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Debating Eskom’s Future: To Privatise Or Not To Privatise…

By Matthew Collins - Dec 15, 2014
Debating Eskom’s Future: To Privatise Or Not To Privatise…

In light of Eskom’s latest surge of load-shedding, the question as to whether or not Eskom should be privatised has made its way onto the table again. Let us take a look...

What is happening in government?

 According to a recent statement by Shadow Minister of Public Enterprises, Natasha Michael, “Eskom is clearly in crisis” as “we are facing constant threats of load shedding and collapsing infrastructure at Eskom”.

Michael is of the opinion that Eskom is becoming an “unaffordable and unsustainable” burden to the state and believes that the ”only rational, affordable and sustainable response is to investigate the role private actors could play in stabilising South Africa’s energy supply crisis”.

“The partial privatisation of Eskom and the involvement of other independent power producers is now a mathematical inevitability. The status quo is simply no longer affordable”, concluded Michael.

According to Business Day in August this year, there were discussions within the cabinet to sell off some of Eskom’s power plants to private investors.

But according to SABC news, this media report was said to have been denied. An article in City Press quoted the Minister of Public Enterprises, Lynne Brown, in having said that, to her knowledge, “cabinet has not discussed the matter of privatisation and there is no need to unnecessarily raise temperatures around this matter.”

However, in a later report by SABC News,spokesperson of the Congress of South African Trade Unions (Cosatu), Patrick Craven, was quoted in stating that “the Congress of SA Trade Unions is not surprised by media reports that there are moves within government to privatise Eskom” and added that the whole ordeal was a “continuation of an agenda started in the late 1990’s.”

According to Fin24,the Democratic Alliance was quoted earlier this year, in a press release, in stating that they have “always advocated for the privatisation of electricity supply generation and the unbundling of Eskom’s supply monopoly."

Opposition to such lines of thought

“Eskom is critical for government to implement its developmental agenda. It would be a grave mistake to privatise this critical player in the economy”, said Brown in a quote by City Press.

According to SABC News,South African Communist Party General Secretary, Blade Nzimande, has said that he will “fight against the privatisation of state owned enterprises, especially Eskom.”

Furthermore, according to BusinessTech at the end of last month, it was stated that the African National Congress (ANC) was “not in favour of privatising the country’s power system, despite problems with Eskom.”

It went on further to quote ANC Secretary General, Gwede Mantashe,in saying that “electricity remains a public good and therefore, if you totally privatise it, it will have problems.”

“Private participation” but not quite “privatisation”

In 2003, cabinet approved private-sector participation in dividing generation capacity with 70% coming from Eskom and 30% coming from Independent Power Producers (IPPs).

According to the South African Independent Power Producers Association, an IPP is “an entity, which is not a public electric utility, but which owns and or operates facilities to generate electric power for sale to a utility…” such as Eskom.  

Therefore, according to the Department of Energy, electricity generation is ultimately dominated by state-owned Eskom, alongside it owning and operating the national electricity grid.

It is worth noting that, according to BusinessReportin a March article, it was reported that the then outgoing chief executive of Eskom, Brian Dames, stated that Eskom cannot afford IPP prices.

In a recent interview with News24,Daniel Silke, a political economist, stated that, in terms of South Africa’s power grid, one needs to at least look towards the “involvement of the private sector in electricity provision in South Africa.” This should be done either by the “part-sale of Eskom” or by “competitive or alternative power providers” within South Africa.  

Approaching the academics

In an RNews interview with the Head of Nelson Mandela Metropolitan University’s (NMMU’s) Department of Economics, Dr. Pierre le Roux, it was stated that the general understanding behind private companies revolves around profit, and therefore the incentive is “efficiency” – a term which is arguably vital to the supply of electricity.  

Furthermore, Dr. le Roux added the importance of observing other countries, particularly African countries such as Nigeria – who recently privatised their electricity – in order to gain some insight into answering the question regarding Eskom’s future.

