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Integrated risk management |
Emerging risks
Emerging risks form part of the relationship between the external environment and any organisation, and Eskom reviews risk regularly. Emerging risks with a wider systemic impact and linked to significant long-term trends include:- The global recession
- South African economic development
- Nuclear safety
- Financial market volatility
- Regulatory compliance
- Commodity price volatility
- Managing talent
- The Chinese economy
- Underinvestment in production innovation and infrastructure
- Corporate social responsibility and social acceptance
- Environmental pressure.
The global recession
The world economic recovery remains in a two-speed mode. The developed economies are growing at a considerably slow pace while the developing nations are by and large steaming ahead. The United States is struggling to overcome its economic problems that were accumulated over the years, Europe is fighting off multiple country, sovereign debt crises, and the emerging economies are trying to fend off inflationary pressures. The economic stimulus packages that were introduced in different countries may have prevented the worsening of the financial crisis but structural problems that were inherent in the crisis are unlikely to be resolved in the short term. High levels of unemployment and difficult conditions in the labour market are set to continue, with negative implications for household incomes, consumption and investment.
The geo-political developments in North Africa and the Middle East have added pressure on the global oil prices. This marked increase in oil prices has potential to derail the world economic recovery in more ways than one. Firstly, the oil price could choke economic growth if prices become prohibitive. Secondly, the inflationary pressures that were already gathering steam could be given an impetus by higher oil prices, prompting a quicker monetary policy response than would otherwise be necessary.
With slow growth predicted for developed markets, the main growth engines like China and India are expected to continue growing at a brisk pace, thereby leading the global recovery efforts. The increasing demand for raw materials by these economies augurs well for South Africa as a commodity exporter. This development is expected to contribute towards the expected increase in the level of domestic electricity consumption as commodity-linked sectors respond to improving market conditions.
South African economic development
Given the improving global conditions, the South African economy is expected to gain momentum in its own recovery path. From a contraction of 1.7% in 2009, the economy bounced back to a growth of 2.8% in 2010 and it could post even higher growth levels in the coming years. This buoyant level of GDP growth is projected to be supported by strong growth in household consumption and a steady increase in capital formation.
The rand remains the main catalyst for inflation outcomes and interest rate projections. A stronger rand exchange rate has mitigated the impact of higher oil prices and rising global food inflation. The consumer price index is expected to increase gradually in the short term and to remain within the inflation target band over the medium term. The threat of higher inflation poses an upside risk on interest rates in the short to medium term. Nevertheless, monetary policy is expected to be tightened at a steady pace so that economic growth is not stifled.
Earthquake and tsunami in Japan
There have been renewed concerns about nuclear safety following the failure of a number of safety systems at the Fukushima nuclear power station in Japan after the tsunami. The subsequent environmental impact of the radiation leakage has prompted the question: How would Koeberg power station have coped with a similar disaster? Refer to here for details on the safety measures in place at Koeberg power station.
Financial market volatility
The credit crunch and the high cost of capital are likely to persist until global credit markets stabilise. Corporate credit markets are beginning to show signs of improvement but lending standards remain stringent. Banks are focusing on credit risk for loan pricing, and bank credit availability will remain limited in the foreseeable future, with companies needing to explore alternate funding sources to ensure liquidity. Bank credit availability will remain restricted with bank loan markets shrinking and public debt and equity markets becoming tighter.
Regulatory compliance
Uncertain conditions and demands have forced compliance and ethics functions to make difficult resource trade-offs, rationalise cost savings and abandon long-standing assumptions. It is likely that intense scrutiny and regulation of business practices, not only in the financial sector but across the whole spectrum – including oil and gas, and the power and utilities sectors – will result from the global financial crisis and events in the Mexican Gulf. This will be accompanied by heightened government vigilance. Regulatory compliance will therefore continue to be a major risk, especially in view of the current deep corporate distrust and stakeholder vigilance, which require unprecedented compliance responsiveness with very limited resources. Uncertainty about regulation affects the ability of investors, as well as companies, to act.
Commodity price volatility
Commodity price volatility is caused by rising oil and commodity prices as a result of increased demand and greater competition for scarce resources. This will lead to increased running costs, the inability to source required resources on time, increased requirements for stockpiling and increased competitive and inflationary pressure.
A new emerging risk is the shortage of the rare earth minerals that are essential components of clean energy technology, computers and electronics. China currently supplies 97% of these minerals and may wish to exploit this position of power.
Managing talent
The market for skilled professionals is highly competitive. Engaging and retaining suitable employees remains an issue for human resources managers. At the same time, the recovery from the recession has not been accompanied by the creation of new jobs. Unemployment has increased, and people are also remaining unemployed for longer periods. These trends entail additional costs in a financially uncertain market. Increased unemployment could also lead to labour unrest, political instability and even slower growth in developed countries.
Chinese economy
China appears to have navigated the global recession and financial crisis successfully. But much of its domestic growth has been a result of high credit growth, so there is the risk of a sharp and potentially recessionary correction. Given the size of the Chinese economy, this correction will have a significant impact on global financial stability, particularly for China’s trading partners, if it should happen before the global economy is more resilient.
Brazil’s finance minister has warned that South American countries are bracing themselves for a trade war, because both China and the United States are influencing their currencies in a questionable way to make their exports more competitive.
Underinvestment in product innovation and infrastructure
Product innovation and infrastructure development are critical for meeting the challenges of climate change and the increased demand for energy. Vast segments of water, energy and transport infrastructure across the globe are structurally deficient or functionally obsolete, requiring considerable annual investment to avoid catastrophic failure. Governments already struggling with fiscal deficits and increased debt may not be in a position to be the major drivers of infrastructural development.
Corporate social responsibility and social acceptance
Demonstrating a high level of corporate social responsibility has become increasingly important, including the social acceptance of a company’s long-term plans. These social demands can affect getting development plans accepted – particularly in the energy sector, due to Eskom’s extensive use of fossil fuels and the resultant CO2 emissions. Public opinion can be driven by perceptions and not necessarily by actual risk. But companies can no longer afford to dismiss public opinion.
As new communications technologies and platforms develop and social networking gains prominence, more and more information is being distributed outside companies. Digital data is easier to copy and distribute, as demonstrated by Wikileaks. So far, governments have borne the brunt of the leaks, but corporations are not immune. Documents leaked from a big trading firm and a bank have already been published. Evidence of malpractice and information on strategic planning can damage corporations.
Environmental pressureEnvironmental regulation, consumer demands and strategic responses remain a pressing long-term issue across all sectors, particularly with increasing public awareness of climate change and environmental preservation. Companies will have to invest resources in maintaining their corporate image and reducing their environmental impact. As economic growth resumes and environmental degradation continues, environmental pressure will re-emerge as a powerful force in shaping business. This is also an opportunity for companies to influence their emissions through more energy-efficient ways of living and working. Eskom opportunitiesThe organisation has identified the following opportunities:
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