/ 11 February 2016

Economic crisis: ANC considers privatising Eskom

Economic Crisis: Anc Considers Privatising Eskom

The head of ANC economic transformation believes freezing posts in the public service and privatising Eskom would go a long way toward restoring the country’s fiscal health. Both will be unpopular.

The former could raise the ire of powerful public-sector unions and the latter is a policy some ruling alliance members strongly oppose.

Enoch Godongwana said in an interview this week the ANC was pushing for a reprioritisation of issues in the budget, which would force the government to cut back on unnecessary spending on things such as luxury vehicles and excessive VIP protection for politicians at all levels of government.

Godongwana said the recent ANC lekgotla discussed Eskom and there was consensus that the continuous bailing out of the utility was becoming unsustainable. According to Eskom’s 2015 annual report, its net debt for the year is slightly less than R260-billion. 

Eskom takes up the largest share of the government’s guarantees. It benefits from a R350-billion guarantee facility, of which R162-billion has been utilised. According to the October medium-term budget, R23-billion would be injected into the utility during the 2015-1016 financial year. Stringent conditions were attached to this recapitalisation, including for planned maintenance, capital expenditure and cost savings. In addition, the government’s R60-billion subordinated loan has been fully converted to equity, reducing the company’s debt burden. 

Godongwana said the ANC rejected Eskom’s tariff increase proposal because the economy could not afford more increases. They would lead to the collapse of some factories, which were battling to survive.

The South African Chamber of Commerce and Industry’s chief operating officer, Peggy Drodskie, said tariff increases would be detrimental to small businesses in particular. 

“We understand Eskom’s constraints but our members would find it extremely difficult to pay high tariffs,” she said.

Given the current fiscal situation, ANC leaders discouraged the option that the government should pump more money into Eskom.

“In the light of the above, the lekgotla resolved that public-public partnership and public-private partnerships be explored,” he said.

Solutions to the economic crisis
It was also important to cut out all unnecessary expenditure, including freezing salary increases and ending corporate events. The current salary bill for public servants was slightly less than R500-million a month, according to figures provided by the treasury.

He said it was important for the government to build confidence. “What this means is that you must appreciate the nature of the problems that you are facing and take steps to deal with those. The package of measures that we take must impact on growth. We must make sure we redirect resources towards areas that will stimulate jobs.”

Although he supported the engagements between the government and business to find lasting solutions to the economic crisis, he said he was not convinced by the argument that an increase in tax on big businesses would harm the economy and investments.

“That argument is a moot point on tax. In the United States of America, there was a call to cut tax for business, but we didn’t see any growth,” said Godongwana.  

President Jacob Zuma and some of his Cabinet members, including Deputy President Cyril Ramaphosa, recently met about 100 chief executives in Cape Town to discuss solutions to the country’s economic crisis. Business reportedly presented Zuma with an eight-point plan, which they believe will save South Africa from a damaging sovereign ratings downgrade to junk status and ultimately long-term decline.

The plan, according to the Business Day newspaper, includes an acceptance of broad-based tax increases in Finance Minister Pravin Gordhan’s 2016-2017 budget – that is, an increase in value-added tax or the fuel levy rather than taxes that harm economic growth and investment. An increase in the marginal tax rates for wealthy individuals is also accepted as part of the plan.

It includes concrete measures such as uniting behind a cohesive plan; fiscal consolidation; more effective management of state-owned enterprises, by appointing, for example, professionals to their boards; accelerated public-private partnerships; a review of legislative measures to ensure consistency and certainty; ensuring that labour legislation contributes to inclusive growth, especially of the youth; and the appointment of a standing anticorruption committee to combat graft in both the public and private sectors.

Godongwana said the ANC’s long-held view favoured a progressive tax system. The party had resolved to investigate the option of a wealth tax or a tax on individual net wealth.

Working class vs the markets
Meanwhile, the labour federation Cosatu was unhappy that it was not part of the meeting, warning that the intention was to impose unilateral decisions on workers.

Political analyst Aubrey Matshiqi said the ANC found itself between a rock and a hard place – it was being forced to choose between its constituency, which is the poor and working class, and the markets. He said whatever decision the ANC took at this point would be to appease the markets.

The vice-chancellor of the Witwatersrand, Adam Habib, said the government had to include all stakeholders to find a solution to the economic crisis.

“If this [the meeting between business and government] is one of the many meetings [with all stakeholders], then it’s okay. But if it is the only meeting [with business], then there is a problem.”

A growing debt headache

With the global and local economic outlook gloomy, the ANC is under pressure to return the country to a sound fiscal footing – and to stop the flow of taxpayer money in the form of bailouts into state enterprises that underperform.

In June 2015, approved government guarantees to state-owned companies amounted to R470-billion, with Eskom, the South African National Roads Agency Limited and SAA among the biggest beneficiaries.

Treasury spokesperson Phumza Macanda said this week that the government’s total debt was standing at R1.9-trillion and that the government was borrowing R10.9-billion a week in the domestic capital market.

This article, originally published in the Mail & Guardian on February 12, has been amended to correct the misspelling of Peggy Drodskie.