Business wakes up to AIDS.

Until recently, the AIDS pandemic in South Africa was seen largely as a health and social issue. Now corporate South Africa is bracing itself for the impact the disease will have on the bottom line.

Before the 13th International AIDS conference in Durban in July, corporate South Africa seemed not fully to have grasped the impact the AIDS epidemic on the private sector. South African firms, it appears, had treated the disease as a medical issue, downplaying its economic, social and development effects. After the conference, when the full facts emerged, all of that changed.

The statistics that emerged from the conference were bone-chilling.

In South Africa, roughly 19% of the adult population is HIV infected. By 2005, that figure is expected to rise to 25%. In neighbouring Botswana, Zimbabwe, Namibia and Swaziland, current prevalence of HIV infection are between 20 and 26%.

Research by the World Bank suggests that when the adult HIV infection rate reaches 8% of the population, it reduces per capita growth by 0.4% a year.

Extracts from the latest UN report on the disease reinforce South Africa's status as a country whose future is imperiled by AIDS. South Africa, says the report, is one of the seven countries in Africa's southern cone where at least one adult in five is living with HIV. With a total of 4.2m infected people, South Africa has the largest number of people living with HIV/AIDS in the world.

Marshall Plan solution

South Africa's Social Development Minister, Zola Skweyiya, has proposed a programme modelled on the Marshall Plan (created by the Allies to rebuild Europe after the second world war) in an attempt to save millions of South African dying from Aids.

Skweyiya proposed the plan after an eight-week tour of South Africa to see for himself the 'catastrophic' situation. "The epidemic will change the structure and characteristics of the country's population in ways that will require a reassessment of most development strategies and programmes," says the minister. "I'm convinced that we have to do something more urgent to save our people."

Skweyiya insists that his plan should transcend political boundaries and enlist the support of all political persuasions in the country.

AIDS is having profound implications for South African companies, according to the Johannesburg Stock Exchange magazine, Reaching Out. Employers have just begun to battle rising costs and forecast that they will need to increase their contributions to pension, life and medical benefits on account of this epidemic. Some of the costs will be passed on to consumers and some will be absorbed by operating profits, or will come out of company savings.

The less tangible and indirect expenses encompass extra recruitment costs, additional sickness and compassionate leave, costs of ensuring occupational health and safety standards, and the loss of turnover and profits due to the effect of AIDS on clients.

AIDS is the single most important strategic issue facing South African companies.

"What makes this even more significant," says a spokesman for the Metropolitan Life Assurance group, "is the fact that the impact on their global competitors will be very different, with Africa the hardest hit by the epidemic."

Other effects of the AIDS scourge include a loss of business confidence and a possible reduction in foreign investment.

Effect on investor returns

Because AIDS will effect the economy and investment markets, it is already having a major impact on the returns of most investors in the southern African region. If the stock market is an accurate but early barometer of the future of economic activity, then the performance of the Johannesburg Stock Exchange (JSE) over the last five years and the past three years in particular, makes a gloomy looking glass for the business sector and investors.

"It is when local investment returns are compared to offshore investments that the reality really strikes home," said a leading Johannesburg analyst, Magnus Heysteck. By his calculation, R100,000 invested in the Dow Jones industrial index 10 years ago would today be worth around R1.3m, just under Rim on the FTSE 100 index in London and R735,000 in Frankfurt's Dax 100. The same investment in the JSE all share index would be worth less than R300,000.

"While this under-performance cannot all be blamed on the effect of AIDS," says Heysteck, "there is a growing realisation that AIDS will play an increasing role in the expected under-performance of the local market relative to other major markets." In Heysteck's view, there is a danger that offshore investors could reassess their exposure to South Africa, leading to a withdrawal from the local market.

Formidable barrier to investment

According to Jeremy Sachs, chief of the Centre for International Development and a professor of international trade at Harvard University, AIDS, TB and malaria pose a formidable barrier to foreign investment. "I hear more and more companies saying they are wary of investing in southern and South Africa because of the AIDS pandemic," says Sachs. In response, he would like to see a multi-pronged solution that would mobilise international resources to help developing countries while encouraging them to help themselves.

Impact on the bottom line

Company profits stand to be hard-hit as the epidemic takes its toll. According to Dave Strugnell of Momentum Life Risk Management Consultancy (MRC), a typical Johannesburg-based manufacturing company employing 1,500 people could suffer a 20% slump over the next 10 years. Death benefit costs are expected to double and disability pay-outs will possibly double. This could lead to a 70% reduction in employer contributions to the retirement fund. The total impact of the disease on the bottom line, according to Strugnell, would be a profit reduction of over 20%, representing 12% of a payroll of 1,500 people.

World-renowned researcher of the economic effects of AIDS, Professor Alan Whiteside of the University of Natal in South Africa told African Business; "The statistical weight of evidence now amassed makes it impossible for anyone to ignore the situation. HIV/AIDS emphasises and intensifies our country's historically existing gaps in wealth, education, lifestyle and opportunity at a time when the government's primary ideological thrust is toward equity and reconciliation.

A new book, 'AIDS: The challenge for South Africa' by Whiteside and former chairman of Anglo American's gold and uranium division, Clem Sunter, tries to quantify the cost. They estimate that by 2006, AIDS deaths in South Africa will equal those from all other causes combined. Some 60,000 children are born HIV positive every year in South Africa alone. A programme to prevent mother-to-child transmission could cut that figure by half.

One company that has tried to quantify the impact of AIDS on turnover and costs is furniture retailer JD group. The company, selling into the mass market and reliant on credit to drive business, commissioned a study two years ago and used the findings to diversify its business, the location of its outlets and its target market.

Pressure on insurance

The effect of HIV/AIDS is also deeply worrying for the insurance industry.

Adrian Baskir, a health care actuary at Old Mutual, reckons that in 10 years from now, between 35% and 40% of costs in South Africa's medical insurance industry will be directed at HIV and AIDS. What has yet to be determined is the impact of AIDS on medical aid schemes and premiums.

A study by the South African Medical Research Council has found that more than 2% of white South Africans are HIV positive, a figure much higher than originally thought. The incidence amongst white populations in the USA and Europe is around 0.6%.

International community reaction

Group of Eight (G8) leaders have committed themselves to reducing the number of young people infected by HIV by 25% by 2010. The target was coupled with the G8's pledge to accelerate its programme of debt relief for the world's poorest countries.

The Okinawa summit was the first G8 meeting to focus heavily on development issues and the impact of diseases such as AIDS and TB on the economy and development of emerging nations.

Japan has pledged $150bn to promote the use of IT in developing countries over the next five years and $3bn to fight disease. The US announced a $300m schools nutrition programme in developing countries while the EU said it would promote healthcare in emerging nations, but did not specify an amount.

Within 15 years, the SA economy will lose the spending power of 6.5m potential consumers through HIV/AIDS. Also in 2015 there could be: 22m fewer taxi trips and l.9m fewer train journeys a week, 7.5m fewer cold drinks 10.8m fewer headache remedies sold each year, 5m fewer users of flour and toothpaste and 3.4m fewer telephone callers.

And that's just the tip of the iceberg, according to Paul Wilkins, managing director of SA media ad space buying giant, Golden Thread.

Projections are that market growth will have to be drawn back because the population simply would nor be there to stimulate expansion; and this applies not only to staple goods such as bread and maize meal, but to education, transport and advertising. AIDS is likely to consume 7.5% of company payrolls and 50% of 15-year-olds will be dead in 15 years. This is the terrifying scenario if nothing is done to halt the march of AIDS.