Business Unusual

The impact of a fire in the US might spare South Africa from getting burned

We tend to give greater significance to recent events than older ones so if you were to asked what is at the heart of Eskom’s problems you may get many to say corruption. It is a significant factor but using our own version of the 10-year-challenge then in 2008 Eskom had no power because of lack of investment while in 2018 we have no power because of corrupt investment.

We tend to look at the new things that will drive innovation or deliver growth in the economy, and that is true, but it requires that the infrastructure that it is built is sufficient and well-maintained. But who talks about maintaining infrastructure?

The ANC election manifesto mentions infrastructure multiple times, mostly talking about the new investment of over R1 trillion via an infrastructure fund. It does not mention the maintenance of infrastructure much because whoever voted for someone promising to look after infrastructure? One element that is promised is new transport and rail infrastructure which is undoubtedly a good ambition, but it does not mention that the adequate rail infrastructure failed thanks to lack of maintenance because of poor management and corruption.

South Africa is not alone and the US offers us a warning should we still not get the message.

Fire

The 114-year-old Pacific Gas and Electric Company, with 16 million customers, supplying power and energy to a large part of California should be one of best investments for good, steady incomes. Even as renewables become a better option, a well-established company would be in the best position to use its dominant position to fund investment in the new infrastructure and look forward to another century of operation. The PG&E Corporation which owns the company has instead filed for bankruptcy protection. Its share price is down to less than $10 from highs of $70 as recently as 2017.

In the last two years, the company has had many power failures resulting from ageing power network components. Not only did the components fail, but they also started fires, lots of them and they were big fires.

There is so much to repair they don't appear able to catch up and the bill for damages could see a century-old business broken up or lost because they did not do enough to look after the basics.

It is not only companies, but many countries also face this at some stage, and the World Economic Forum has listed infrastructure provision and quality as one of 12 factors to determine competitiveness. Countries with the best infrastructure tend to perform better economically than those that don’t. The first Sub-Saharan country to appear on the list is South Africa, but that is in position 67 for the 2018 report.

To improve the economy, fix the infrastructure

Some countries have privatised their infrastructure ownership or outsourced the maintenance to manage costs and ensure it is carried out. It is an option, however, when governments need to tighten belts the maintenance budgets for things like roads, bridges and dams which may seem almost indestructible are cut back. Concrete structures have design limitations of about a century and many old designs have some structural flaws that may reduce their lifespan.

We are not alone

An Italian bridge collapse in 2018 resulted in 43 deaths when a 200m section of a bridge collapsed. The cause appears to a combination of factors that includes age, design, costly repairs and reduced maintenance budgets.

Unfortunately, it will not be the last. Much of Europe and significant parts of Asia were rebuilt after the Second World War. As we approach the centenary of that, we begin to move into the danger zone for failures. That is not to say it can’t be addressed, just that many countries that may need to invest heavily either lack the ability or will to do so.

South Africa, for all our existing infrastructure, still needs to spend a lot to maintain it. Adding another R1 trillion investment into mostly new infrastructure requires us to consider the cost of looking after it too.

This is not just a government issue. Any business knows that for all the benefits of buying new equipment or machinery and technology, it needs to have a time frame for being replaced or upgraded or repaired. In a low growth, highly competitive environment spending money on maintenance that will not improve your profits or increase productivity may be reduced.

Homeowners should also understand that without regular maintenance to your home you not only get a living environment you don’t enjoy, but you also damage the value of the property.

Investing too heavily or incorrectly can be just as damaging. The Gauteng Freeway Improvement Project was planned to boost the economy and economic activity not only in the province but for the country. It no doubt makes getting around and transporting goods easier, but the benefits do not appear to square with the costs to use it. Whether it was too ambitious or did not take a realistic view of how it would be paid for, it should be a warning that nothing gets built for free and that the benefit must exceed the cost to be viable and sustainable.

China’s impressive belt and road project have offered a significant boost to trade and economic opportunities along the designated route. However, for some countries the returns are not able to match the costs and rather than being an economic benefit turns into a drain on limited resources.

Eskom is now in a position that makes it critical for South Africa to operate while also trying to service unsustainable debt which undermines the debt rating of the country and stretches South African business and households with excessively high electricity costs.

Had we paid more attention to the need for proper investment and maintenance 20 years ago it would have been far less of an issue. Had we paid more attention to reports about dodgy dealings in the last decade it would be even less of a problem.

The only question now is; will we have learned that any company and country can be brought to its knees if it fails to do what needs to be done when it needs to be done - always?

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This article first appeared on 702 : The impact of a fire in the US might spare South Africa from getting burned


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