Unbundling may save Eskom from loans and load-shedding
Given that Eskom is too big a machine, the diagnostic process is a difficult one, necessitating its dismantling so as to locate the cause of its malfunctioning
As we accept the reality that Eskom’s load-shedding is once more upon us, we should also shed a tear for President Cyril Ramaphosa’s noble plans to fix the SA economy, and for his investment envoys and job creation initiatives. Eskom’s decelerating profit levels and increasing inability to repay its almost R435bn debt or the compounding loan interests are worrisome.
Of greater concern is that the details of loan agreements signed between Eskom and the Export-Import Bank of China (Exim), with ample support from the China Development Bank, are shrouded in secrecy.
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Arguably, as you read this, some of Eskom’s power plants may already be in the process of being legally confiscated by China due to potential non-repayment of loan advancements. Recently, a poorly translated tweet made public by Exim stated that Eskom was granted a R33.4bn loan facility with repayments to start in June 2019, in 20 installments over 10 years.
Alarmingly, the tweet also generally stated that any default in payment will see Exim take absolute control of Eskom’s plants. Although the tweet generally lacks detail, it paints a poignant reality regarding Eskom’s situation and partially explains why the government has been reluctant to release the details of the Eskom loan agreement with China, despite several calls by captains of industry, labour unions and opposition parties to do so.
The cause-and-effect approach patently supports the government’s proposed clustering of Eskom’s activities into the generation, transmission and distribution spectrum
The load-shedding comes at a time when businesses are planning ahead or forecasting wide-ranging annual growth trajectories in line with domestic or global trends, and is a spanner in the works at a time when it is supposed to be business as usual. Moreover, the quandary faced by Eskom is worsened by the fact that the Medupi and Kusile power stations — which were supposed to serve as a buffer — are not serving their intended purpose, with project cost over-runs impeding their completion.
The main concern from the Steel and Engineering Industries Federation of Southern Africa (Seifsa) is the effect of irregular power supply on small businesses in the metals and engineering cluster, which are struggling to break even, are constrained by ballooning operational expenses, and cannot afford to incur additional costs in sourcing back-up power supply.
The ongoing debate on whether or not to unbundle Eskom should, therefore, consider the extended ramifications of unreliable power supply on business’s growth prospects and jobs potential. An urgent solution is needed. Not only have beleaguered small- and medium-sized enterprises suffered from the recent power outages, but they have also been adversely affected by the recent steep increases in Eskom tariffs.
The fact that Eskom’s most recent request for a double whammy of electricity tariff increases to the National Electricity Regulator of SA (Nersa) was vehemently opposed by captains of industry, labour unions, academics, broader civil society and Seifsa, among others, confirms the strain businesses are already under. Despite the proliferation of alternative sources of energy — including the auspicious potential presented by independent power producers (IPPs) — renewable sources and gas in the near future, Eskom still remains a key strategic state-owned enterprise (SOE) that cannot simply be ignored and allowed to perish.
Diagnosing Eskom’s ailments
Although Eskom stated that the main reason for the recent alternating stages of load-shedding was that a number of generating units were out of service as a result of breakdowns, the challenges at Eskom span a number of domains. These include operational challenges, administrative bottlenecks, financial mismanagement, capacity constraints, profligacy, malpractice and malfeasance. The challenges are serious and deeply embedded, requiring an independent and systematic diagnosis to expose and isolate the problems.
Labour unions have vehemently opposed the idea of unbundling Eskom — and understandably so. The unions have raised concerns regarding enhanced competition, which may invariably lead to the outsourcing of services to profit-driven private entities
Given that Eskom is too big a machine, the diagnostic process is a difficult one, requiring a different approach aimed at salvaging Eskom’s image. Engineers know it is often necessary to dismantle a colossal machine soas to locate the cause of its malfunctioning.
Theoretically, MBA students use the cause-and-effect, fishbone or Ishikawa diagrams to break down events in successive layers of detail or root causes that potentially contribute to a particular effect. The cause-and-effect approach patently supports the government’s proposed clustering of Eskom’s activities into the generation, transmission and distribution spectrum.
Given the size of Eskom, unbundling is necessary and may present more opportunities for investment. The process will help re-assure local and international investors and various energy-intensive sub-sectors that a new approach is being sought in attempting to solve persistent challenges at Eskom. The initiative will also send positive signals to investors in the metals and engineering cluster businesses, which, together, contributed a turnover of R967bn last year.
Labour unions have vehemently opposed the idea of unbundling Eskom — and understandably so. The unions have raised concerns regarding enhanced competition, which may invariably lead to the outsourcing of services to profit-driven private entities. The argument is that with different budgetary requirements for each entity of the proposed Eskom holding, rivalry will intensify as each inward-looking division strives to be more efficient, competitive and reliable, with devastating consequences on jobs.
Concerns have also been raised against the inclusion of IPPs in the electricity-generation system, given that their independence may allow them to pursue profits at all costs, perhaps via higher prices, without considering socio-economic ramifications.
In the present atmosphere of difficult business conditions, labour — as opposed to other factors of production — is the input over which companies have a relative degree of control. It can be measured, observed, influenced, contained and, in times of difficulties, disposed of by employers who often shed jobs (not as a last resort) in order to minimise costs.
Despite existing labour regulations aimed at stemming the rate at which labour can be disposed of, businesses still capitalise on existing loopholes by hiring workers on fixed-term contracts, on a temporary or consultancy basis, or outsource services.
Unbundling without losing jobs
Indeed, the unions have a case when one considers that in a quasi-labour-intensive entity such as Eskom, where labour can easily be substituted with capital, job-shedding may not always invariably affect Eskom’s operations. In fact, the converse is true, given the advent of the fourth industrial revolution with the proliferation of new technology, including artificial intelligence (AI), the industrial internet of things or automation.
Eskom’s unbundling may be the solution to its woes and can occur without job losses. In contrast, other factors unrelated to the process, including Eskom’s insolvency, may precipitate job losses. Labour may become obsolete as less capacity is developed, there is limited retraining, productivity dips and mediocrity increases due to less competition.
Encouragingly, in a worse-case-scenario where unbundling leads to job losses, the process may be reversed if properly managed, leading to long-term gains (including debt consolidation) via opportunities for transparent, inclusive investment for small, black-owned businesses, ultimately creating more jobs.
Eskom can improve on its efficiency without forcibly retrenching workers and, apart from offering a voluntary golden handshake, it should pay more attention to the latent concept of productivity — especially labour and total-factor productivity — and retrain workers on how to use new technology. Cross-subsidisation within the proposed Eskom holding should also be encouraged and operational processes should be enhanced by servicing sub-stations timeously by sticking to agreed schedules and avoiding cutting corners.
Export-parity pricing should be discouraged and local mining companies should be encouraged to place a moratorium on increasing prices of coal sold locally to Eskom. In effect, coal companies should be part of the conversation in the proposed unbundling of Eskom to level the playing field with the adequately funded IPPs.
While it is still too early to say whether the unbundling process will lead to a more efficient Eskom, the process will enable policy makers to isolate and properly monitor interventions that are working or not working, thereby allowing for specific turnaround strategies to be implemented.
Importantly, the process should not be pursued with a preconceived notion of retrenching workers; rather, it should be seen as a diagnostic process and the shedding of jobs should be a last resort. Accordingly, the vocal or tacit support of all South Africans — including the labour unions — is needed for a successful intervention.
• Ade is chief economist of the Steel and Engineering Industries Federation of Southern Africa.