and hours.”

Since the first quarter of 2021 and the third quarter of 2022, formal enterprises grew with 70 000 and informal enterprises with 300 000.

Small businesses are important for the South African economy.

“South Africa has a vibrant small business sector with about 711 000 formal enterprises in the third quarter of 2022 and about 1,75 million informal businesses. This sector suffered a lot during Covid, which was evident from the 3% fall in the number of small businesses in the formal sector and a 26% decline in the informal sector.”

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Impact of load shedding on small businesses

Levin says more work needs to be done to empirically understand the impact of load shedding on enterprises, but limited research shows that small business owners have to work longer or different hours, lose potential sales or produce less products.

“These all impact on profitability and the viability of businesses and the cumulative impact across the economy has an overall negative outcome for economic growth and job creation. The concern is that the loadshedding has held back much needed economic growth and stronger recovery as we move out of Covid.”

The lack of sufficient electricity forces businesses to find other options as it is unlikely that Eskom’s supply of electricity will increase anytime soon. However, other options cost money that must come from small business’s profits.

Levin says more needs to be done and landlords, municipalities and industrial sites should all be looking at long term solutions to move off the grid and supply as much of their own electricity as possible through renewable energy, which for most businesses or industrial sites would be the installation of solar panels and batteries.

“The available evidence shows that it is cost effective to do so and TIPS is doing further research to confirm that. There are also increasingly finance options and companies that are offering renewables solutions.”

The upfront costs of installing solar panels, inverters and batteries for small businesses is high.

“Even if the long-term price of electricity is cheaper, the upfront costs of solar are a barrier. Some small businesses found finance solutions or even leasing options and some turned to landlords to provide the investment. Others turned to generators or gas as a temporary measure during loadshedding although that is increasingly becoming an expensive option.”

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Small businesses’ contribution to job creation

Small businesses do not only contribute to the gross domestic product (GDP) of the country, but also create many jobs. According to Levin, the formal and informal small business sector employs 4,65 million people according to statistics. Over 83% of them are employed by formal businesses.

“The combined small business employment numbers are down from pre-Covid levels when more than 5 million people were employed. Despite the growth in the small business sector, there fewer people (over 350 000) are employed in the sector.”

Levin says between the first quarter of 2022 and the second quarter there was an increase of over 200 000 employees in the small business sector, but between the second and third quarters there was a decline of approximately 100 000 employees.

“While it is difficult to ascribe these 2022 employment changes specifically to electricity and load shedding, it is clear is that the small business sector is an important employer and requires appropriate support to grow, which includes sufficient electricity.”

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Contribution to GDP

David Morobe, executive general manager for Impact Investing at Business Partners Limited also emphasizes the importance of SMEs to the national economy.

“Estimates are that, with the requisite enabling environment, SMEs contribute up to 40% to the country’s GDP.”

He says SMEs also represent a key part of what can constitute an inclusive economy and that with an appropriate enabling environment, SMEs can also contribute significantly to creating jobs and thereby alleviate high unemployment levels.

“The various stages of load shedding cost the productive economy dearly and small businesses are vulnerable because it has a severe impact on a business’ productivity given that electricity is generally cut for two to four hours depending on the stage, which takes up the bulk of the working day.”

Productivity is often affected in terms of machinery, as some machines can require some time to start, which is invariably costlier as the machines may use more electricity to start up again. In addition, machines are often busy with a continuous process and when they are interrupted midway, it results in wastage and increased costs.

“Regardless of the extent to which production may have been impacted during load shedding, the business still needs to cover their fixed overheads. This may result in businesses whose profitability is less than desired passing on the burden to consumers by increasing prices to maintain their margins.”

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And the department of small business development?

South Africa has a department of small business development and its minister, Stella Ndabeni Abrahams, issued a statement late on Tuesday to say that she and her team “are currently seized (sic) with trying to find solutions aimed at lessening the devastating impact of loadshedding on small businesses.”

She says she understands the problems of SMMEs with load shedding and her department’s Small Enterprise Finance Agency (SEFA) conducted a research study on the impact of loadshedding on its funded clients.

According to the study, most respondents indicated they are highly reliant on electricity for their operations, with about 71% indicating that they are negatively impacted and the majority will require an alternative power source to continue with their operations. 

According to the statement the minister instructed the department and its agencies (Seda and Sefa) in consultation with different stakeholders within and outside government to urgently work on an energy relief package for the small, medium, informal and micro sectors.

The details of the package, criteria and avenues for application for the relief will be announced soon.