Privatisation of Eskom units may be sole solution

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I WOULD really like the SACP and Cosatu to explain exactly why they are against the proposal to invite private capital to help fund part of Eskom’s operations.

I understand that their ideologies stand against privatisation of what should be government-delivered services (such as power security) but are they prepared to re-evaluate their ideologies in order to serve the best interests of their members and society as a whole?

Eskom is facing a R225 billion funding gap to finance its committed spending over the next three years. It also faces a cash liquidity problem and needs to raise R50bn to pay its immediate expenses.

One solution that has been proposed and is being considered by cabinet members is to allow private investors to purchase some of the existing power plants, or invest in new ones and run them as a private business. These independent companies would then sell power to the national grid.

Fundamental to the new structure would be the establishment of the Independent System and Market Operator (Ismo) – a separate entity to Eskom that would be in charge of managing transmission and the national grid. Eskom would not be privatised completely and would still maintain the major share of power generation, but it would become just one of many producers supplying energy to Ismo.

The SACP and Cosatu have already voiced their opposition, saying that it would lead to rising living costs for the poor and that Eskom is critical for the nation’s development agenda. Fikile Majola, the chairman of Parliament’s portfolio committee on energy, says that privatisation would weaken Eskom. It’s hard to imagine that Eskom could get any weaker.

The SACP and Cosatu are probably right in saying that part privatisation will lead to an increase in electricity tariffs as companies need to remain profitable. But this is not new; Eskom itself has sought tariff increases of more than 8 percent. Last week the National Energy Regulator of SA granted permission for the power utility to raise its tariffs by between 3 percent and 8 percent next year.

The SACP and Cosatu are also right in saying that energy generation is critical for the nation’s development agenda but so far Eskom has been more a hindrance than a help to this agenda.

Eskom has three ways to meet its financial shortfall: raise tariffs (assuming the regulator allows it), borrow more money, or raise more equity from its shareholders.

Raising tariffs sufficiently to cover a R225bn shortfall in three years will make electricity grotesquely unaffordable for everyone. Sourcing the funding through borrowing is either unfeasible or expensive; Eskom already faces downgrading of its credit rating by the major agencies. With a lower rating it will pay higher interest rates on the money it borrows in order to encourage lenders to lend to it. In short, Eskom has no capacity to borrow more.

The only other option is for the utility to raise equity from its shareholders, but with the state being the only shareholder this means greater government spending and either higher taxes or reduced spending on other areas of the economy.

The opposition to the privatisation of elements of Eskom’s production is based on avoiding unfair price increases to consumers. But the alternatives are either even higher prices, increased government spending, or a collapse in power generation.

 

Pierre Heistein is the convener of UCT’s Applied Economics for Smart Decision Making course. Follow him on Twitter @PierreHeistein


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