A private-sector plan won’t save Eskom
Eskom is in dire straits. It is saddled with more than R450bn in debt, has inadequate capacity and is dogged by mismanagement and endemic corruption. It must also contend with its dependence on coal for electricity generation, a main contributor to greenhouse gas emissions in SA.
The solution put forward by the government is to unbundle Eskom into three entities: generation, transmission and distribution. In his February budget speech, finance minister Tito Mboweni argued that this process would bring “credibility to the turnaround of Eskom and position SA’s power sector for the future”.
Support for an increasing private-sector role in bringing much-needed change to Eskom has been largely unchallenged, including by CEO André de Ruyter, who has argued that Eskom needs to unbundle to encourage private investment, specifically in the generation sector.
Despite the private sector’s role in benefiting from corruption at Eskom, it is still heralded as efficient and innovative in a way the public sector can’t match. The main claim is that greater business participation will eradicate bad public management and that privatising Eskom (fully or partially) will lead to a leaner, more competitive enterprise.
What is missing from this analysis is an acknowledgment of the inherent tension between different stakeholders — citizens, consumers, the government, unions, rich and poor. It is uniformly assumed that introducing private sector competition in the energy sector will uniformly benefit everyone equally — the overwhelming narrative is couched in simplistic assertions of a “win-win” outcome.
There is no doubt that public spending can “crowd in” private investment, and that the private sector should play a role in SA’s development. However, even when social infrastructure projects are derisked the mandate of any private sector venture is maximising return on investment, not public benefit. Asset managers are accountable to shareholders, not citizens.
This has important consequences for equitable access to the services provided. It can also end up burdening the state with as much risk as it would bear from direct investment, while allowing profits to accrue solely to private investors. Such schemes essentially outsource key government functions to the private sector, and more debate is needed over whether this is appropriate or desirable.
Infrastructure projects that will require “blended” financing from the private sector include the provision of water, sanitation and human settlement projects. Treasury director-general Dondo Mogajane asserted in August at the launch of the R100bn Infrastructure Fund that the private sector was needed to “stretch the rand and the little resources of government”. The overwhelming narrative from the Treasury seems to be that the government has no option but to incentivise private investment, obscuring other alternatives for state revenue collection such as increased taxation and clamping down on illicit financial flows.
The narrative of private sector involvement in the Treasury’s economic reforms does not actively and honestly engage with the reality that private sector investment introduces different, often competing, interests among different constituencies, nor that all parties need to be held accountable to the public and that investment with state support must be in the interests of the public. In addition, private and public institutions have different objectives and any state-funded investment must be in the interests of the public.
If unbundling Eskom is the beginning of a larger process to privatisation — despite vehement assertions from President Cyril Ramaphosa that it isn’t — this will not be a surprise given the Treasury’s overall plans for “structural reforms” peddled in the supplementary budget and 2019 budget speech. Earlier plans to unbundle Eskom in 1996 were part of a broader economic drive for market liberalisation and fiscal consolidation under market-centric economic policies that supported increased privatisation of state-owned entities and liberalised capital markets.
Despite the failure to fully implement the 1996 white paper, broader economic liberalisation has contributed to many of SA’s economic ailments, including the rollback of social provisioning. Globally, privatisation of basic public services such as water and electricity has failed to provide affordable access to communities that need it the most. A working paper on Eskom by the Institute for Economic Justice found that unbundling processes in other African countries, such as Kenya, led to increased electricity prices and lacklustre distributional effects.
Proponents of unbundling have argued that it will result in greater access to the grid by small-scale generation, thus increasing competition and lowering prices. However, access to the grid under a privatised utility is not guaranteed, particularly as working-class communities are increasingly economically squeezed through budget cuts and fiscal consolidation. Greater private sector involvement in the generation market does not guarantee full energy access. Given the scale of unemployment and poverty, it will be the state’s responsibility to ensure perverse outcomes as a result of increased competition does not occur.
In addition, it is unclear how unbundling or greater private sector involvement will solve Eskom’s most pressing issue — its mounting debt. The private sector is not likely to invest in a high-risk monopoly utility that is in a debt spiral. Reversing Eskom’s escalating debts will require a multi-stakeholder effort, but only the state has the capacity to mobilise enough resources to lower this debt.
Any proposed plan to save Eskom will need to happen in tandem with an economic structural transformation plan that aims to uplift millions out of poverty. Structurally transforming the economy means using expansionary macroeconomic policy to stimulate demand, diversify the economy to high-value adding sectors and target spend where there are high employment multipliers that benefit more than a few vested interests.
Historically, Eskom has been integral to providing cheap electricity to support economic development, mostly in heavy industries that unfortunately maintain and concentrate wealth and ownership in sectors such as mining. The Covid-19 moment presents an opportunity to reverse this trajectory by charting a new path for Eskom, and the broader economy, that is not reliant on coal-fired energy generation and creates new industries and a greener economy. This transition must be just, and it must be state-led for it to benefit more than a few.
A viable turnaround strategy for Eskom must contend with the broader economic landscape that limits access to basic social protections. The options government pursues to restructure Eskom should be guided by principles that strengthen the capacity of the public sector, provides affordable electricity to all, and are environmentally sustainable.
The private sector is not well placed to drive this, regardless of how “investor-friendly” government makes the economy. It is vital that all policies put forward to save Eskom involve the full spectrum of stakeholders, including trade unions, civil society organisations, business councils and the informal sector.
• Phalatse is a researcher at the Institute for Economic Justice.
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