Short-term

Counting the ‘real’ cost of strikes

It seems that industrial strikes are now not only an indelible part of South Africa’s business landscape, but that they are also increasing in frequency and duration. While the non-damage costs of strike action are difficult to calculate, one thing is certain: they are significant. Generally, non-damage strike-related costs are much higher than the actual damage to property. A figure as high as R2 billion has been ascribed to the recent Transnet strike, which relates not only to Transnet’s losses but also to the losses experienced by its customers due to the lack of transport services.

The stark reality is that having a content workforce does not eliminate the risk of strike-related losses because strikes at suppliers and service providers can have a significant and direct impact on a company’s bottom line.

In the case of the Transnet strike, its customers across the board – including some of the country’s biggest revenue generators like coal and steel suppliers – could not get their products to market. Fruit and flower growers stood by helplessly as their products rotted in warehouses and motor manufacturers had to shut down their plants as they ran out of storage space for vehicles; one local motor manufacturer reports that storage costs during the strike were its highest cost.

The domino effect of the strike was immense: with transport workers on strike, ships were not being loaded, so they were not leaving on time and were missing their docking times in European ports. Many local companies consequently found themselves in breach of contract with international customers.

Strikes not only impact on a company’s income, they can also increase the cost of working. Since many large factories, with complex manufacturing processes, operate on a ‘just-in-time’ basis when it comes to sourcing raw materials, not being able to get these can send operation costs soaring. For instance, it can take 48 hours to bring a smelter back into operation and glass furnaces take up to two weeks to heat up – so, even when the strike is officially over, its effects will continue be felt.

Since parastatals that provide essential services, like power and transport, contract out of being held liable for the inability to provide services owing to labour-related interruptions, the problem of financing the strike-related costs is left firmly in the lap of the corporate.

For now, the traditional market provides little relief in this regard: SASRIA offers cover of up to R500 million, which is the combined limit for material damage and business interruption (standing charges and working expenses only). For business interruption cover – which can be topped up to R1 billion – to be effective, there must be a material damage coupon covering the same property. However, there is no cover for non-damage related costs and companies cannot claim for loss of income if there is no damage to property or machinery.

The lack of cover in the traditional market for non-damage strike-related costs is mainly owing to the fact that there is not yet sufficient data available to price it properly. However, just like product liability cover emerged after a local supermarket chain suffered significant losses because of its products being poisoned a few years ago, non-damage strike-related cover will eventually be available, albeit with big deductibles – this is where the ART market will come into its own, by helping corporates to finance those deductibles.

With losses due to strike action (either by the company’s own workforce or that of one of its suppliers or service providers) seeming to be a matter of when, rather than if, companies will increasingly be looking to finance this risk. And this seems to be yet another issue that will best be tackled by the traditional and alternative risk transfer (ART) markets working together to find a solution.







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