Timing is right to extend fuel rebates to other businesses

South Africa

In the past few months, South Africans have experiences an unprecedented increase in loadshedding or as it should properly be called, blackouts. This is as a result of Eskom’s inability to keep its electricity generation capacity to acceptable levels. Experts say Eskom cannot properly maintain its aging coal power stations and it is unable to bring ‘new’ power stations, Kusile and Medupi properly online or keep them operating optimally.

Due to the constant breakdown of its coal power stations, Eskom has to rely more on its open-cycle gas turbines to keep the lights on when breakdowns happens at these power stations. Reliance on the gas turbines means extra costs for Eskom as they are powered by diesel. Increase in breakdowns means increase in the use of the gas turbines which results in the increase in diesel costs. With the increase in the global crude oil prices since the War in Ukraine, diesel prices have been on a sharp rise in the last few months to over R25 a litre. This means Eskom is paying more than it had anticipated for the diesel it is utilising to operate the gas turbines. It is estimated by various commentators and Eskom that it’s diesel bill for this year is expected to be over R20 billion and the cost to the economy much higher.

Some businesses cannot operate during blackouts as they are forced to shut their doors. Some businesses keep operating by utilising alternative power sources such as solar or diesel powered generators. Use of diesel generators means increased costs for these businesses that is unmanageable due to the cost of diesel which is increasing at an alarming rate. However, generators are usually unable to power all the equipment necessary to keep the business operating at 100%. This may result in the business losing customers.

These diesel expenses erode the businesses’ cash flow further and a time business needs more cash flow. For various reasons, cash flow is extremely important for any business as it allows it to meet its current financial obligations, plan for its immediate expansion and enables it to survive difficult trading conditions such as the recent lockdowns due to Covid-19 restrictions. The need for a healthy cash flow applies to Eskom too. Admittedly, Eskom’s excessive utilisation of the gas turbines is bad for its cash flow. Spending over R20 billion on diesel for a business that is the red by over R400 billion is surely not good for any entity.

Fortunately for Eskom, it can claim rebates from SARS via the VAT system. In terms of the Customs and Excise Act, Eskom can currently claim back from SARS the fuel and Road Accident Fund (RAF) levies imposed on every litre of diesel it purchases. This means that Eskom can claim at least R3,65 on every litre of diesel it uses for its gas turbines. This alleviates its cash flow to an extent. In 2020, Eskom claimed diesel rebates of R799m while in 2021 it claimed diesel rebates of R1 655billion. This is some of the money that it used to keep its business operating.

Some of the reasoning by National Treasury (NT) for allowing Eskom and businesses in certain industries such as mining, farming, forestry, shipping and rail to claim diesel rebates is mainly due to the fact that these industries do not utilise the road infrastructure hence they should not be required to subsidize industries that do. Further, they should not be subsidising the Road Accident Fund that compensate victims of road accidents. This reasoning is equally applicable to many other industries that are now forced to utilise diesel to keep their doors or their businesses open for businesses during the constant blackouts.

Businesses in the tourism, hospitality and property sectors are now utilising diesel generators regularly to run their businesses. It is now a regular site at shopping malls to see generators outside of shops and restaurants during blackouts. Restaurants and shops need to keep the lights on at all times as they loose large amounts of stock when their freezer are not operating during extended or frequent periods of blackouts. Recently, it has been reported that Growthpoint properties, one of SA’s largest property group is spending more money to keep its diesel generators at its numerous properties operating during blackouts.

Obviously, Growthpoint is not the only property group facing these diesel costs, other property owners face the same cost and it is eroding their cash flow and profits. Similar to Eskom, these businesses do not utilise the road infrastructure and should not be subsidising the RAF and other businesses that do.

As a result, we do not see why the Minister of finance should not be exploring the extension of the diesel rebates to such businesses considering that Eskom’s inability to keep the lights on is the root cause of their need to use diesel to run their businesses. This should be fairly easy to implement as these businesses are already registered VAT vendors and the rebates system utilises the VAT system. I have no doubt should the Minister of Finance expand the diesel rebate system to other industries and sectors, SARS would be able to manage the resultant increased diesel rebate claims.

The R3,65 rebate per litre that these businesses will be able to claim back will definitely improve their cash flow thereby increasing their chance of survival. This is another mechanism that government can utilise to save much needed jobs. Loss of revenue to the fiscus due to the expanded diesel rebate regime should be minimal as the increased utilisation of diesel by other industries was never anticipated by government. In any case, government should not benefit from its inability to properly manage Eskom but must help South African survive it.