/ 10 October 2022

Eskom’s death spiral caused by policies and political choices

Nersa is holding public hearings over the next three weeks
The state-owned electricity company is set up as a public entity but it operates like a corporation, an inevitable symptom of our neoliberal age.

Three days before Eskom announced its implementation of stage six load-shedding, news broke of the utility’s application for a 32% tariff hike. In recent years South Africans have had to endure gruelling price  hikes for life’s basic necessities — food, fuel, electricity and water. 

These financial burdens are placed on citizens in a society where unemployment and poverty flourish, while inequality booms. 

Although it may feel that we have become acclimated to our society’s dysfunction, one cannot forget that the design of our central institutions is a product of political choices made in the past and present, alongside being the outcome of certain economic conditions. 

But the hard times we find ourselves plunged into are not immutable. And this applies to the policies and political choices that have plunged Eskom into its decades-long crisis. 

Eskom’s request for a tariff hike is a symptom of Eskom’s failure to deliver reliable, affordable and physically accessible electricity caused by its unsustainable financing model. Understanding why tariff hikes are an inevitability will first require us to comprehend the policies that guide the utility’s operations. 

Eskom is often characterised as a nationalised public utility and its deterioration is seen to be a consequence of gross mismanagement by the government, purported to be a given, as a result of Eskom’s monopoly over the energy sector. 

This is partly true but what stifled the utility before and during years of parasitic corruption, known now as state capture, is a contradiction between its public ownership and its corporatised mandate. 

This creates an impossible task — to provide electricity as a universal public good, while at the same time needing to make Eskom profitable by selling electricity to people, who for the most part are unable to afford it. 

The gradual corporatisation of Eskom and the push towards privatising South Africa’s power system are a central moment in the ANC’s adoption of neoliberalism as a guiding philosophy for governance and macroeconomic policy. 

Neoliberalism is on one level “a political project to re-establish the conditions for capital accumulation and to restore the power of economic elites”, according to David Harvey, of the Graduate Centre of City University of New York. In other words, an attempt to increase the rate of profit realised by corporations particularly after the 1973 oil crisis. Beginning in the late 1980s Eskom was increasingly commercialised, recast from a not-for-profit public service into an Eskom operating on a commercial basis. 

Following the neoliberal paradigm of the Growth, Employment and Redistribution (Gear) policy, the 1998 Eskom Amendment Act saw the utility become a limited liability company. The government became its sole shareholder and its tax-exempt status was removed. Essentially a public universal good became heavily commodified and citizens became consumers. 

By 2001, Eskom was fully corporatised — a public utility, having to operate on the basis of a private company.  With this we see the adoption of the full cost recovery model, requiring end-users to cover the costs of the generation and supply of energy. This financing model and the neoliberal outlook that has governed its operations have deprived millions of reliable and affordable electricity. 

The government recognised the problems this would pose and that it could perpetuate energy poverty. The introduction of free basic electricity in 2003, of 50 kilowatt-hours a household a month, was an attempt to remedy the problem. The programme has been a failure because of the incompetence in local government and the misapproriation of funds. 

Of the estimated 11 million households identified and funded through the national budget for an assortment of basic services, only 25% of that number receive these services. There is a large chasm between houses funded for basic services such as free electricity and those municipalities actually end up providing for. 

Aggravating this misgovernance is municipalities devouring funds meant to provide  free basic electricity. According to the Public Affairs Research Institute, in the 2019-20 financial year R9-billion was budgeted and disbursed by the treasury to local governments for the provision of electricity and was subsequently misappropriated for unauthorised purposes. 

From 2015 to 2020 an estimated R38.3-billion failed to reach indigent households — it was instead appropriated by municipalities for unsanctioned ends. 

A 2013 study by the Socio-Economic Rights Institute of South Africa discovered that the bureaucratic and administrative hurdles made it difficult for poor citizens to get free basic electricity. 

The study’s conclusions suggest that municipalities are restricting rather than expanding access to  free basic electricity. One sees this in how municipalities struggling to provide basic services then sell electricity at a higher price than Eskom, to the detriment of people. 

Municipalities’ failure to register indigent households results in two disastrous outcomes: poverty deepening by continued lack of electricity and Eskom losing billions of rands in revenue because the utility is meant to receive revenue from municipalities for the free units provided. 

The perils of privatisation 

Pursuing a massive electrification programme between 1994 and 2000, it became clear that Eskom would need to sustain building capacity and power generation into the future to meet increasing demand. 

But the 1998 White Paper on Energy placed a moratorium on Eskom building any new generation capacity. The government did not see the need to continue building new power generation, assuming eager players from the private sector would do so in the near future. 

When Eskom requested approval to initiate a new programme of electrification, it was denied. In a public apology after the announcement of the country’s first round of load-shedding, former president Thabo Mbeki spoke to government’s error: “When Eskom said to the government, ‘We think we must invest more in terms of electricity generation,’ we said no,” Mbeki admitted in late 2007. “We said, ‘Not now, later.’ We were wrong. Eskom was right. We were wrong.”

Seeking to solve Eskom’s issue of limited capacity, the utility initiated a new five-year build programme from 2008 to 2013. Constructing two huge coal-fired plants, Medupi and Kusile, would be central to the programme. To fund the building of the Medupi plant, the World Bank approved a loan of $3.75-billion to Eskom, claiming this loan would foster the transition to clean and renewable energy. 

