Change the incentives – SA needs competition in energy

President Cyril Ramaphosa recently told the World Economic Forum he intended to break up Eskom's monopoly over energy. Eskom's reputation, around the world is one of corruption and mismanagement, so something must be done.

The Economist
, described the problem as 'Years of corruption and mismanagement' which 'have taken their toll'. Eskom is plagued by an inability to produce sufficient power. The Economist noted that under 'Jacob Zuma, South Africa's former president, Eskom was systematically looted. Today it is broke, with debts of R450bn ($30bn) that are crippling the public finances'.

BBC reported: 'The firm has recently been described by government officials as 'technically insolvent' and in a 'death spiral'. It owes nearly R420bn (£23bn; $30bn) – an enormous sum on which it can barely even afford the interest payments.'

Sound familiar? It's precisely the same thing happening in South Africa with SAA and other state-owned enterprises.

Mr. Ramaphosa offered the 'solution' of breaking Eskom into three different state-owned enterprises.

That's no solution. He just doesn't understand the problem is more in Eskom being politically owned and operated than in how many separate divisions there are.

One of the truths about state-owned enterprises is they are owned by the state in name only. At any time they are owned by the political leadership of the country, they are used to reward those in favour with those leaders. SOEs are used to provide cushy jobs to favourites. When it comes to the massive debts they run up, those belong to the taxpayers – not the politicians.

It is a system where politicians get the perks and the public is handed the debt, along with substandard service. Political provision of goods and services rarely benefits anyone but the political class. Since appointments are often made for political reasons, the individuals put in charge often have no clue what they're doing.

This isn't a unique problem for South Africa; it is a global problem repeated anywhere politicians take control of providing services best left to private producers.

But, aren't those private owners also profit-seekers?

Of course, but the difference isn't how they seek to profit from producing the service. The real difference is if they fail and rack up debts, it comes out of their own pockets. In the realm of state-owned enterprises, however, debts are thrown onto the broken backs of the taxpayers. The politicians who reap the benefits don't pay for their failures – you do.

Mr. Ramaphosa seems to think creating even more state-owned enterprises while make the system more competitive. How? It is still run by the same people, there is no competition in leadership. In the end the government will hand out positions like candy at Christmas.

That change is cosmetic at best.

Neither is it a genuine solution to set up regional monopolies. For instance, a separate state-owned enterprise in Cape Town merely creates a regional monopoly that is still politically managed. It only swaps around which politicians will reap the benefits.

Basic incentives haven't changed. In fact, the real problem is incentives, not profit-seeking.

Private producers have to produce enough to fill demand at prices consumers can afford. If they fail, others will swoop in and take their customers.

It's time to open the market for production and allow anyone with the capital and know-how to set up facilities to produce electricity. Let them open solar or wind farms if they wish. Each independent producer can feed electricity into the power grid.

When I lived in Auckland, New Zealand, I grew unhappy with the electric company I used for my business. To solve the problem, all it took was a phone call to hire a different company. Both fed electricity into the grid and set their own prices. I paid the prices of the second company and costs went down.

That company then had the obligation to feed enough power into the grid to cover what their customers consumed. If the company I fired sees consumption go down and has surplus they can lower prices to entice customers back.

I now live in a house with solar panels, which produce most the electricity used. During the day they feed the surplus power into the grid – when rates are most expensive – and we 
draw power out at night – when prices are lowest. In essence, every home with solar panels in California is a miniature producer of power. If they produce more than they consume, the electric company purchases the surplus to sell to other users.

That Mr. Ramaphosa is willing to consider solutions should be applauded, but if all he does is create additional state-owned services he will only magnify the problem, not solve it. What is needed is private production between competitive companies, not another set of politically controlled bureaucracies.

This article was first published on BBrief on 17 February 2021.

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