Is Eskom’s unbundling the light at the end of the tunnel?
JOHANNESBURG - It’s no surprise that the Eskom debacle has been called an ‘emergency’ by Public Enterprises Minister Pravin Gordhan.
This sentiment was echoed by Minister of Finance, Tito Mboweni, in his recent 2019 Budget Speech with his comment that ‘Pouring money directly into Eskom in its current form is like pouring water into a sieve.’
As South Africa’s largest power generator, Eskom provides 95% of our electricity and effectively powers the nation. Eskom’s debt has concerningly spiralled from a manageable amount of around R40billion, to R420bn under Jacob Zuma’s presidency. This country now spends about R1bn a day on interest, whilst continuing to borrow about R1.2bn a day to keep the lights on. It is not sustainable, and we’ve run out of time.
It is estimated that South Africa loses R1bn aday for every stage of load shedding – which means the recent stage 4 load shedding cost this economy R4bn per day. It is simply astounding that two coal-powered power stations, Medupi and Kusile, could be allowed to go more than R200bn over budget, and once complete will only provide 40 – 50% of their intended output due to poor design. In addition to this, it is now estimated that R139bn has simply been stolen!
The bailouts continuously required by our stae -owned enterprices are still a serious concern, and one shared by the credit ratings agencies. Moody’s remains the only agency that still has some faith in our economy, but that support is waning, and all eyes will be on their next assessment, scheduled for 29 March. On average, it takes eight to 12 years for a country to get back to investment grade after being downgraded. More sobering still is the fact that no African country has ever come back from a downgrade to junk status.
South Africa’s burden of debt, in addition to a potential downgrade and the outflow of capital that would result, could send the country into hyperinflation. With the existing levels of inequality, this is tantamount to a timebomb. While this notion may sound alarmist, the seriousness of the situation cannot be underestimated and it’s the poorest members of our society who will suffer the most.
Possibly the only proverbial light at the end of the tunnel is President Cyril Ramaphosa’s recent State of the National Address announcement that Eskom will be unbundled into three entities: Generation, Transmission and Distribution. This unbundling should be accelerated as a national priority and should be a first step toward privatisation.
It is fully understandable within a South African context that government wishes to have some measure of control over supply of electricity – this allows for wealthier households to subsidise poorer communities. We would thus expect that Distribution, and possibly Transmission, remain under government control. There is, however, no logical argument to support government remaining invested in, and exposed to the risks associated with, Generation. Privatising generation of electricity would allow government to set a price point at which they will enter into offtake agreements for power, thereby transferring the capital requirements, build program, technology decisions, and risks to the private sector.
If there remains any doubt as to the government’s continued ability to provide and operate generation infrastructure, we should pause to consider Eskom’s existing infrastructure.
The average coal power station has a 25-year lifespan. More than half of South Africa’s stations are beyond that, with some over 50 years of age. This is the infrastructure that the country – and indeed, our economy – relies on for the generation of power, and yet it would appear that planning and development of this critical infrastructure has been entirely neglected.
What this state of affairs demonstrates is that government cannot be trusted to manage power generation infrastructure. Its poor performance in this regard is what has plunged us into a crisis, and we’re left with few other options than to privatise. This is the only way to truly extricate ourselves from the swamp of uncertainty surrounding Eskom and its inability to power the nation going forward.
It should be pointed out that privatising the generation entity is not about the prospect of profit. It is about the sustainability of South Africa’s economy. As things stand, privatisation seems to be the most viable, sustainable option; and with a significant focus on renewables, it could be the catalyst that moves the energy sector forward.
The trade unions’ reaction to the Sona announcement has not been a surprise, with the prospect of privatisation being met with strong opposition. The trade unions dead set on ensuring that Eskom is not unbundled and privatised need to bear in mind that they supported Zuma throughout his tenure, and that they now need to accept responsibility for the consequences. This inconvenient truth should be acknowledged by the unions as it is their members who will pay the highest price for the unions’ unequivocal support of a corrupt president.
While there was criticism of the Independent Power Producers (IPPs) in the media (as if they are to blame for Eskom’s debt), this is mere smoke and mirrors – a feeble attempt to shift blame onto the private sector. If it is downscaling, retrenchments and streamlining for efficiency that will help the ailing Eskom to regain some balance, we will need to manage this in the short term. As painful as it may be, it is in the interests of our national economic recovery in the longer term.
It is expected that the government will want to placate the unions before the May elections, and will engage robustly – if not submit to their conditions. As business , we would welcome the same engagement on privatisation: this is the conversation that could help avert an economic meltdown.
In a country with neither water nor energy security, there is much at stake as a ‘wait and see’ attitude prevails prior to the Moody’s announcement and the May elections.
Hiking up electricity prices is not a quick fix nor the answer to relieving our debt. Apart from an already stretched tax base, energy-intensive industries like mining and smelting are simply not viable in the face of major tariff increases in electricity. We need to keep the cost of doing business down if we hope to create the jobs this country desperately needs.
It is a case of all hands on deck to fix Eskom – and fixed it will be if privatised in part. How else, realistically, do we stop bleeding cash, and ensure sustainability in the long term?
Ryan Ravens is the chief executive of Accelerate Cape Town.