Martin van Staden is the Head of Policy at the Free Market Foundation. He is pursuing a doctorate in law at the University of Pretoria. For more information visit www.martinvanstaden.com.
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This article was first published by BizNews on 17 August 2023
Navigating South Africa’s governance circus around the electricity crisis
‘Government’ is a serious concept. Related theories of public utilities, the commons, and privatisation are similarly serious and nuanced. But sometimes what government does in reality reaches such a level of clownishness that disengagement, ridicule, and contemptuous laughter are all that sensible people should respond with.
Indeed, this is how South Africans must start treating their government and its continued ‘involvement’ in the generation, transmission, distribution, and sale of electricity.
South Africa has been caught in a policy-induced electricity crisis for close on two decades. Recent research indicates that the private sector is rapidly beginning to drag the country out of the mess the government first created in 1922, and then doubled down on in the 2000s when it abandoned plans to privatise Eskom. Despite this positive news, however, the government continues to play an outsized role in the discourse around solving the very problem it and its centralising tendencies created in the first place.
In the past two weeks alone, we were treated to more of the spectacle that is the circus of South Africa’s government-electricity complex.
‘Unbundling’ of Eskom
First, Pravin Gordhan, the Minister of Public Enterprises, on behalf of the government as Eskom’s single shareholder, ‘approved’ the so-called ‘sale’ of the utility’s electricity distribution assets to a ‘new’ company. This is part of the ‘unbundling’ of Eskom that was announced, to much fanfare, several years ago: the entity would be split into three separate (but still state-owned) enterprises, dealing with generation, transmission, and distribution respectively. The President called this ‘bold and decisive action’ to end rolling blackouts.
As it turns out, this new company will be nothing more than a subsidiary of Eskom, just like the National Transmission Company will be.
South Africans can therefore look forward to three new boards of directors, three new CEOs, and three new executive committees, all of which will report to Eskom’s board of directors, Eskom’s CEO, and Eskom’s executive committee, who all in turn will continue to report to some Cabinet member. This could or could not be the Minister of Public Enterprises, the Minister of Minerals and Energy, the Minister of Electricity, a yet-to-be-created ministerial portfolio, or any combination of these.
If this is what ‘reform’ looks like, we should want none of it.
Eskom’s problem is one of concentration and incentive. By keeping these ‘new companies’ under the corporate structure of Eskom, the concentration risk that put South Africa in the precarious position it occupies today is not eliminated. And the political imperatives that currently direct Eskom’s behaviour will remain, rather than being replaced – as they should be – by the efficient incentives that come about in a competitive marketplace.
The unbundling of Eskom is a cosmetic exercise that will simply burden the South African taxpayer with more bureaucracy to fund. It also opens innumerable additional doors for corruption and patronage.
No big business can be done in South Africa without political grease.
At its most innocuous, this takes the form of honest businesspeople having a ‘relationship’ with ministers and regulators through the various task forces, teams, partnerships, and NEDLAC, that government establishes from time to time. These relationships then, usually, result in those same businesspeople being ambivalent about openly criticising the government’s political agenda.
But the more harmful manifestation of political greasing for big business in South Africa is so-called black economic empowerment (BEE), which has nothing to do with black people, economics, or empowerment, but everything to do with politically connected elites, political control, and enrichment without adding value.
So, when a foreign firm like Karpowership, a Turkish company, identifies a market opportunity to provide electricity through its mobile power boats, it cannot simply send the boats in exchange for a recurring EFT payment into its bank account. No, it needs ‘local BEE partners’ first.
The local partner, Powergroup SA, was formed less than a year before being awarded the partnership with Karpowership. Powergroup’s energy credentials are questionable, and some of its directors have concerning but not unexpected political connections.
And now the infighting has begun.
Karpowership is apparently unhappy with Powergroup SA’s performance in acquiring additional funding domestically, and is seeking out a different partner. Responding to this criticism, Powergroup has explained that it consists of ‘aspiring black South Africans with the requisite skills to bring the project to its current status’.
If this government were serious about ending the electricity crisis, all ‘empowerment’ requirements in any part of the electricity value chain would have been abolished, or at least suspended, back in 2008 when the crisis began. Contracts would have been awarded purely on the basis that the relevant contractor could reasonably solve the problem in the shortest span of time, at a competitive cost.
But this is not the extent of the circus that recently developed around Karpowership doing business in South Africa. It turns out that senior executives with the Turkish firm, two years after acquiring a 20-year licence from the South African government, had to find out via the news media that the government was now unhappy about the agreement’s duration and will instead seek out a 5-year contract.
This will significantly reduce the window within which the firm can get a return on its investment, but it is also fundamentally dishonest and unethical. Why would any other large enterprise seek to do business in South Africa if it cannot trust the word of the country’s government?
Squandering the most valuable asset
South Africa is Africa’s only state with ready access to nuclear power, given its generous uranium resource deposit and the only nuclear power station on the continent, Koeberg. Nuclear power is far and away the most reliable source of electricity.
Despite this blessing of providence, the South African government is doing its utmost to ensure nuclear power is not experienced as the silver bullet it can be for the electricity crisis.
Whenever nuclear power is brought up as a solution to loadshedding, one is invariably told that it is ‘too expensive’ or ‘takes too long’ to bring online. This is an unfortunate sentiment, given how great the expense of loadshedding has been to the economy and the duration of the crisis over 20 years. If Eskom had invested in the construction of additional nuclear capacity 20 years ago, or even 10 years ago, it would likely have been ready today.
Instead, Eskom is desperately attempting to have Koeberg’s operating life extended by having its generating equipment upgraded and replaced. To top off this meagre gesture, Eskom’s preferred contractor, a French company that put in a more expensive bid than its American competitor but came out on top regardless due to vague ‘strategic considerations’, has dropped the ball. This is in addition to Eskom’s own mismanagement and incompetence.
Significant delays have taken place, which risks the National Energy Regulator (NERSA) potentially being legally required to take Koeberg’s units offline in July 2024.
The fingerprints of government are all over this blunder, beginning with a failure to exploit South Africa’s nuclear resources to the maximum, or alternatively allow the private sector to do so without undue interference. NERSA could also have been more proactive, rather than simply holding the threat of closing Koeberg over Eskom’s head, which is now causing panic.
Solving the crisis means no longer taking government seriously
These three stories from the past two weeks of our two-decades-long power crisis are a small taste of how the government continues to fumble its response to a relatively simple problem: South Africa, one of the most coal- and uranium-rich countries in the world, requires more electricity generation.
But the desire of government to keep total control of Eskom through ‘unbundling’ rather than privatisation means the utility will never respond with the speed of a competitive enterprise.
The unending desire for ‘empowerment’ (an unfortunate euphemism for ‘corruption’) means foreign firms like Karpowership will never be capable of simply investing in South Africa and assisting with electricity deficits.
The burdensome regulations around nuclear power, including a virtue-signalling desire among political elites to invest only in intermittent energy, stands to close down South Africa’s most reliable source of electricity in the midst of an electricity crisis.
Politicians and civil servants will not be the vehicles South Africa uses to escape this quagmire. It will instead be ordinary communities and enterprising individuals in the commercial realm who will end the power crisis. We can speed up the process of recovery significantly by putting a stop to the state-centrism we are all guilty of adopting in our discourse and thinking around electricity.