Eskom should be pri­va­tised be­cause pri­vati­sa­tion in­creases ef­fi­ciency and pro­duc­tiv­ity

Financial Mail - Investors Monthly - - Contents - THABI LEOKA Thabi Leoka is an econ­o­mist at Re­nais­sance Cap­i­tal.

Thabi Leoka col­umn

Pri­vati­sa­tion is not a popular word in SA. In some cir­cles, if you want to lose friends quickly, sug­gest the pri­vati­sa­tion of state as­sets. But what those who de­fend pri­vati­sa­tion fail to re­alise is that it’s the tax­pay­ers’ money that is be­ing gam­bled with. When an en­tity such as Eskom with a short­fall of about R250bn (and count­ing) is strug­gling to keep the lights on, yet alone im­ple­ment its power sup­ply plan — to the ex­tent that the state has had to sell some of its non­core as­sets to keep the com­pany afloat — then it’s time we have a se­ri­ous dis­cus­sion about pri­vatis­ing the state util­ity.

SA’s elec­tric­ity sys­tem is con­fronted with a tight de­mand and sup­ply bal­ance; hence its ad­e­quacy and re­li­a­bil­ity are in jeop­ardy. This is ev­i­denced in the op­er­a­tional re­serve ca­pac­ity of about 1,3%, and if we con­sider the ex­pen­sive open-cy­cle gas tur­bines, the op­er­a­tional ca­pac­ity is about -5,3%. Gov­ern­ment has at­trib­uted the un­prece­dented decline in the elec­tric­ity re­serve mar­gin to ro­bust eco­nomic growth, es­pe­cially from the res­i­den­tial sec­tor, since 1994.

The per­cent­age of house­holds with elec­tric­ity went from 50% in 1995 to about 72% in 2005, mainly ow­ing to elec­tri­fi­ca­tion of ru­ral house­holds. How­ever, this elec­tri­fi­ca­tion drive was not ac­com­pa­nied by the build­ing of new power sta­tions to sup­port the grow­ing econ­omy. This also speaks to a plan­ning deficit, or rather, an im­ple­men­ta­tion deficit in SA.

The dis­tri­bu­tion seg­ment (largely un­der the con­trol of mu­nic­i­pal­i­ties) has been marred by se­ri­ous in­ef­fi­cien­cies and fi­nan­cial dif­fi­cul­ties for some years, adding to Eskom’s fi­nan­cial woes. House­holds owe about 58% of to­tal out­stand­ing debt. The sim­ple so­lu­tion to this prob­lem is to in­stall pre-paid me­ters, but re­cent protests in Protea North, Soweto, where res­i­dents took to the streets in protest against pre-paid me­ters, il­lus­trate Eskom’s many chal­lenges.

We are at a crit­i­cal junc­ture and the more time spent med­dling in Eskom’s af­fairs the more we risk de­lay­ing its in­fra­struc­ture pro­grammes. Over 65% of SA’s power sta­tions have passed their de­sign life of 30 years. The youngest power sta­tion, Ma­juba, which is 17 years old, had one silo col­lapse on its con­veyor belt in Novem­ber, re­sult­ing in elec­tric­ity short­ages. Ma­juba will op­er­ate at full ca­pac­ity only in 2017. Medupi power sta­tion is four years over­due and the dead­lines for Kusile and In­gula re­main elu­sive.

There is the risk that in a few years’ time the three new power sta­tions will only be re­plac­ing the de­com­mis­sioned ones. This means we may find our­selves in an elec­tric­ity cri­sis again.

I be­lieve Eskom should be pri­va­tised be­cause pri­vati­sa­tion in­creases ef­fi­ciency and pro­duc­tiv­ity. It also en­hances prod­uct or ser­vice prices, firms’ prof­its, and com­pe­ti­tion. Im­por­tantly, it cur­tails po­lit­i­cal in­ter­fer­ence. Prin­ci­pal-agent the­ory at­tributes the public sec­tor’s un­der­per­for­mance to the dis­con­nect be­tween the in­ter­ests of cit­i­zens or tax­pay­ers (the prin­ci­pal) and that of politi­cians, bu­reau­crats and public en­ter­prise man­agers (the agents who have been hired to man­age public re­sources on their be­half), and the for­mer’s dif­fi­culty in en­sur­ing that their in­ter­ests are catered to by the lat­ter, ow­ing to prob­lems of in­for­ma­tion asym­me­try, con­tract in­com­plete­ness, as well as high trans­ac­tion costs and risks en­tailed.

Pri­vati­sa­tion will gen­er­ate the much needed di­rect cash from the sale of as­sets, which will also go to­wards im­prov­ing gov­ern­ment’s fis­cal health. Pri­vatis­ing Eskom will elim­i­nate waste­ful spend­ing and re­duce bor­row­ing re­quire­ments and “crowd­ing out”. We will at­tract for­eign in­vest­ment and gen­er­ate new rev­enues from new cor­po­rate or in­come taxes, which will go to­wards shrink­ing our bud­get deficit. Some ar­gue that pri­vati­sa­tion will lead to un­em­ploy­ment. I be­lieve the op­po­site. Elec­tric­ity short­ages have an im­pact on pro­duc­tiv­ity and low pro­duc­tiv­ity of­ten re­sults in job losses. Ac­cord­ing to a sur­vey con­ducted by the Man­u­fac­tur­ing Cir­cle, the num­ber one fac­tor that af­fected pro­duc­tiv­ity was spo­radic elec­tric­ity sup­ply by Eskom.

Elec­tric­ity sup­ply short­ages are likely to be the main con­straint for GDP growth in the next 7-10 years and if we don’t take dras­tic mea­sures right now, we may live in dark­ness for many years.

Some ar­gue that pri­vati­sa­tion will lead to un­em­ploy­ment; how­ever, I ar­gue the op­po­site

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