WORLDVIEW: Eskom highlights SA’s “too big to fail” problem

During the last financial crisis – or I should say, the most recent financial crisis, since I'm sure it's not the last one we'll see – one major problem that regulators faced was that many banks were "too big to fail." In other words, these banks accounted for such a big chunk of the world's financial system that, even though they had made terrible decisions and wasted billions of dollars, they couldn't be allowed to fail because their failure would bring down the global economy..This was great for the banks, which received generous government bailouts, and terrible for taxpayers, who are funding those bailouts. At the time, regulators said that we needed to learn from that experience and use competition law to prevent banks from getting too big in the future. Obviously, we have done no such thing and there are just as many giant, systemically risky banks today as there were in 2007..But that's neither here nor there. The important point is that South Africa today is much like the financial system in 2007 – it is full of clunky, inefficient giants that survive because they are too big to fail, and they use this fact to their advantage..___STEADY_PAYWALL___.Eskom is, of course, the big gorilla here. As Pravin Gordhan made clear in his presentation of the long-awaited Eskom salvage plan, the electricity giant is simply too big to fail. It accounts for virtually all SA's electricity and no matter how messed up, expensive, inefficient, and generally lousy Eskom is, we can't get rid of it because we have no other choice. This is lovely for Eskom since it means that the whole country will have to go broke before we stop pumping money into it. It's not so great for everyone else..Read also: WORLDVIEW: Moment of truth as Eskom approaches total collapse.This same picture reasserts itself in industry after industry in SA, across both private-dominated and public-dominated sectors..It's no great mystery why this is so. Starting in the 1950s, government policy emphasised the creation of "champions" – big corporations that could dominate their markets and provide jobs for the "right" (white) people. Some of these were private companies, others were state-owned. These giants were helped by the fact that SA – as an international pariah state – was protected from meaningful foreign competition for a long time..Since achieving democracy, competition policy has been significantly improved and the Competition Commission has waged a noble, but ultimately Quixotic battle to fight SA's tendency to oligopoly. Today, the country remains a poster child for market concentration. Indeed, one study found that the average market share of the dominant firm in a given sector in SA is about 60%..Now, in some ways, this makes sense. SA is a small country, by global standards, and small markets usually attract fewer suppliers than large ones. Larger firms also tend to enjoy economies of scale, and which is important when servicing a small market..But around the world – and particularly in the US – economic research consistently indicates that small businesses, and especially small business that have room to grow, are the biggest drivers of economic growth and employment. Small firms tend to be more innovative and to grow their workforces more rapidly than large firms. Conversely, evidence suggests that when a market is dominated by a few large firms, employment and growth are lower..Read also: View from London: Even with half current debt, Eskom not sustainable.This suggests that some part of the blame for SA's persistent economic stagnation can be attributed to its troublingly high levels of market concentration. SA's big companies actively work to keep small businesses out and this hurts innovation and employment. While claims of "white monopoly capital" are, clearly, politically motivated, there is a lot of truth to the idea that monopoly is hurting SA – whether in the private sector or the public..What is to be done? Well, the idea in Gordhan's Eskom plan is not bad – splitting the monopoly provider into its component pieces and liberalising the rules over who can sell to and buy from those components..This is the path taken by many countries when liberalising their telecoms systems. They broke up the incumbent state player and made a rule saying that anyone who felt like it could freely buy access to the physical network to provide telecoms services. The system was far from perfect, but liberalising the pipes lowered prices and increased choice for consumers..Gordhan is hoping that by opening up access to Eskom's "pipes" (transmission network) and by breaking Eskom's generation capacity off the main body and setting it up as an independent provider, competition will increase and prices will fall as private generation operations compete to sell into the grid. It's a decent strategy to solve a tricky problem..It is also one that could be replicated in other industries. Problematic state monopolies in areas such as transport and private near monopolies in areas like healthcare could both be susceptible to such a change. It needn't even be bad for shareholders in the private sector – breaking up big businesses can create a lot of smaller and more nimble and profitable ones.

WORLDVIEW: Eskom highlights SA’s “too big to fail” problem

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