/ 27 November 2009

Private money needed

Eskom's tariff increases will harm the economy so an alternative is needed, writes Lloyd Gedye.

Most economists agree South Africa’s economy cannot sustain the damage that massive electricity price increases will cause and that another solution is required, one that will require some form of privatisation of Eskom.

Government is caught between a rock and a hard place when it comes to funding Eskom’s required future power-generation capacity and a recent Democratic Alliance question highlighted the fact there are many more problem children lining up behind Eskom.

According to Finance Minister Pravin Gordhan, R242.8-billion in financial assistance was forked out from government coffers between 2005 and 2009 to state-owned entities.

Add to this the recently announced R1-billion bailout for the SABC and the R1-billion bailout for the Land Bank, which was included in the medium-term budget, and the figure is closer to R245-billion.

Although Deputy Transport Minister Jeremy Cronin and ANC Youth League president Julius Malema are locked in a heated debate over the proposed nationalisation of the mines, it is clear that South Africa has enough problem children without creating more.

The worst offenders needing financial assitance, according to Gordhan, are Eskom at R188.7-billion, Denel at R8.8-billion, the Land Bank at R6.7-billion, SAA at R5.2-billion and the Pebble Bed Modular Reactor at R4.5-million.

But with Eskom requiring capital for its planned R385-billion capital expenditure programme, it’s at the front of the queue.

Economist Mike Schussler says there is no doubt in his mind that some form of privatisation or public- private partnership has to be part of the solution to Eskom’s problems.

This is not a popular view among the tripartite alliance, which regards state-owned entities as key to the role of the developmental state.

‘You are not going to be a developmental state by charging high prices and having poor services,” says Schussler.

‘All state-owned entities are in trouble and have received massive bai louts. We haven’t looked at the efficiencies of stateowned entities.”

Schussler says that Eskom must be split up into three parts.

The first would be power generation, which would include selling power-generation units to investors and using that money to build new capacity.

The second would be the national grid and distribution network, which would have to remain under state control.

The third would be the retail space, which would
stimulate competition.

‘There are inefficiencies in the system and the only way to get rid of inefficiencies is to make people compete,” Schussler says.

Frost & Sullivan’s energy analyst Marc Goldstein says that passing on a huge tariff increase to the end user would be ‘destructive” and the knock-on effect to the economy would be severe.

‘Going down the road we are travelling is quite scary for many people,” says Goldstein. He says that an alternative has to be found, but is not sure what form it would take.

‘Privatisation has to be part of the solution. We need competition in this market.”

Goldstein agrees with Schussler’s proposal, arguing that Eskom should be split up into three parts, but he expresses doubt about whether government would allow an investor to take up equity in Eskom.

Goldstein also says that tariffs will have to go up further if private energy players are going to enter the South African market and be able to make money.

Pan African Advisory Services chief executive Iraj Abedian agrees with Schussler’s proposal in part, but argues that there is a need to step away from the immediate power crisis and to create a coherent mediumto long-term energy strategy.

‘Eskom has an immediate cashflow situation and is trying to use the energy crisis to sort out its cash problems,” says Abedian.

He warns that selling off part of Eskom without thoroughly interrogating what the long-term strategy is would be foolish. He says it could lead to a similar situation the government found itself in when it sold off Telkom to foreign investors.

A transaction the country is still paying for, he says. ‘Competition is the solution to inefficiencies,” says Abedian.

‘We have to identify the areas of inefficiency before we introduce competition.

‘Selling off the power-generation capacity without first setting the long-term price would be undervaluing the asset,” he says.

‘Privatisation is not the answer per se. Privatisation, if it means leveraging the existing assets, is the way to go.”