WHY ESKOM’S MONOPOLY MUST END

As the en­ergy sup­plier is rid­dled with mis­man­age­ment and cor­rup­tion, com­pe­ti­tion might be just what it, and South Africa, needs.

Finweek English Edition - - Front Page - By Andile Ntingi ed­i­to­rial@fin­week.co.za Andile Ntingi is the chief ex­ec­u­tive and co-founder of GetBiz, an e-pro­cure­ment and ten­der no­ti­fi­ca­tion ser­vice.

with the spec­tre of yet an­other bailout for state-owned elec­tric­ity sup­plier Eskom loom­ing, the old ar­gu­ment of break­ing up the paras­tatal’s monopoly to im­prove com­pet­i­tive­ness and gov­er­nance is bound to be raised once more. An end to Eskom’s monopoly would lead to the in­tro­duc­tion of new en­trants in the power gen­er­a­tion in­dus­try and pre­vent tax­pay­ers from hav­ing to pick up the tab for fu­ture bailouts, which arise mostly from mis­man­age­ment, cor­rup­tion, and the ab­sence of com­pe­ti­tion to the state power util­ity’s un­chal­lenged mar­ket dom­i­nance.

In re­cent months, the paras­tatal has been plagued by al­le­ga­tions of cor­rup­tion and cap­ture by the con­tro­ver­sial Gupta fam­ily, lead­ing to the de­par­ture of CEO Brian Molefe and chair­man Ben Ngubane un­der a cloud.

The man who tem­po­rar­ily stepped in as CEO after Molefe’s de­par­ture, Mat­shela Koko, has since been sus­pended for al­leged cor­rup­tion. He is fac­ing a dis­ci­plinary hear­ing after Eskom awarded con­tracts to a com­pany linked to his step­daugh­ter. Even the chief fi­nan­cial of­fi­cer, Anoj Singh, who has also been sus­pended, stands ac­cused of help­ing busi­nesses linked to the Gup­tas to se­cure lu­cra­tive con­tracts worth hun­dreds of mil­lions of rands.

Act­ing Eskom chair­man Zethembe Khoza and act­ing CEO Johnny Dladla are promis­ing to clean up the or­gan­i­sa­tion and usher in the high­est stan­dards of good cor­po­rate gov­er­nance. (Also see page 36.)

While Eskom says it will bor­row from the cap­i­tal mar­kets against the guar­an­tees gov­ern­ment is pro­vid­ing, fi­nance min­is­ter Malusi Gi­gaba hinted re­cently that the elec­tric­ity sup­plier may re­quire fi­nan­cial as­sis­tance to help it im­ple­ment its cap­i­tal ex­pen­di­ture pro­gramme, which in­volves build­ing new coal-fired power stations and buy­ing wind and so­lar en­ergy from in­de­pen­dent power pro­duc­ers (IPPs).

There is a view in some quar­ters of the en­ergy sec­tor that Eskom’s woes are self-in­flicted and that the paras­tatal would long have been out of the mar­ket if it was not a monopoly pro­tected by the gov­ern­ment.

Tin­ker­ing with and re­struc­tur­ing the com­pany’s board and man­age­ment is not a long-last­ing so­lu­tion. What needs to be restruc­tured is the mar­ket in which Eskom op­er­ates. Eskom’s monopoly needs to be dis­man­tled and the elec­tric­ity mar­ket opened up to se­ri­ous com­pe­ti­tion. A new mech­a­nism needs to be cre­ated to al­low IPPs to sell di­rectly to house­hold and in­dus­trial cus­tomers. If di­rect com­pe­ti­tion were to be in­tro­duced, Eskom would be forced to shape up or get out of the mar­ket.

What we have learnt from the string of scan­dals that have been play­ing out in the me­dia is that Eskom is a piggy bank for po­lit­i­cally con­nected peo­ple who are loot­ing the paras­tatal and then ask tax­pay­ers to bail it out.

The best way of end­ing Eskom’s monopoly is to sep­a­rate trans­mis­sion and dis­tri­bu­tion as­sets from the pow­er­gen­er­a­tion busi­ness. Once Eskom has re­lin­quished the trans­mis­sion and dis­tri­bu­tion in­fra­struc­ture, it can be taken over by a new op­er­a­tor that pro­vides a ser­vice to all IPPs and Eskom, whose mar­ket par­tic­i­pa­tion will be lim­ited to power gen­er­a­tion. The state power util­ity would then com­pete di­rectly with IPPs on an equal foot­ing in power gen­er­a­tion.

Un­der the cur­rent mar­ket struc­ture, IPPs are Eskom’s sup­pli­ers, not com­peti­tors. The elec­tric­ity sup­plier has used its dom­i­nance to re­strict IPPs, which are sup­ply­ing it with so­lar and wind power to the na­tional grid, which Eskom then sells to house­hold, mu­nic­i­pal, and in­dus­trial cus­tomers.

In Fe­bru­ary, Pres­i­dent Ja­cob Zuma said Eskom would sign 26 out­stand­ing power pur­chase agree­ments (PPAs) for re­new­able en­ergy with the IPPs, paving the way for the con­struc­tion of new wind and so­lar farms. Six months on, the PPAs are yet to be signed. All that has come out of Eskom is a string of cor­po­rate scan­dals and rev­e­la­tions of ir­reg­u­lar and cor­rupt deals. Mean­while IPPs that have in­vested more than R200bn into our coun­try have been left in limbo.

Eskom can even raise money from its old coal power stations by sell­ing them off in an open mar­ket to IPPs, which could retrofit them with cleaner power-gen­er­a­tion tech­nol­ogy. Funds raised from the sale of old power stations could be used to fund Eskom’s power-gen­er­a­tion op­er­a­tions. Com­pe­ti­tion would boost power out­put and re­sult in con­sumers be­ing able to buy power at com­pet­i­tive prices.

The de­pen­dence on Eskom, which has been prone to cor­rup­tion and rent-seek­ing by its of­fi­cials, is pre­cisely the risk that we as South Africans do not need. They can in­flate the cost of elec­tric­ity and the cost of build­ing the in­fra­struc­ture needed to pro­vide elec­tric­ity.

The en­tity that op­er­ates the trans­mis­sion and dis­tri­bu­tion in­fra­struc­ture can prob­a­bly be owned by gov­ern­ment and pri­vate in­vestors to en­sure that it op­er­ates ef­fi­ciently and in the in­ter­est of all stake­hold­ers, par­tic­u­larly con­sumers and pro­duc­ers. The en­tity has to be in­de­pen­dent and en­sure that it pro­vides equal and fair ac­cess to its in­fra­struc­ture to IPPs and the state power util­ity.

And if a restruc­tured Eskom, op­er­at­ing only in power gen­er­a­tion, can’t get its act to­gether, then par­tially pri­vatis­ing it could be con­sid­ered to in­ject pri­vate sec­tor skills and cap­i­tal to im­prove its per­for­mance and gov­er­nance. ■

For­mer Eskom chair­man Ben Ngubane (left) and for­mer CEO Brian Molefe

Pres­i­dent Ja­cob Zuma

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