GRACELIN BASKARAN: Keep Eskom off the balance sheet and the budget

Finance minister Enoch Godongwana says a debt relief package for Eskom will be announced in next month’s budget. At a time when SA is pursuing debt reduction that means only one thing: the government will have to rein in spending, and critical areas are likely to go unfunded or underfunded.

The need for debt reduction and fiscal consolidation was affirmed by Reserve Bank governor Lesetja Kganyago before of the medium-term budget policy statement last October. That’s all well and good, but it also means areas that support economic growth, particularly equitable growth, will lose out.

A good example is climate resilience. KwaZulu-Natal was hit by severe flooding in 2017 and 2019 (165mm in 24 hours, the heaviest downpour since 1985), and again in 2022 (the worst floods in SA’s history). It may be the third-smallest province by land size, but it’s the second-largest contributor to SA’s GDP, at about 16%. Repeated destruction of the province’s infrastructure is costing it — and the country — dearly.

Expenditure cuts mean less is going to important priorities such as building climate-resilient infrastructure. We're building cheaper infrastructure that gets wiped out every time there’s a flood (which is likely to become increasingly common in a coastal province). Sustainable infrastructure is a gift that keeps on giving.

Every dollar invested in climate-resilient infrastructure in middle income countries yields $4 in benefits. Not only does it reduce recovery and reconstruction costs, it also mitigates business disruptions and ensures people can get to work, children can get to school, people can access hospitals ... you get the gist.

Most of us would agree that fiscal support to state-owned enterprises has generally yielded poor outcomes. Repeated bailouts for SAA and Eskom certainly didn’t turn them around. But what we do know is that when climate shocks happen, such as consecutive years of drought that led to the Day Zero crisis in Cape Town, or nationwide droughts that led to no fewer than three national states of disaster in the past five years, the funding response has been limited, and in some cases nonexistent. This has led to major economic disruptions and a loss of government revenue. Look no further than tourism and agriculture data during the Day Zero crisis.

Spending priorities

Given SA’s vulnerability to drought, fiscal expenditure would be more efficiently used if it went to improve water infrastructure. On the best of days only a third of SA’s water infrastructure is operational. Then there are sectors that need additional support — financing solar powered irrigation for farmers, for instance.

The bulk of my work focuses on climate change, but there also important human capital areas that will remain underfunded amid expenditure cuts, such as education and health. The effect is to hobble SA for decades given that low investment in education will be felt as children become adults who need to enter the workforce.

Section 27’s 2022 budget analysis found that funding for basic education is expected to grow at only 2% per annum on average, over the next three years, and health by 0.2% — far below the average forecast consumer inflation rate of 4.5%. This means that in real terms the education sector will face a 2% contraction a year, and the health sector a 4.3% annual contraction, over the coming three years.

Is there a solution? Sometimes it feels that the answer is no — that darkness will be the norm indefinitely and we’ll move towards Nigeria’s model of giving up on the state, that anyone who can afford should just buy a generator. But that’s untenable — it will only widen inequality. Already we have seen this trend in SA:  look out of the window when you’re flying into Cape Town and you’ll many formal houses covered in solar panels. And if you can’t afford it? Tough luck.

I’d like to think there’s hope though — and it’s not that moving Eskom to Gwede Mantashe’s department of mineral resources & energy will miraculously fix things. It’s ensuring that Eskom stays off the balance sheet and budget, so that SA’s fiscal resources can be used to finance the areas that need it most, including strengthening this country’s ability to cope with climate change amid repeated shocks, and improving human capital outcomes.

Without the private sector taking over energy Eskom will remain a burden on SA’s balance sheet. My hope is that the coming budget won’t take shortcuts on the areas that need it most. But that seems unlikely.

• Dr Baskaran (@gracebaskaran), a development economist, is a bye-fellow in economics at the University of Cambridge.