On Eskom: act soon or it will be too late to get back our investment

March 31st, 2017 by Brian Kantor

One offers commentary on matters of broad SA national interest that might helpfully respond to and benefit from the analysis and arguments raised. It is a tradition that – perish the thought – goes back to colonial times.

The notion that a concern for economic efficiency and economic development in the interests of society at large will prevail in the policy choices SA makes and the economic direction we take, has alas, become increasingly suspect. No other set of policies will be as important for the ability of our economy to raise future incomes, output and employment and to compete globally as taking the right path for delivering energy. Yet following the tempting money trail open to a few potential beneficiaries of energy procurement as currently practiced is much more likely to predict the future of energy production and consumption in SA than any objective analysis can do. But however objective such analysis could be it is still very unlikely to make the right choices- given the unpredictability of the future of energy. The best the government of SA and its agencies – Eskom and the municipalities that have monopoly powers over the generation and distribution of electricity in SA – could do for SA, would be to get completely get out of the business as soon as possible and on the best possible terms. Terms that are very likely to deteriorate the longer they delay their exit.

The reason for getting out and handing over the responsibilities to the fullest possible set of competing privately owned generators and distributors is that the future of energy is impossible to predict with any degree of confidence. Therefore the decisions to be taken in this regard by a government monopoly (with its narrow interest as a monopoly even an honest monopoly) are almost certain to be the wrong ones from which the society and economy will suffer permanent damage.

The most efficient, lowest cost methods of delivering energy in the future cannot be known. It will be discovered in the market place as all such discoveries are made. Discovered, as will be the case with every product and service to be delivered over the next thirty years, by trial and error in the market place, by constant experimentation by owners and managers with their open capital at risk where winners may be rewarded handsomely and losers punished severely with the loss of their capital. It may well turn out to be a future where the cheapest energy is delivered off-grid, making large capital intensive generating plants generating electricity with coal, uranium or gas redundant in time – but just how much time?

Permitting and encouraging such a market place in energy to fund the future demands for electricity on competitive terms , is the right path for SA to take. Adding further highly capital-consuming power plants using whatever kind of input, is surely a most dangerous step for the SA tax base or electricity consumers to have to support. Such plants supported by monopoly powers as were granted their developer Eskom fifty years ago, were arguably then the right way forward. They delivered satisfactory outcomes until recently, in the form of what were globally competitive electricity prices. But they are surely not the way forward today given the risks that technology poses and especially since Eskom itself has become close to bottom of its class of electric utilities on efficiency criteria – as judged by a recent study commissioned by the Intensive Electricity Users Group in SA – who have much at stake.

Eskom has proved very good (predictably so given its monopoly) only at providing employment and generous employment benefits as well as it would appear generous terms to its suppliers – at the expense of its users – who could have proved much better at delivering employment, profits and taxes (with lower electricity costs) including benefits of energy intensive beneficiation of metals and minerals.

There is little time to be lost if the SA tax payer is to recover its investment in and debt guarantees provided for Eskom given the uncertain future. If the plant and equipment were to be privatised soon, they might well fetch a price that would pay off the debts and avoid subsequent white elephants. And help open up, perhaps only gradually, a competitive market for electricity where different owners of generating capacity could compete for customers through the privately owned grid, treated perhaps as a regulated private utility.

The plants Eskom is now mothballing could attract bids and be kept running at a low enough asking price. And help produce electricity at highly competitive prices, enough to cover operating costs and a return on capital, that could perhaps, for a while, keep alternative electricity generators at bay, long enough for SA to get its money back.

*The views expressed in this column are those of the author and may not necessarily represent those of Investec Wealth & Investment