FORECASTING INVESTMENT NEEDS IN SOUTH AFRICA’S ELECTRICITY

AND TELECOMMUNICATIONS

UNDER ALTERNATIVE GROWTH SCENARIOS

Johann Fedderke & Zeljko BogeticInfrastructure and Growth Workshop

Economic Research South Africa May 29-31, 2006

Cape Town, South Africa

OUTLINE OF THE PRESENTATION

PART I: Why Worry About Infrastructure and Growth in SA? Highlights of international Benchmarking of South

Africa’s Infrastructure Performance for Electricity and Telecom

PART II Forecasting Demand for Infrastructure in South Africa:

Electricity and Telecom Investment Requirements in Electricity generation and

Telecom Under Alternative Growth Scenarios

PART I. Why Worry About Infrastructure and Growth in SA?

International Evidence Evidence from South Africa Decline in Infrastructure Investments

in South Africa Since the 1970s South Africa’s Growth Accelerating ASGI-SA’s Emphasis on Infrastructure

International Evidence Figure 1: Infrastructure Accumulation and Growth

(1960-97 country averages, percent)

y = 0.4224x + 0.0007

R 2 = 0.3487

-4%

-2%

0%

2%

4%

6%

-2% 0% 2% 4% 6% 8% 10% 12%

Growth in infrastructure stocks per worker

G

Others

lac

eap7

Evidence from South Africa

Aggregate time series growth model (Fedderke, Perkins, Luiz, 2005):

Output elasticity w.r.t. electricity:

0.1 – 0.2 range under robustness checks

0.5 once control for institutions (Property Rights)

Decline in Infrastructure Investments in South Africa

Real GDP and public-sector economic infrastructural investment (gross) and fixed capital stock (indices, all measured per capita)

60

100

140

180

220

260

1960 1970 1980 1990 2000

Ind

ex (

1960

= 1

00)

(all

val

ues

per

cap

ita)

Infrastructural investment Infrastructural fixed capital stock GDP

South Africa’s Growth Accelerating

In 2004-05, growth was 4.5 and 5% In 1994-2003, it averaged 2.9% Infrastructure Requirements of Accelerated

Growth: Will Infrastructure Constrain Accelerated Growth?

ASGI-SA’s Emphasis on Infrastructure Scale Up Planned infrastructure spending plan of ~R372-

billion (about US$60 billion, or 24% of 2005 dollar GDP) over the next three years

International Benchmarking of South Africa’s Infrastructure Performance

Bogetic and Fedderke (2005, 2006b) use an international research database (Eustache & Goicoehea, World Bank, 2005) to benchmark infrastructure pefrormance of SA in electricity, telecom, water and sanitation, and transport

Indicators: Access, Pricing/Affordability, Technical and Perceived Quality

Comparators: All world geographical groups and main income groups; Upper Middle-Income Group (Main benchmark for South Africa)

Conclusion: Despite impressive gains on the electrification front, SA still lags behind its benchmark income group on several indicators of performance

Highlights of Benchmarking South Africa’s Infrastructure Performance:ELECTRICITY: ACCESS (% of population)

Access to Electricity Network (% of population)

66

15

8587

60

0

20

40

60

80

100

South Africa SSA Middle Income Upper MiddleIncome

High Income OECD World

Highlights of Benchmarking South Africa’s Infrastructure Performance:

Electricity Transmission & distribution losses (% of total output)

Electric Power Transmission and Distribution Losses (% of total output)

8

19

15

14

6

14

0

5

10

15

20

South Africa SSA Middle Income Upper MiddleIncome

High Income OECD World

Highlights of Benchmarking South Africa’s Infrastructure Performance: TELECOM: TELEDENSITY(total telephone subscribers per 1,000 population)

Teledensity (total telephone subscribers/1000 people)

408

99

468

635

1393

501

0

400

800

1200

1600

South Africa SSA Middle Income Upper MiddleIncome

High Income OECD World

Highlights of Benchmarking South Africa’s Infrastructure Performance: TELECOM: PHONE FAULTS(Reported faults per 1,000 mainlines)

Phone Faults (reported faults/100 mainlines)

48

57

25

18

11

37

0

20

40

60

South Africa SSA Middle Income Upper MiddleIncome

High Income OECD World

Table 2: South Africa's Infrastructure Performance - Significant Deviation from Benchmark

INFRASTRUCTURE SECTOR

South Africa

Benchmark Upper Middle

Income SSA World South Africa's

performance vs. Benchmark

ENERGY--ELECTRICITY Energy: Access to Electricity Network (% of Population)

66 87 15 60 Lower

Energy: Households Reporting Access to Electricity (% of households) 65 74 23 45 Lower

Electricity Average End-User Prices (US cents/kWh) - (Residential/Non-Energy: Residential) 3 / 2 9 / 7 6 / 5 9 / 6 Higher

Energy: Electric Power Transmission and Distribution Losses (% of total output)

8.0 14.0 19.0 14.0 Higher

WATER Water: Access to Improved Sanitation (% of population) 67 86 37 64

Lower

TELECOM

ICT: Teledensity (total telephone subscribers/1000 people) 408 635 99 501 Lower

ICT: Mainlines Teledensity (mainlines subscribers/1000 people) 107 261 31 213 Lower

