Wednesday, February 24, 2010

Alternatives to hiking electricity prices?

" if there has never been any alternative, and as if South Africans should 'shut up and deal with it'..." Manie van Dyk, DA MP

Despite what NERSA and the SA Government may have you believe, there were actually alternatives to hiking electricity prices. Broadly speaking, there are three sources from which revenue could be raised to finance Eskom's expansion needs. These are:

    1. Consumers of electricity, through price-hikes
    2. Government, through tax revenue or guarantees on Eskom's debt
    3. International capital markets, by selling a majority stake in Eskom to private investors
I am in favour of the last option. I don't see any value to society in maintaining ownership of Eskom that could not be achieved through mere regulation and tax of a privately-owned electricity producer (or producers, preferably). This view echoes the statement of Chairperson of Business Leadership South Africa (BLSA) Bobby Godsell on the nationalisation of the mining industry:

"Why would you want to take massive State resources to own something that you already regulate very comprehensively? ... I would be asking what public good is achieved by taking away ownership."
I would go further by saying that it is in society's best interests, but perhaps not Government's, to privatise Eskom entirely. Such privatisation would amount to splitting Eskom into its various business units and selling the government's share.

Not only does the SA Government need the revenue to pay off its rising debt levels (and future revenue that will inevitably be pumped into Eskom's future failures), but it has a moral obligation to reverse the wealth accumulation of the state under the previous regime (for a reference, see Julian's first comment to this article).

This privitisation process amounts to the liquidation that any private firm would undergo, had it performed as poorly as Eskom over the last decade. In addition, the process would provide an opportunity to restructure Eskom into several smaller producers, reducing the extent of the unfair monopoly Eskom has over both electricity production and distribution in SA.

The DA's Manie van Dyk expresses a similar opinion in today's feature article:

The problem with this is that there was an alternative. Introducing Independent Power Producers (IPPs) would bring with it the efficiencies, technological advances and, most crucially, hugely needed capital funds, that our electricity production sector is currently crying out for. Now we are in a situation where, although the Minister of Public Enterprises and President have both recently acknowledged the potential of IPPs, the state is trying to go it alone on funding when faced with a capacity crisis of epic proportions. The ANC's hands remain tied by their obsession with a state-centred "developmental" approach, which in large part precludes the raising of capital for infrastructure via markets. The ANC government is now trying to raise nearly R400-billion for infrastructure development, in the space of just a few years, via a series of ad hoc tariffs, instead of by means of long-term loans or by securing capital via the markets. That, we believe, is simply an untenable approach.
Simon Spicer, CEO of BLSA, rightly points out that the health of the SA economy is to a significant degree dependant on the health of key state-owned enterprises. The price hikes are really worrying because even the SA Reserve Bank (which is still independent, thankfully) cannot predict the effect they will have on inflation. According to today's article by Dion George, DA MP:

What we do not know, and herein lies significant risk, is what the second-round effects will be. The Reserve Bank confirmed that even its own sophisticated models have difficulty in predicting the magnitude, especially of a continual shock over the next three years. At the NERSA hearings, the case was simply put that our economy cannot withstand an increase at the rate of 35%. 24.8% does not make the pill any easier to swallow. It will go down, but at the opportunity cost of slower growth and unquantified second round effects. The Reserve Bank forecast GDP growth at 2% for 2010/11 and National Treasury forecast 2.3%, presumably having factored in the tariff increase - but we cannot be sure.
Inflation, and how the SARB will respond to inflation, are now the most important factors affecting future economic growth in SA. Remember when the SARB hiked the repo rate up and up and up in 2008, in response to inflation? That piece of monetary policy arguably sent SA into recession long before the financial crisis turned into an economic crisis.

The SA repo rate since 1999:


  1. So the government argues that it needs to remain in control of Eskom etc. so it can use them to further its developmental goals. Then it asks for 35% annual price hikes that damage the economy and hits both rich & poor consumers. Anyone heard of cognitive dissonance?

    Eskom price hikes a betrayal of the poor - SACP
    On this point, gentlemen, we can agree.

  2. Would selling equity necessarily not result in price hikes? Surely for the sale of capital to work investors need to know that the resources pumped into Eskom will pay off financially. Wouldn't that entail price hikes? Anyway, I am not an economist so I may be completely wrong.

  3. @Dave absolutely. By privatising Eskom the state would lose its unfettered control over electricity tariffs, which may result in price hikes anyway.

    However, there are some mitigating factors:

    1. Eskom could be restructured to lose its monopoly over power generation and distribution, mitigating any price hikes.

    2. The Government would not lose its ability to regulate electricity prices through NERSA, even to the point of fixing such prices.

    3. Any price rises through a private, competitive market process would have been determined by the privatised firm to be more efficient than further debt/equity finance.

    4. Any price rises through a private, competitive market process would make it easier for competitor producers/distributors to enter the market by undercutting the market price.

  4. @Dave - Basically Eskom is opting to fund future electricity production by charging current consumption. Remember that a large part of the cost of production is the initial capital cost of the power plant. What Eskom should be doing is matching future electricity production costs with future electricity consumption - building plants now using outside capital, and then charging future consumption to pay for loan repayments or shareholder dividends.

  5. Yes, Eskom is raising money for investment in production of future electricity by charging customers more now. From a social justice perspective, future electricity consumers should pay for their own electricity. Why should I pay for future generations' electricity?

    A private company would for the most part issue additional shares to raise the capital to finance such an expansion. Since Eskom only has one shareholder (government) and that shareholder cannot cough up more capital, all SA electricity users have to suffer.

    Effectively, SA electricity consumers are 'bailing out' Eskom for its shoddy management in the past.