How will SA’s electricity problems ever be solved?

Eskom is disintegrating and taking the whole economy down with it. Andrew Kenny writes on the Daily Friend that as a desperate measure it seems we must privatise the national electricity supply, even though this is far from an optimum solution. Power stations are very expensive, requiring huge amounts of money. The state can always raise capital more cheaply than the private sector, and so a state electricity company has a fundamental advantage over a private company. When the ANC took over Eskom, he believes, it ceased to be an efficient company managed by engineers and became a treasure to be looted, an instrument of racial engineering, a source for enriching friends and comrades, a form of social welfare, an employment agency for incompetent and under-qualified workers and managers and, recently, an arm of organised crime. His excellent article below explains more. – Sandra Laurence

Perhaps we must privatise Eskom, but…

By Andrew Kenny*

Andrew Kenny

The best possible electricity supply for a country is through a well-run state electricity company, which we had before 1990. The worst possible is through a badly run state company, which is what we have now. I suppose we must go for the compromise, which is through private electricity companies. This is a difficult matter.

The DA has called for the privatisation of all state-owned enterprises (SOEs). Dawie Roodt, perhaps our best economist and certainly one I trust, is quoted as saying, “Eskom is falling apart – the private sector will have to provide electricity.” Many other commentators are calling for the same thing. These are calls made in a time of desperation, when Eskom is disintegrating and taking the whole economy down with it. As a desperate measure it seems we must privatise the national electricity supply, in part at least, even though this is far from an optimum solution and even though there are problems with it.

I believe in free enterprise, which I am happy to call “capitalism”, and I believe private enterprise has been chiefly responsible for the staggering improvement in human welfare over the last two hundred years. But I try to be objective about it. Private enterprise can nearly always provide better services and goods than the state – but not always. Electricity supply is an outstanding exception. No private company can provide electricity as cheaply as a well-run state company. I belong to the Free Market Foundation (FMF) and have got into trouble with it for expressing these views.

Natural advantages

A private company, constrained by good laws so that the only way it can increase its profits is by providing better goods or services, has many natural advantages over a state company. Since it is only concerned about making money, it is freed from the political and social obligations that might hobble a state company. It is single-minded about striving for efficiency. It gets rid of workers who are not delivering. It does not carry passengers. It is flexible and inventive, ready to exploit new ideas or think up new ideas itself. It can adapt quickly to the changing needs of the marketplace. In Britain, private telecommunication companies were spectacularly better at serving the people than the previous state-owned British Telecom. In electricity generation, few of these advantages matter. A power station doesn’t need to be flexible or inventive. All it needs to do is keep generator shafts turning at 50 Hz (50 revolutions a second). It doesn’t have to adapt to the changing needs of the marketplace because its product, AC electricity, has not changed in over a hundred years. All the invention in electricity supply is provided by the engineering components of the power station, which are usually made by private companies. The power station just has to follow the instructions in their manuals. It doesn’t need imagination or creative thinking – but it does need lots of capital.

Power stations are very expensive, requiring huge amounts of money. For nuclear power, which has very cheap fuel, the cost of capital is by far the most important financial consideration. Hydro is the same. Coal has high fuel costs but also high capital costs. The state can always raise capital more cheaply than the private sector, and so a state electricity company has a fundamental advantage over a private company. Furthermore, the state is content with a very long payback period (modern nuclear stations will last over 60 years) and a very low return, both of which would be unacceptable to private shareholders. This is why the old Eskom provided us with the world’s cheapest electricity. This is also why the privatisation of electricity generation in the UK did not lead to lower electricity prices, nor a noticeably better service.

For some reason, all the South African governments before 1994, including the apartheid ones, managed to keep their hands off Eskom. They gave the company over to engineers and managers and told them their single purpose was to provide electricity and cover their costs. Nothing else mattered. When the ANC took over Eskom, everything else mattered. Electricity supply became of secondary importance, and the requirement to cover costs evaporated. Instead Eskom was seen as a treasure to be looted, an instrument of racial engineering, a source of enrichment of friends and comrades, a form of social welfare, an employment agency for incompetent and under-qualified workers and managers and, recently, an arm of organised crime. The reliability of Eskom electricity plunged and Eskom debt soared. The ANC reduced Eskom from the world’s best electricity company into a bankrupt ruin in short time. Its genius for destruction is remarkable. The power stations are falling to pieces and failing more and more often, with more and more load shedding. The coal supply, thanks to both BEE procurement and crime, is becoming more and more expensive and worse and worse in quality. The competence of its staff goes down and down while their numbers are twice as high as comparable utilities elsewhere.

Well-run state company

Can the ANC return to the old days and make Eskom a well-run state company? No, that is impossible. To ask the ANC to be honest and efficient is like asking a lion to eat only vegetables. It is not in their nature: they don’t want to do it; they cannot do it. If Eskom continues to be run by the ANC government, it will collapse altogether. The argument for privatising it becomes impossible to gainsay. How to do so?