ICT: Cost of Local Phone Call (US cents/3 minutes) 15 9 10 9 Lower

ICT: Cost of Phone Call to the US (US cents/3 minutes) 58 305 497 335 Higher

ICT: Cost of Cellular Local Call (US cents/3 off-peak minutes) 25 54 42 49 Higher

ICT: Phone Faults (reported faults/100 mainlines) 48 18 57 37 Lower

TRANSPORT--ROADS

Transport: Road Density in Terms of Population (road-km/1000 people) 6.1 9.2 3.3 6.7 Lower

Transport: Road Density in Terms of Land (road-km/1000 sq km) 227.2 1076.4 155.7 840.6 Lower

Transport: Travel Time to Work in Main Cities (minutes/one-way work trip) 35 29 34 31 Lower

Transport: Paved Roads (% of total roads) 21 57 25 50 Lower

PART II: Forecasting Demand for Electricity and Telecommunications

Earlier Studies by Fay (2001), Fay et al (2003), Heffley et al. (1996), Bogetic and Fedderke (2005, 2006a)

Estimation by Fay (2001) and Fay et al (2003):

(I/P) = F( Y/L , Ag/Y , Man/Y, Z )

Underlying Estimation:

ELECTRICITY TELEPHONES Income per Capita 1.43 1.20 Share of Agriculture -0.01 -0.04 Share of Manufacturing 0.01 -0.06 Share of Services 0.08 1996 Structural Break 1.06

Quantity Forecast:

South Africa: Proje cted Stocks of Capacity and Flows of Electricity Kilowat Hours per capita, 2003-2010

0

1000

2000

3000

4000

5000

6000

7000

2002 2003 2004 2005 2006 2007 2008 2009 20100

50

100

150

200

250

PMGE forecast, stock, left scale MGE forecast, stocks, right scale

PMGE forecast, flows, left scale MGE forecast, flows, right scale

South Africa: Projected Stocks and Flows of Te lephone Lines, 2003-2010(number per 1,000 people)

0

100

200

300

400

500

600

700

2002 2003 2004 2005 2006 2007 2008 2009 20100

5

10

15

20

25

30

35

40

45

50

Stock of Telephone Lines - left scale Change in Stok of Telephone Lines--right scale

Cost Forecast Under Current Growth Scenario:

South Africa: Projected Cost (including associated network costs) of Electricity Production Capacity and Flows (Inve stments) Based on Forecasted Demand, 2004-2010

(US$ billions)

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

5

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Long-Run PMGE forecast--stocks Long-Run PMGE forecas--flows

Average annual investment flows, 2003-2010: US$ 0.5 billion upper bound

South Africa: Projected Cost of the Stock and Flow (Investments) of Fixed Line and Mobile Phone Infrastructure Based on Forecasted Demand , 2004-2010

(US$ billions)

0

2

4

6

8

10

12

14

16

18

20

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Long-Run PMGE forecast Long-Run MGE forecast (if deficit covered every year)

Average annual investm ent flows 2003-2010: $1.9 billion

Forecast under the “current growth scenario” (3.6% pa): 2005 - 2010

South Africa – Annual Infrastructure Investment Needs Forecast, The Current Growth Scenario*, 2003-2010

Average Annual Investment Flows

In billions of US$ In billions of rand In % of GDP

Power:Lower Bound:Upper Bound:Telecom:

0.290.521.98

1.873.37

12.90

0.110.200.75

Total(upper bound):

2.50 16.27 0.95

*Average annual growth projection (in %): 3.6%. Source: IMF and World Bank medium-term projection.

Source: The authors’ estimates.

Forecast under the ASGI-SA like, “accelerated growth scenario” (6% pa) until 2010

Table 4: South Africa – Annual Infrastructure Investment Needs Forecast, The Accelerated Growth Scenario*, 2003-2010

Average Annual Investment Flows

In billions of US$ In billions of rand In % of GDP

Power:Lower Bound:Upper Bound:Telecom:

0.964.28

6.2327.83

0.402.00

Total(upper bound): 5.24 34.06 2.40

*Average annual growth projection (in %): 3.6%. Source: IMF and World Bank medium-term projection.

Source: The authors’ estimates.

CONCLUSION 1: We estimated a robust model of demand

for electricity and telecom using panel data on 52 countries for the period 1980-2002

The model performs well in characterizing historical demand

We use the model to forecast future demand for electricity and telecom under two growth scenarios: “current” and “accelerated” growth, covering the range of likely growth scenarios for South Africa

CONCLUSION 2:Significant new investments in electricity and telecom

required

To support economic growth:

Under the current growth scenario: Rand 16 billion (3.5 billion in electricity generation and 13 billion in telephone mainlines)

Under the accelerated growth scenario: Rand 34 billion (6 in electricity generation and 28 in telephone mainlines)

In electricity, these investments may exceed those currently planned by ESKOM

Further research needed:

Our paper establishes investment requirements of growth in electricity generation and telephony; it does not say anything how those requirements will be met (public vs private sector, financing options etc). Further useful research to assist the operationalization of ASFI-SA could focus on:

Policy assessments of alternative ownership, operating, efficiency, and financing scenarios