BUSINESS DAY TV: Bypassing a municipality keeps company running
Gary Arnold, MD of agriculture at Astral Foods, discusses the chicken producer’s court victory against Eskom — getting the lights kept on
BUSINESS DAY TV: Astral Foods has been assured that the lights will stay on at its Standerton operation, that’s after it reached agreement with Eskom in the North Gauteng High Court last week that its power supply wouldn’t be disrupted despite the Lekwa Municipality not paying its bills.
The disruption would have had devastating consequences for Astral’s operations and joining us with more is Gary Arnold, MD of agriculture at Astral.
Gary, so is bypassing the Lekwa Municipality and dealing with Eskom directly the best possible outcome for you?
GARY ARNOLD: In terms of the court action, we consider this a major victory against Eskom. In January of this year, Eskom threatened to cut power permanently to Lekwa Municipality if they did not pay the arrears on the outstanding electricity bill with Eskom. That was close at the time R300m.
Astral has sizeable businesses in Standerton. We have investments in animal feed and poultry operations in excess of R3bn. We employ 4,150 people in these businesses. Every day we have to look after 11.5-million chickens that need food and water and they need to be taken care of. Any cut in power, whether it be of a temporary nature or permanent nature, would have dire consequences for our businesses. Not only for our employees but for the welfare of our livestock, as well as dire financial consequences for Astral.
So in February of this year, we approached the courts with an urgent interim interdict application to prevent Eskom switching the lights off. This was their threat to the Lekwa municipality. Now in Standerton, where our businesses are based, as I mentioned, that falls within in the Lekwa municipal region, we simply could not face any cut in power.
BDTV: I watched an interview with Chris Schutte outside the North Gauteng High Court last week and he said Eskom hasn’t been paid by Lekwa for 13 years. You’ve been paying your bills — where has that money been going?
GA: I wish we had an answer to that question. We make up about 52% of all power consumed in the municipality. Our electricity bill averages between R7m and R10m a month and we pay it on time every time. It’s your guess as to where the money goes. What we know is that Eskom threatened to turn the power off.
BDTV: So, as far as this arrangement is concerned, how long does that sit for, is it just until the municipality gets its ducks in a row and governance standards are met?
GA: In February, we applied for an urgent interdict in our court order that would prevent Eskom cutting power. That was delayed to May this year for further argument, during which time Eskom was not allowed to cut power to the town. That matter was heard last week over two days.
Astral was successful in forcing a concession out of Eskom whereby they would not be allowed to cut power to the town, never mind our operations being in the town. That was made an order of court, that settlement agreement was made an order of court whereby we would pay our monthly electricity account over to Eskom so they are assured of receiving the money that we owe every month on our electricity account and full costs were awarded to Astral for all the legal costs incurred, so Eskom will be paying their legal bill as well.
BDTV: Your operations aren’t constrained to Standerton, you have operations elsewhere in the country: does this set a precedent for other municipalities where you operate who may also be defaulting on their payments to Eskom?
GA: I’m sure it does for large businesses. We were one of the large businesses who approached the courts. Bridgestone was one of them, Mediclinic was another one. I wouldn’t want to discuss the merits of their cases here today but I’m sure that it obviously does…
BDTV: Do you face a similar situation in other places where you have operations?
GA: Not with electricity, not within those other municipal regions where we have operations. Our focus is now turning to all organs of state. They have a constitutional obligation to provide electricity and water. That includes the Lekwa Municipality. In the Lekwa Municipality, the Standerton town, the infrastructure is falling apart. We face ongoing water cuts, day to day, week to week. We had, last week on Thursday, a cut in power for 18 hours that impacted our operations because of a burnt cable within the municipal infrastructure; the water cuts are spilling over into other areas. Just on Friday in the local newspaper of Standerton, even the correctional services are considering moving some of their inmates to other facilities because they don’t get enough water.
BDTV: So, while this judgment then alleviates some of the pressure that would have rendered Astral’s operations in the Standerton area unsustainable now, where do things sit and how operationally viable are you?
GA: With this court order we are operationally viable. We sit with a R3bn investment in the businesses in the town. We could not sit back and just let this happen as it was going to; in other words, they were going to switch the lights off. We couldn’t allow that. With the court order, they are not allowed to turn the lights off, in other words, the power cannot be cut to the town.
Our obligation is to pay the money that’s due every month on electricity account to Eskom and the power will stay on.
BDTV: Any thoughts of becoming self-sustaining with generating your own power?
GA: Certainly, and there are two angles to that. We’ve had discussions with Eskom where we’re looking at direct supply into our businesses. That’s a long-term project, probably two to three years to get the infrastructure in place, the power lines, sub-stations, there’s a cost to it of anything from R75m to R100m and, of course, we look at alternative energy sources.
The problem is our businesses are so energy hungry, they consume large amounts of power. You can imagine our factories consume 52% of all the power in the town. That’s the size of a small town on its own. Alternative energy sources only go so far and its completely … we cannot run the businesses on diesel generators, the costs will kill us.
BDTV: How much of a strategic shift has the company had to employ amid it all because, for the second quarter, you have implemented production cut-backs in the business in order to avoid over-stocking conditions. So how much of a shift has been triggered?
GA: None of the production cut-backs relate to the threat of us not receiving power. At the time that we had production cut-backs, we were receiving power and, of course, the High Court ordered Eskom not to turn the lights off until the case was heard in May, which it was last week. But we’ve had to endure other issues, water cuts — so sometimes five to six hours a day you stand without water.
That has obvious consequences in our business and we’ve had to make practical plans around that. So it is an ongoing challenge; that’s why I say our focus is now on forcing all organs of state, including the Lekwa municipality, to provide us with electricity and water, and maintain the infrastructure. That’s probably more critical than ever. We sit with a dysfunctional municipality that is not maintaining the infrastructure. We can’t run a business without electricity and water.
BDTV: We’ll be taking a closer look at Astral’s results due out next week.