It’s not about revenue, Mr Molefe
Eskom CEO’s argument against sale of utility misses point completely
From someone who had training in economics and worked at the National Treasury, where he was last responsible for raising money from domestic and foreign investors, Brian Molefe’s argument against the sale of a portion of Eskom makes no economic sense.
Last month, he argued that government should not sell a portion of Eskom to private sector investors because the sale would not generate much revenue for the fiscus.
Molefe made similar arguments in November last year, saying that a sale of a portion of Eskom should wait until 2025, when the utility would be cash-positive. Eskom is in the middle of a multibillion-rand investment programme that it expects to be completed around 2021. Given the utility’s record, “around” is an important qualifier.
However, Eskom is squeezed for cash and has already sucked up huge government resources to plug holes in its balance sheet.
It has also been granted huge tariff increases to pay for its build programme, which is running way behind the original schedule.
Eskom’s reliance on government support comes at a time when the fiscus is overstretched. To inject cash into the utility, government had to sell its shareholding in cellphone group Vodacom.
Hence the recent proposal to sell a portion of Eskom, or some of its assets, to private sector investors, who would inject capital and therefore reduce the pressure on the government.
Molefe is opposed to this. His argument is a mirage. He misses the point completely. Such a sale would not be motivated by the need to generate revenue for the government. Far from it. The government would be selling a portion of Eskom, or its assets, to introduce alternative sources of funding for Eskom.
Also, such a sale would be to introduce a sense of urgency to the resolution of the electricity shortage.
Shortage of electricity is one of the big domestic factors holding back economic growth. Electricity matters most for manufacturing, a sector the government has identified as crucial for creating quality jobs and boosting value-added exports.
Manufacturing is also now a major pillar of the government’s transformation agenda, specifically the creation of black industrialists.
Whether this is doable is another matter, but you can bet your last dollar that without adequate electricity you won’t have a manufacturing sector, black or white.
The bottom line is that Molefe’s dreams of fancy will cost South Africa dearly. The economy would shrink. In addition, Eskom would have sucked the fiscus dry. And remember, there is a direct link between economic growth and tax revenue. A shrinking economy means less tax revenue, a vicious cycle.
But there is another problem that will face Eskom soon enough. Its market is shrinking, fast. The big manufacturing and mining firms that suck up more than 40% of electricity produced by Eskom are increasingly generating their own.
Some of these firms are selling electricity back to Eskom.
They do so because the cost of electricity has gone up a lot. Eskom’s financial hole has widened too, which means the utility will continue to ask the regulator for fat tariff increases. What’s worse is that very few business people trust that Eskom, under its current political leadership, will solve the energy crisis. They won’t say so publicly, but their actions (building their own generation capacity) speak volumes.
Take Sasol. The petrochemicals giant says it has an installed generation capacity of about 70% of its total South African power supply OVERTAKING COAL: Sheep graze beneath solar panels at Sishen solar park, operated by Acciona SA in Kathu, Northern Cape. Businesses and high-income households are increasingly going solar needs. Sasol also has an agreement to sell up to 440 megawatts to Eskom.
Sappi, the paper-milling group, has been steadily increasing the amount of electricity it generates, from 38.4% of what it used in 2011 to 42.3% last year. Sappi has a huge focus on generating electricity, not only for its own use but for selling back into the market.
Many of these big firms are under pressure from their customers and shareholders globally to reduce their carbon footprint.
In short, that means they have to reduce the use of energy that pollutes the environment. Eskom burns tons of coal, a high pollutant.
Some of these firms are now converting into electricity the waste that was being let loose into the environment or dumped at landfills.
Households too, especially the rich, high-consuming segment, are turning to alternative sources of energy.
And the increases in tariffs that Eskom continues to push for to buttress its finances are making alternative energy sources, particularly the renewables, that much more attractive to households and firms.
The sum total of all of these developments is that Eskom will have a much smaller market for its product. And there’s no worse position for a business to be in than to wake up and find that the business sits on shiny pieces of equipment, but no customers it can sell its product to.
With Eskom making less money, some of the lenders will turn to the government in terms of the guarantees that back some of Eskom’s debt.
If Molefe succeeds in taking South Africa with him on his dreams of fancy, this country will pay a huge price in lower economic growth and fewer, if any, jobs. Rather than make South Africa tons of money, he will bankrupt the republic. So, whoever is close to Molefe, please wake him up and talk sense to him.
The bottom line is that Molefe’s dreams of fancy will cost South Africa dearly
Sikhakhane is deputy editor of The Conversation Africa Comment on this: write to letters@businesstimes.co.za or SMS us at 33971 www.sundaytimes.co.za