All businesses have to continually engage in capital investment to improve and maintain processes, equipment and facilities. Governments also invest in infrastructure projects like roads, rail and utilities provision. Whether a private or public organization, when capital investment is not undertaken, the effects will cause problems. In South Africa, no power generation plants had been built for about 20 years from the early 1990s. With a growing economy since then, this has caused problems for many businesses. In 2008, the country exceeded its generation capability which caused power blackouts. The power problems hit one business sector particularly hard, namely the mining sector. Ore smelters and mines consume vast quantities of power and the South African economy is hugely dependent on this sector. Why no investment in new generation capacity? The Financial Times website (10 April 2010), stated that a major problem was low electricity prices, which in turn implied little cash for re-investment. According to a Bloomberg article, investment of R500 billion from 2013 to 2017 was needed to overcome an electricity shortage. To help overcome this issue, electricity prices were increased from just under 20 cent per kw/h to 75 cent between 2008 and 2016. However, additional power generation capacity takes time to build and Eskom, who produce 95 per cent of South Africa’s power, had spent R265 billion up to 2015. In response, smelting operations like International Ferro Metals invested in their own onsite generation facility. The company produces some of its power requirements by recycling heat from its smelters. This not only helps protect the company from power outages, but also protects to some degree against rising costs. A sound investment in the longer term it would seem.
Questions:
1 When evaluating an investment in energy generation solely on cost considerations, can a manager make the right decision?
2 Thinking about the International Ferro Metals example given above, what non-financial benefits might arise other than protecting against power outages?