Nigeria: A case study

According to The Guardian,“Nigerians have suffered for decades from the inadequate electricity service from the government owned monopoly PHCN, the Power Holding Company of Nigeria, commonly known by other names such as ‘Please have candle nearby’.”

On 30 September, 2013, Reuters stated that the Nigerian president, Goodluck Jonathan, handed ownership of the bulk of the state electricity company to private buyers…” as part of a privatisation process intended on ending the country’s power shortage.

“Despite slow and costly progress, Jonathan's effort to privatise the sector and draw in investment may be the best chance yet to unblock a major bottleneck to development”, read the Reuters article. 

It is interesting to note that, according to a recent article in the Nigerian newspaper, Leadership,it has been reported that consumers in Nigeria are becoming discontent with the rising electricity tariffs under the electricity distribution companies.

President of the Consumer Rights Advancement Association (CRAO),Adeolu Ogunbanjo, has been reported to have said that the “post-privatisation estimated bills are four times higher than the figures paid by consumers before the privatisation exercise…”

A similar situation occurring in South Africa can be argued to be a catalyst sparking a whole new set of problems.

However, Reuters reported that experts have, upon the privatisation of Nigeria’s electricity, said that improvements could possibly be felt within two to three years time. Therefore, drawing any conclusions at this moment in time would be premature to say the least.

Advocates for change

Eustace Davie, a director of the Free Market Foundation (Southern Africa) –an organisation that promotes, among other things, economic freedom in advocating human rights and democracy based on a foundation of classical liberal principles – stated, in a May article, the need to introduce an independent power transmission grid.

“Eskom, as a state-owned monopoly, with centrally controlled oversight and direction, is not the best structure for the supply of electricity, a critical energy source without which no nation can grow and prosper”, stated Davie.

In other words, Davie believes that an efficient power supply in the country will only be possible if it is operated independently.

In an interview with RNews, Themba Nolutshungu, also a director at the Free Market Association, stated that, as it stands, “load-shedding is going to become a normal part of South Africans’ lives”.

“There is no way that Eskom can do justice in delivering electricity”, added Nolutshungu in saying that Eskom, having a state monopoly, has no competition. Therefore, with no competition, there is a tendency to become “complacent” and to “relax”.

In this “relaxed” position of Eskom’s, Nolutshungu went further to state that Eskom has become too comfortable, especially with “Big Brother”, namely the government, looking out for it.

So what’s next?

It is always important to understand the contexts in which one finds oneself.

In terms of South Africa’s context, Dr. le Roux has stressed the importance of understanding the somewhat touchy nature of the privatisation subject as much of the country appears to be socialist.

Silke confirmed this, in his interview with News24, by saying that, apart from the theoretical aspects, there are also political constraints as South Africa still views privatisation as a “dirty word”. “We are hamstrung by ideology…” said Silke.

Nolutshungu, too, has noted the possible difficulties of privatiastion in the midst of South Africa’s political context. However, he has stated that the government “must look past it and look towards what is in the best interest of the country”, which he argues is privatisation.

In a March article by Moneyweb,it was stated that “Eskom is spending money it doesn’t have to keep the country’s lights on and may be sacrificing its own sustainability in the process.” Furthermore, it reported the Economists.co.zaeconomist, Mike Schüssler, as having said that the South African government is unable to afford bailing Eskom out.

According to Professors William L. Megginson and Jeffy M. Netter (2001) in a journal article titled “From State to Market: A Survey of Empirical Studies on Privatization” in the Journal of Economic Literature, it has been stated that the implicit assumption around the goal of government is to “promote efficiency”.

This begs the question as to whether or not Eskom, under state-control, is, in essence, efficient.

Unfortunately, it can be argued that efficiency and, as Megginson and Netter call, “equitable concerns” are not necessarily related.

Therefore, the complexity of such an issue, such as the future of Eskom and whether or not it should be privatised, can seem fairly overwhelming in the South African context.

In terms of Eskom’s future, the very appropriate words of Dr. le Roux can be used in saying that “we are in the dark”. It is uncertain. 


IMAGE: www.dispatchlive.co.za