The reality is that the World Bank loan has dealt a devastating blow to the functionality of Eskom in the long and short term. By constructing what would be the largest coal-fired power plant in the world, Medupi, the country’s climate crisis has only been exacerbated, with the plant emitting staggering levels of carbon dioxide. Compounding this environmental pollution, which is a lethal threat to people, was the pervasive corruption that implicated both the World Bank and the ANC government. 

Analysts, opposition parties and climate change activists have highlighted that the World Bank’s loan was key to cultivating corruption at Eskom during its new build programme. During a United States House hearing in 2017, David Malpass, the current president of the World Bank, accused the bank of habitual corruption in its relationship with developing countries and South Africa was explicitly mentioned as an example.

Who benefited from this odious loan? Transnational corporations such as Hitachi Power Africa and investment companies such as Chancellor House Holdings, or in other words, the economic elites who continue to unjustly accrue power in our neoliberal age, alongside the political leadership defending them from accountability for their plunder. 

The cost of Medupi exceeded the initial R69-billion and in 2019 the project was estimated to have cost Eskom R234-billion. Further complicating the project were constant delays and significant design and performance issues. Eskom has since attempted to recover the costs of electrification and service odious debt through raising revenue. 

In response to narrowing revenue and profit streams alongside ballooning debt, Eskom continuously applies for tariff hikes, which only anger citizens and produce more instances of non-payment, which then hinders the utility’s ability to maintain its infrastructure (or build new generation capacity) and compel it to seek out more loans and more tariff hikes while increased use of renewables closes of other streams of revenue, resulting in a death spiral. 

This has resulted in immense and unsustainable hikes in tariffs over the past 27 years. In just one decade tariffs have risen by a bewildering 400%. 

The commitment to raising revenue at all social costs and increasing tariffs in a context of abundant poverty not only places a tremendous strain on citizens but also intensifies Eskom’s death spiral. A feature of Eskom’s financing model that some may find surprising is its inequitable and ineffectual method of gathering revenue.  

For example, the eight corporations that make up the Energy Intensive Users Group (EIUG) consume 40% of Eskom’s energy and yet continue to contribute disproportionately less to revenue. The same applies to the mining and industrial sectors, whose use of Eskom’s generation sits, on the highest estimates, at 60%. 

This disproportionate contribution of revenue, relative to consumption, is another instance of macroeconomic policy being designed towards the benefit of corporate power and investment, even if it is unsustainable and plainly unfair towards the country’s most vulnerable citizens. 

All of this unfolds beneath the dictates of austerity philosophies that have historically discouraged the government from spending money to maintain Eskom’s current fleet and install urgently needed capacity. The fact that the price Eskom needed to pay for coal increased exponentially between 2002 and 2014 (about a R64-billion jump in cost) intensified the utility’s troubles. 

Plans for privatisation coupled with growing financial pressures resulted in local government and Eskom not executing critical maintenance on the electricity infrastructure and suffering from a shortage of supply because there were no plans to build new capacity.

Considering these debilitating factors, resulting largely from short-sighted attempts to court the private sector, should we be surprised that load-shedding struck the nation in 2007? 

Tariff hikes, austerity and Eskom’s death spiral 

South Africa is a country beset by the manufactured epidemics of poverty and unemployment, both products of our capitalist economy and parasitic government. With the latest statistics reporting 18.2 million of our citizens living in extreme poverty and eight million unemployed, constant rises in the cost of electricity are profoundly unreasonable. 

Destitution is so dire for many that often the poor must make a choice between spending income on food or on electricity. In a social order that respects human dignity, no one should make a choice between keeping the lights on and feeding their family.

Nonetheless, the government has remained resolute in its commitment to attracting foreign investment and pleasing credit rating agencies as the primary mechanisms to trigger economic growth while also hoping said economic growth will ease the country’s myriad of socioeconomic ills. To achieve this objective, in recent years austerity policies have been adopted to reduce the country’s debt. 

South Africans have had to endure government cuts in spending towards healthcare, education, job creation, basic service provision and social grants. The failure of state-owned enterprises such as Eskom has been used as a justification for austerity measures that leave the working class and poor at greater heights of financial instability. 

Since the 2019 budget was adopted, the treasury has persisted in using substantial portions of tax revenue (taken from the National Revenue Fund) to service Eskom’s debt and pay back its loans on expiry. Tax revenue that should be poured into human development, poverty alleviation or investment in public infrastructure is being used to bail out a flailing Eskom. 

A public pathway to energy provision

In South Africa and abroad, neoliberal governance has cultivated an increasingly inhospitable world. The needs and goods of daily life are unaffordable for most, political leadership is indifferent to those they are meant to serve and economic elites continue to plunder wealth at the expense of political stability, the natural environment and justice. 

Eskom embodies these pitfalls and its tariff hikes are a worrying symptom. But the choice before South Africans is not between the grand privatisation of energy and a destroyed Eskom.

To reverse societal collapse, Eskom must become a truly public entity that functions to deliver reliable, safe and affordable electricity to all citizens regardless of their socioeconomic position. Its operations must be transparent and accountable to democratic institutions, its World Debt debt cancelled, and direct public procurement by the government must occur to maintain and install new capacity. 

Most importantly, the transformation of Eskom into a public good is vital in South Africa’s transition to renewable energy, an effort that is pivotal in protecting our present and future. 

Andile Zulu is with the Alternative Information and Development Centre in Cape Town. He writes in his personal capacity.

The views expressed are those of the author and do not necessarily reflect the official policy or position of the Mail & Guardian.