As South Africa embarks this week on the challenging journey of negotiating a post-election political agreement, the business community must prepare for a landscape marked by heightened uncertainty.
And in the realms of scenario planning and strategic risk management, cash flow should now be given top priority as a primary signal in crucial sectors that rely on essential services.
Riskonet Africa’s Principal Strategic Risk Advisor, Volker Von Widdern says the importance of accelerated scenario planning in this uncertain environment cannot be overemphasised: “The election result has already introduced higher levels of uncertainty and general indications are that the level of investor appetite for South Africa will either decrease quickly or remain in a holding position until real evidence of improvement is available. In the meantime, economic forces must be dealt with on a day-by-day basis with constant evaluation of business opportunities and threats.”
He says one recent example of strategic risk management is “state proofing,” which aims to minimise the impacts of the erosion of state-provided services. The migration to solar power at both corporate and private levels is already well underway, and alternative methods of maintaining water supplies are gathering momentum. However, this shift has significant implications for local authorities, which rely heavily on the sale of electricity and water as primary revenue sources. The accelerating move away from state-based provision of these utilities is expected to severely impact the revenue base of local authorities. This situation is compounded by the increasing levels of unpaid balances owed by local authorities to major bulk utilities like Eskom and Rand Water, with little chance of repayment or reduction of amounts owing to these suppliers.
Von Widdern also highlights the unintended consequences of first-level risk management in the electricity and water sectors. “Strategic risk management should consider responses and mitigations to emerging risks that are sustainable in the medium term and which avoid emergency action when crises develop. For example, the cost of maintaining power at a business using generators (i.e. a first level response) is much more expensive than equivalent capacity from a solar plant, despite the higher capital cost of solar. Similarly, the long-term cost of harvesting rainwater, accessing borehole water, and developing filtration and wastewater treatment facilities will be lower than the risk and cost of operational shutdowns caused by inadequate water supply,” he explains.
One potential scenario involves the development of suburban multipurpose water and waste treatment facilities that can operate at sufficient scale to meet the needs of defined residential or industrial areas. This approach could mitigate the risks associated with inadequate state-provided utilities and ensure a more stable and sustainable supply of critical services.
The bond market represents the price and liquidity of major fund flows in South Africa, I.e. the leading indicator of cash flows at country level. The SA Reserve Bank recently commented that these benchmarks had declined, which would lead to increased costs of borrowing for both the government, corporates and citizens. He says often the most accurate measure of a business’s performance is its ability to generate operational cash flow. Scenario planning and strategic risk management should now prioritise cash flow as a leading indicator in key areas dependent on critical services, whether provided by local authorities, state-owned entities, or other key service providers.
In coming days says Von Widdern the risk community and boards of directors must proactively and consciously engage in strategic risk management to navigate the post-election uncertainty. “By developing robust scenario plans, businesses can better anticipate and mitigate risks, ensuring long-term sustainability and resilience in a rapidly changing environment.”
