CAPE TOWN – When President Cyril Ramaphosa told delegates at the World Economic Forum (WEF) at Davos on January 23 that a turnaround strategy for Eskom would soon be unveiled, he sparked a surge of speculation over what that might mean for the embattled state-owned enterprise (SOE).
But what it likely did not mean was privatisation.
“We are currently developing a response to the financial and operational crisis at the country’s electricity utility, Eskom. In the next few weeks, we will be announcing a set of measures to stabilise and improve the company’s financial position and to ensure uninterrupted energy supply,” Ramaphosa said of the SOE whose current situation poses a significant risk to the economy.
Breakup without privatisation may compound, not solve, the problem
According to media reports, the special task team appointed by the president has suggested the power utility be divided into three SOEs responsible for generation, distribution and transmission in what it called a “strategic unbundling”.
And right there is the problem – split into “state-owned entities”
Splitting state-owned power utility into the three components is a decades-old formula – in fact this analyst contributed to the Energy Policy White Paper of 1998 by providing a case for the privatisation of Eskom and its division into the three entities.
The tactic has a proven track record of success, but only when the split-off components are fully or significantly privatised. In that way the utility gains some efficiencies and, more to the point, it encourages competition and consequently improves performance.
The inevitable consequence of unbundling Eskom into three SOEs with no private intervention will be the creation of three inefficient, underperforming entities to replace one. The idea to unbundle Eskom into the traditional three entities is sound – but only if privatisation is also involved. Leaving it all in the hands of an inefficient state will compound the problem, not address it.
Professor Anton Eberhard, director of the University of Cape Town’s Managing Infrastructure Investment Reform and Regulation in Africa (MIRA) programme, agrees with the concept of breaking up Eskom and points out that it was proposed in the Energy Policy White Paper of 1998. “It’s logical. It separates the potentially competitive elements of the electricity industry — power generation — from the natural monopoly component, transmission. It’s also potentially efficient as it creates focused utilities," Mr Eberhard told a recent gathering. The policy White Paper envisaged at least partial privatisation. Adding his voice, Professor Raymond Parsons from the North West University Business School was reported in the media as stating that a share scheme which “encourages participation by outside financial institutions should also be part of Eskom’s future restructuring”.
The voices encouraging a breakup of Eskom have at least one eye on the critical aspect of privatisation in such a process, but it is also clear that the government does not appear to have the same idea.
Comments by Minister of Public Enterprises Pravin Gordhan suggest government seems to be locked into “improving” the performance of SOEs rather than privatising or shutting them down entirely. Eskom’s chief financial officer, Calib Cassim, has told the National Energy Regulator of South Africa (Nersa) that municipal debt coupled with Eskom’s poor financial and operational performance pose a “systemic risk to the sustainability of the company”.
Local media reports stated that Eskom wants Nersa to approve a tariff hike of 15 percent a year for the next three and has added that its debt will reach R600bn should such an increase be denied. It is highly likely that Nersa will in fact deny that request and then some other plan may have to be hatched.
Why do we care?
Ramaphosa’s comments at Davos coupled with pressure from all quarters for the Eskom crisis to be addressed suggest it will be at next week’s State of the Nation Address (Sona), and what is said will provide a key insight into what lies ahead post elections.
The context is that the president has spent the past year rebuilding the ruling party’s relationship with the South African Communist Party (SACP) and the Congress of South African Trade Unions (Cosatu) ahead of elections scheduled for May.
He has also spent the past year promising economic reforms and growth with ambitious employment and other targets that would rely on fundamental policy reform. It is unlikely that months before the polls Ramaphosa will decide to take on the unions and even suggest partial privatisation let alone full privatisation. But investors and rating agencies are also watching, so expect a fudge.
Some apparently radical moves may be in the pipeline for Eskom and perhaps for a wider scope, but what is really required will probably not feature too prominently until after the votes have been counted in May.
Gary van Staden is an analyst at NKC Research. The views expressed here are his.