Privatised generation is the only way out of the Eskom catastrophe
It’s no surprise the Eskom debacle has been called an emergency by public enterprises minister Pravin Gordhan.
As SA’s largest power generator, Eskom provides 95% of our electricity and in effect powers the nation. The utility's debt spiralled from a manageable amount of about R40bn to R420bn under Jacob Zuma’s presidency. This country now spends about R1bn a day on interest while continuing to borrow about R1.2bn a day to keep the lights on. It is not sustainable, and we’ve run out of time.
It is estimated that SA loses R1bn a day for every stage of load shedding, which means the recent stage four load shedding cost this economy R4bn a day. It is astounding that two coal-powered power stations, Medupi and Kusile, could be allowed to go more than R200bn over budget, and even once complete will only provide 40%–50% of their intended output due to poor design. In addition, it is now estimated R139bn has simply been stolen.
The bailouts required by our state-owned enterprises are a serious concern, and one shared by the credit ratings agencies. Moody’s remains the only agency that still has some faith in our economy, but that support is waning and all eyes will be on the next assessment. On average, it takes eight to 12 years for a country to get back to investment grade after being downgraded. More sobering still is the fact that no African country has ever come back from a downgrade to junk status.
SA’s burden of debt, in addition to a potential downgrade and the outflow of capital that would result, could send the country into hyperinflation. With the existing levels of inequality this is tantamount to a timebomb. While this notion may sound alarmist, the seriousness of the situation cannot be over-estimated, and it’s the poorest members of our society who will suffer the most.
Possibly the only proverbial light at the end of the tunnel is President Cyril Ramaphosa’s state of the nation address announcement that Eskom will be unbundled into three entities: generation, transmission and distribution. This unbundling should be accelerated as a national priority and be a first step towards privatisation.
It is understandable within an SA context that the government wishes to have some measure of control over supply of electricity — it allows for wealthier households to subsidise poorer communities. We would thus expect distribution, and possibly transmission, to remain under government control.
There is, however, no logical argument to support the government remaining invested in, and exposed to the risks associated with, generation. Privatising generation of electricity would allow the government to set a price point at which they will enter into offtake agreements for power, thereby transferring the capital requirements, build programme, technology decisions and risks to the private sector.
If there remains any doubt as to government’s continued ability to provide and operate generation infrastructure we should pause to consider Eskom’s existing infrastructure. The average coal power station has a 25-year lifespan. More than half of SA’s stations are beyond that, with some over 50 years old. This is the infrastructure the country, and indeed our economy, relies on for the generation of power, and yet planning and development of this critical infrastructure has been neglected.
What this demonstrates is that the government cannot be trusted to manage power generation infrastructure. Its poor performance in this regard is what has plunged us into a crisis, and we’re left with few other options than to privatise. This is the only way to truly extricate ourselves from the swamp of uncertainty surrounding Eskom and its inability to power the nation going forward.
The trade unions — with their outright rejection of the notion of Eskom being unbundled and privatised — need to bear in mind that they supported Zuma throughout his tenure and must therefore take responsibility for the consequences. This inconvenient truth should be acknowledged by the unions as it is their members who will pay the highest price for their unequivocal support for a corrupt president.
It is expected that the government will want to placate the unions before the May elections and will therefore engage robustly if not submit to their conditions. As business we would welcome the same engagement on privatisation — this is the conversation that could help avert an economic meltdown. In a country with neither water nor energy security, there is much at stake as we await Moody’s announcement and the May elections.
Hiking electricity prices is no quick fix, nor the answer to relieving our debt. Apart from an already stretched tax base, energy-intensive industries like mining and smelting will simply not be viable in the face of major tariff increases in electricity. We need to keep the cost of doing business down if we hope to create the jobs this country so desperately needs.
• Ravens is CEO of Accelerate Cape Town.