TICKLING A NERVE

Eskom should be privatised because privatisation increases efficiency and productivity

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