Eskom’s links to the private sector are central to its dysfunction
The role of private business in the energy sector is complex
Much has happened since President Cyril Ramaphosa first announced his plan for the unbundling of Eskom in his state of the nation address (Sona) on February 7.
The utility’s debt and financial viability turned out to be worse than expected, as Eskom has limped on with only enough in its coffers to cover a few months’ operational costs.
The electricity tariffs needed to address this situation were also more dire than expected. Having been promised an end to load shedding over and again, households, businesses, schools and hospitals have had to reacquaint themselves with back-up energy solutions.
We have been regularly reminded that Eskom is too big to fail, too important, too much of a risk. It will also clearly not succeed in its current form.
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Eskom featured again in the Sona on June 20 when Ramaphosa announced that Eskom is to be allocated R230bn in fiscal support through a Special Appropriation Bill. This money is meant to stabilise the entity, in parallel to a more fundamental intervention through the utility’s unbundling, led by a chief restructuring officer.
Many people have voiced disappointment about the absence of further detail on unbundling in the president’s speech. Civil society, unions, political parties, the SA Local Government Association (Salga) and other interested parties have been anxious to understand what will happen once Eskom is split into three subsidiaries.
In the absence of clarity, there has been much speculation on the compromises and negotiations taking place in the aftermath of the February 7 pronouncements. One set of splintering issues echoing in these analyses involves the role of the private sector in corruption and state capture, the possibility of selling Eskom’s assets to private companies, and the role of independent power producers (IPPs) in particular. These issues are usually more or less conflated into a homogeneous business-led threat to an electricity sector that supports sustainable development mislabelled “privatisation”.
Eskom’s large, complicated structure was not designed to operate without the private sector
What is missing in the debate on unbundling and privatisation is that, in its current monopolistic form, Eskom’s web of relationships with the private sector have been central to its dysfunction. We may not have a perfect model of what we want the private sector to do in the sector, but the current mode is not viable.
The role of private business in the energy sector is complex. And the current simplistic polemic for and against privatisation is irrelevant to how the system operates.
Eskom’s large, complicated structure was not designed to operate without the private sector. From the creation of Eskom to its current crisis, the private sector has been integral to the entity’s greatest achievements and most dire failures. Eskom has loans and accounts with private banks, as well as contracts with coal-mining companies, management consultancies, maintenance services and accounting firms in the order of tens of billions of rand annually.
Eskom’s relationships and transactions with private companies have a long and often problematic history, most recently excavated through state capture investigations in parliament and at the Zondo commission.
As an enormous, single, wholly state-owned utility, Eskom’s procurement of goods and services from the private sector and foreign government state-owned companies has failed to consistently meet the requirements of the Public Finance Management Act and the constitution.
While we might have hoped in 1994 that state ownership of a single large public utility would allow for more efficient alignment between the electricity sector and SA’s national development objectives, this has not been the case. Since 2012, Eskom has acknowledged irregular expenditure in excess of R19bn.
Just two days before Sona, the infamous Trillian Capital was ordered to pay back the almost R600m it took in unlawful payments from Eskom. Its partner in crime, McKinsey, had already made its own arrangements to pay back the R1bn it accepted in suspect payments.
Eskom chair Jabu Mabuza and Ramaphosa have since made pleas for other private companies that have benefited from endemic corruption at Eskom to return their ill-gotten money. The chances of that happening are slim indeed. These are just two companies implicated in state capture; many others have acted with impunity under the protection of Eskom’s monopolistic power.
Structural reform, unbundling, or ring-fencing the national state-owned grid will change the way Eskom interacts with private companies. In the context of Eskom’s limited capacity to raise capital for a just and sustainable transition away from coal dependency, it is likely a state-owned grid company will contract more IPPs, for example. This is significant and should be robustly debated and designed.
While the kind of private sector actors and nature of engagements might be changing with the introduction of new technologies and policies, the fundamental necessity of private companies within the electricity system is a fact, whether Eskom is one or three companies. This has been ignored by many people using the threat of privatisation to lobby against structural reform and IPPs, both of which are on the president’s agenda for Eskom.
The way private companies act and transact in the electricity sector should be urgently addressed. The president’s reformist agenda provides an important opportunity to do this, as long as the country remains alert to the real state of play instead of becoming distracted by false oppositions made in political contests.
Now is a critical moment to proactively shape the way businesses behave, helping to move SA towards a just and sustainable energy future.
• Hermanus is with Power Futures SA, based at the University of Cape Town Graduate School of Business. She writes in her personal capacity.