WORLDVIEW: Stakeholders, privatisation, and the Eskom split

By Felicity Duncan .How do you solve a problem like Eskom? It's a difficult question with no easy answers..It's also a very high-stakes question. Eskom is absolutely fundamental to all of South Africa's hopes for economic development. With all the will in the world, you cannot build a 21st-century economy without reliable electricity. We can talk all we want to about the Third Industrial Revolution and the digital future – but let's keep in mind that all today's fancy technologies rely on a stream of good, old-fashioned electrons. If SA can't fix Eskom, it faces a truly existential threat..___STEADY_PAYWALL___.Fixing Eskom is, however, complex. There are a lot of stakeholders with fingers in this pie, from labour unions to politicians to municipalities to consumers to environmentalists. While it's tempting to imagine that these groups can be ignored, the reality is that all of them have the power to seriously damage Eskom if their needs aren't met. Consulting all stakeholders isn't wishy-washy posing or communist nonsense. It's a necessity..This necessity is one reason why Ramaphosa didn't privatise Eskom. Labour unions opposed privatisation and Ramaphosa needs the labour unions to fix Eskom. He can't simply fire everyone who works there and start fresh – it's not like he could lure away tens of thousands of skilled workers from the other major national power company. Eskom workers have a near-monopoly on the skills needed to run Eskom. Nothing is getting fixed without them. And if they go on strike, the country would be crippled..Plus, Eskom is a state-owned entity. That means that workers there have additional leverage over their bosses – they can strike and they can withhold their votes from the politicians in charge. With elections a couple of months away, the unions are holding all the good cards. If they don't want privatisation, it's not going to happen. That's all there is to it..Another reason for avoiding privatization is that it wouldn't solve Eskom's financial problems anyway. While plenty of people are calling for privatisation, you'll notice that none of them are making concrete financial bids for Eskom. Realistically, if Eskom were a private utility, in its current state it would be looking for a government bailout..No private investor is going to be willing to assume Eskom's tens of billions in debt in exchange for the dubious privilege of trying to force customers to pay for the power they use while dealing with entrenched labour issues, crippling maintenance problems, the ongoing troubles at Kusile and Medupi, and a fundamental inability to supply the electricity the country needs. Where's the investment case?.Eskom would need to be a functional entity before it could go private – you can't sell a plane that's on fire and plummeting to the earth from 30,000 feet. At best, you might find someone willing to give running Eskom a bash provided government guarantees all its debt and promises double-digit electricity price increases for the next 20 years. From a taxpayer and consumer perspective, that isn't really a better deal than the current one..Privatization also doesn't really make sense for a vertically integrated utility like Eskom, because parts of what it does only make sense as a state-owned (or at least very highly regulated) monopoly..Consider electricity transmission. Transmission involves moving very high voltage electricity across long distances – from, say, Majuba Power Station in Mpumalanga to Johannesburg, a distance of about 250km..There is no earthly reason to have multiple separate transmission networks competing with one another in a country SA's size. It's cheaper and more efficient to build one good transmission network, because power lines can carry basically as much electricity as they need to. There's not really any extra cost for each extra unit of power transmitted, so the economies of scale here are enormous..Plus, the upfront capital investment for a grid is huge, so building a second transmission grid would essentially make the overall cost of transmission for the country higher, not lower. One transmission grid is good enough – transmission is what economists call a natural monopoly..In general, however, national transmission grids (and other natural monopolies) are publicly run or highly regulated so that they can't use its monopoly power to engage in price gouging. For a private investor, this makes transmission an unattractive investment prospect. It's not exactly a growth industry in SA, which is already covered in high-voltage transmission lines. It's barely even a cash cow, since it's a good bet the state would make sure that transmission charges didn't do much more than cover the costs of network maintenance. Again, not much of an investment case here..Looked at in this light, Ramaphosa's proposed solution – the three-way splitting of Eskom into generation, transmission, and distribution – has a lot going for it..For a start, it's acceptable to all the key players. That's important – essential, even..Then, the split could help clear up where the problems are. By having separate operations, costs, and revenue lines, it could point to areas where savings make sense and areas that need investment..The split could also foster more competition in electricity provision in SA. For example, if Eskom's transmission operations are broken out and tasked with buying the cheapest electricity available – whether it's produced by Eskom Generation or Sally's Wind Farm – that would make power generation more interesting to private sector players. A lot depends, of course, on what the split actually looks like..Fixing Eskom is hard. There are no easy answers, and that includes the popular cry of privatisation. Ramaphosa's approach looks realistic and pragmatic, and it may even help move us towards a solution. It's the best deal on offer.

WORLDVIEW: Stakeholders, privatisation, and the Eskom split

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