Eskom, the electricity producing giant is South Africa’s biggest state-owned enterprise (SOE). It has a monopoly, but is drowning in debt, corruption and inefficiencies. If nothing is done, it is in danger of dragging the Government, who guaranteed most of the debt, down to junk status.
Out of a need to be self sufficient during the apartheid years, Eskom continued to build power stations far beyond their actual needs. 7 out of the 15 coal fired power stations were commissioned in the 1980’s. Eventually they produced so much electricity that South African businesses enjoyed some of the lowest tariffs in the world, and excess was exported to the neighbouring countries. The new government rather focused on expanding the grid to electrify most of the population. That was done successfully, but the increased demand was not matched with increased supply. The resource boom years were not anticipated and in 2007 Eskom began to run out of electricity. This forced Eskom to build new capacity. Among the expansion plans are two big coal fired power plants, called Medupi and Kusile. Both cost a lot more than planned and are lagging far behind their completion date.
Besides the operational difficulties, Eskom was plundered by scrupulous contractors, aided by corrupt Eskom management. Eskom also has a bloated staff contingency, who enjoyed underserved massive bonuses and pay hikes. All that lead to the issuing of more and more debt. But that party has now ended, and like after the end of any good party, the hang over is starting to rear its ugly head. We now know that there are a lot of things they should have done differently, but that doesn’t help explain what should be done going forward. For that, the very capable Minister of public enterprises, Pravin Gordan has enlisted the help of some of the top CEO’s to come up with a strategy to get Eskom back on its feet.
Here is my take on what should be done: Eskom should be broken up into two units, power generation and grid. The grid should be kept by the state, because it provides the infrastructure to get everybody connected, no matter if rich or poor. A private company would prioritise the profitable lines, and neglect the ones just costing them money. In a fair society, this would be an unfair practice.
The power generation section should be partly privatised. This can be done by selling off power generators, mainly the coal fired power stations to the highest bidder. In return they would get a 10,15 or 20 year electricity take-off agreement, similar to those of the renewable power generators. With that in hand, the winning bidder will be able to raise funding in the private sector to finance the purchase of the power plants. Thus, it is ideal for previously disadvantaged, and will help the governments goal to foster black industrialists. It would be up them run the units as efficiently as possible. The government will use the money raised by the sales to settle the outstanding debt.
It might sound a little bit simplistic, because I have not taken into account a failure of power generation from any of those newly established private companies, but when that happens, you can be assured that competitors are quick to jump at the opportunity. As we have seen with the renewables, give the private sector the right playing field and a reliable set of rules, and they will fill any opportunities that might present themselves.