Could Eskom power stations be sold off to the private sector? The key question is their price. The original price of any power station would be beyond the means of any private company. You would have to put down massive depreciation, which tends to be arbitrary, and would almost certainly mean the taxpayer having to subsidise the private company that bought the station at a low price. Perhaps Eskom could continue to own the stations but outsource their operation, maintenance and fuel supply to private companies. What about staffing and procurement?

A private company taking over a power station would want to reduce staff numbers, keep the competent workers and get rid of the incompetent ones – some of whom are responsible for accidents costing billions of Rand. Would it be allowed to do so? Or would it be forced under the labour laws and BEE laws to carry the burden of an over-paid staff with many useless and even dangerous workers? A private company would want to appoint the best engineers and managers on merit, on qualifications and past performance. BEE laws do not allow that – in fact make it illegal, with vicious penalties. BEE, which is complicated and obscure, requires appointments to be made on race rather than merit. We have seen the trouble Dischem is in over it.

In parliament, in September 2016, then-Deputy President Ramaphosa spoke about BEE “fronting”. He said sternly, “If you are found guilty of fronting, your business could face a penalty of up to 10% turnover, as well as 10 years in prison for individuals.” Recently President Ramaphosa confirmed he remains in favour of cadre deployment, which is the same sort of thing. “Fronting” is the crime of giving a BEE appointment to an ordinary black person, however competent and suited to the job, rather than a rich crony of the ANC establishment. Under a privatised Eskom, the BEE laws would prevent you from making appointments on merit and would punish you severely if you appointed a lowly black worker of supreme natural ability to a high BEE position.

Under the ANC, Eskom considered that achieving “employment equity” was more important than supplying reliable electricity. Employment equity means making the racial proportion at every level of employment the same as those in the country at large. To put it simply, it means kicking out the whites. A privatised Eskom would be bound by the same EE laws.

BEE procurement

BEE procurement is even worse. One of the main reasons for so many of Eskom’s coal station failures and for its rocketing price of coal is BEE coal procurement. Eskom used to get good, cheap, reliable coal from the big mining majors. (By “good” I mean good enough to burn, and consistent. Most South African coal is of poor quality and high ash but the old Eskom was expert at burning it if it was consistent.) Now it gets bad, expensive, unreliable coal from BEE coal mines. Organised crime has made it even worse by hijacking trucks of reasonable coal and replacing it with bad coal or stone. Would a private coal power station be allowed to return to buying cheap, consistent, reasonable coal? Probably not. BEE coal suppliers are making a fortune, and the ANC could not take the political risk of denying them their ill-gotten gains. Nor could it risk returning to the “white monopoly capital” of the big mining companies – many of whom have fled the country anyway. In his mid-term budget speech this week, the Finance Minister, Enoch Godongwana, made some encouraging but vague remarks about a coming Public Procurement Bill, “which empower organs of state with the authority to determine their own preferential procurement policies within the ambit of the Preferential Procurement Policy Framework Act.” Will this remove BEE procurement? I shouldn’t hold your breEskom is now victim to sabotage and organised crime. Criminals steal good coal and replace it with junk, which wrecks the coal mills and boilers. They wreck machinery and get shady contractors to replace it at high prices. Eskom staff are clearly implicated. Tutuka Power Station seems particularly afflicted. It is almost certain that privatisation would greatly reduce the crime and sabotage. The broader ANC family connects legal corruption such as BEE with illegal corruption and crime in a seamless join. The Zondo Commission into state capture unearthed some of this. You get crime and corruption in the private sector too, but there is less of it and it is not as established as it is under the ANC.

Under the ANC we shall never have the superb electricity supply we had from Eskom in the past. Our task now is not enhancement but damage control. Our need is survival. We must stop Eskom collapsing altogether, as it will do under the ANC. Some sort of privatisation could prevent this.

A separate matter is the threat to our electricity supply of “green” energy (meaning staggeringly expensive, environmentally harmful solar and wind) and of the “just transition” (meaning the unjust transition from reliable, affordable electricity to unreliable, unaffordable electricity). Private electricity suppliers in our compulsory green energy program (REIPPPP) have forced upon South Africa the most expensive and worst electricity in her history. That is not the fault of the private sector or the ANC but of our policy makers, driven by ideology from abroad, which is systematically crippling the power supply of Europe and other advanced parts of the world. Green energy for grid electricity is useless; it doesn’t matter whether it is owned by the state or the private sector.

For useful energy sources, such as nuclear, gas, coal and hydro, it matters a great deal whether electricity supply is owned privately or by the state. In our strange and awful circumstances, under the wrecking crew of the ANC, some private electricity supply is now a last hope.

The views of the writer are not necessarily the views of the Daily Friend or the IRR. If you like what you have just read, support the Daily Friend.

  • Andrew Kenny is a writer, an engineer and a classical liberal.

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