BEE and Eskom blackout: A total eclipse of the brain
___STEADY_PAYWALL___
The deepening crisis at Eskom has left the country scrambling to find answers. We are slowly getting answers, some to questions we didn’t even know to ask, but the questioning needs to go further below the surface. South Africa needs to ask questions like a toddler to get to the bottom of it all.
Why is Eskom in trouble? Because it has high operating costs and it cannot meet its debt obligations. Why? It’s ambitious programme to build two big power stations has incurred substantial cost overruns and technical faults. Why? In part it was flawed from the beginning with a small bidding pool, meaning it was likely not cost competitive from the start. Why? There was political meddling. Why? Chancellor House. Why? Contractors needed to have a black partner in order to secure contracts. Why? BEE.
It is difficult to convince people to travel down this line of questioning, the closer one gets to the subject of BEE the more it resembles going down an abandoned mine shaft. The further one probes the darker it gets, people find it difficult to see or think clearly as panic sets in, the air becomes thinner and many lose their voice, while others are eventually consumed by conspiracy as they take more interest with the motives behind the exploration than the exploration itself. A complete mental blackout.
For those who continue to ask ‘why’ the policies of Broad-Based Black Economic Empowerment and affirmative action are soon revealed as a common denominator across many of Eskom’s greatest challenges including the failure of the Medupi and Kusile stations, its coal supply problems, and loss of skills. Race-based policy has been used as a vehicle to secure tenders to the benefit of political elites, to raise procurement spend, and to push out experienced technocrats.
Some will say it is not the intention that redress policy should be the conduit of corruption and the hollowing out of institutions. And indeed, over the years as BEE became BBBEE the intentions have become nobler if that is even possible; which of course is to say nothing of the policy’s susceptibility to abuse. Scorecards have been tinkered with to give recognition to broad based ownership, skills and enterprise development. However, those settled on self-enrichment care little for policy intention; it matters not that the policy is intended to benefit the many and not the few, if the policy design lends itself to abuse then the opportunity to do so will be exploited.
In his book, Paying for Politics: Party Funding and Political Change in South Africa and the Global South, Anthony Butler argues that “BEE offers a simple and coherent ideological message with which the liberation movement’s left wing has not even begun to compete: “It’s our turn”. It is BEE that has provided a vehicle and a respectable justification for the injection of money deep into our politics. Until the alliance recognises and confronts that reality — confronts its own addiction to short-term gratification — the prospect for a cure will remain remote.”
BEE and design flaws at Medupi and Kusile
Design and technical faults at Medupi and Kusile are a critical factor behind the rotational blackouts South Africa is currently experiencing. Eskom COO, Jan Oberholzer, has placed the blame at the feet of Hitachi, the contractor behind boiler contracts at the two coal-fired power stations.
A cursory glance at the history reveals that the Medupi contract had only two bidders to supply the boilers, and the Kusile boiler contract was awarded to the Hitachi consortium without a further tender. Alarm bells were raised in various quarters including by then leader of the Democratic Alliance, Helen Zille, about ANC involvement. In 2015 the US Securities Exchange Commission revealed that Hitachi “directed Chancellor to help Hitachi win reconsideration of the boiler component of the Medupi power station contract”.
In any case it is common knowledge that a joint venture was set up between Hitachi Power Europe and Chancellor House, called Hitachi Power Africa, which would enable Hitachi to secure contracts by helping it to meet black empowerment criteria. Hitachi succeeded in securing the contracts- as for Chancellor House, the ANC’s investment arm, it received a handsome return for its efforts; approximately 5 000% return on its initial investment.
BEE and coal supply
In early 2018 EE Publishers reported that it had come to their attention that Eskom was facing coal supply challenges.
The summary is that years of lack of investment in Eskom’s tied collieries led to a decline in the volume of coal available to Eskom from these mines. Eskom’s approach to addressing the shortfall was to contract with emerging coal miners on short term contracts.
Despite higher costs, Eskom justified the procurement from non-tied miners on the need to increase diversity and facilitate black economic empowerment (BEE) in the coal mining sector. EE Publishers reports on speculations that “the intention would be to have lucrative coal supply and transportation contracts placed with business associates, friends and family at inflated prices, using BEE as a cover.”
What is true is that in 2013 Malusi Gigaba said, “At Eskom, we are working on a programme for Emerging Coal Miners that will change the empowerment game in the mining sector, which could lead to Eskom procuring 50%+1 of their coal from black miners by 2018.” While the original mining charter required 26 percent black ownership, Eskom’s contracts imposed an additional ownership requirement; its coal suppliers had to be 51 percent black-owned.
In a strange revision of history Jabu Mabuza, chair of the Eskom board, recently insisted that Eskom never had a policy to procure from black-owned suppliers. The bizarre clarification comes much too late: mining houses such as Anglo American and South32 divested from the domestic coal sector ostensibly off the back of this policy.
Wescoal Holdings, in particular, underwent a bruising episode where its CEO and founder, Andre Boje, relinquished control to enable Wescoal to have a competititve edge in South Africa. Now in just one throw-away line, it seems the policy was just the figment of over-sensitive investor imagination.
Race-based affirmative action and skills
Eskom has experienced a skills carnage for many years, and the long spectre of race-based policies has never been far from the crime scene.
A decade after the skills shortages plaguing Eskom at the time of the 2008 financial crisis, it still cites ‘people issues’ as one of its major concerns. This is startling for a company where the staff complement has increased by almost 50% in the last 10 years. As recently as 2015 Eskom was talking about reducing the number of white engineers by 1 081 and white artisans by 2 179 in professional and mid-management positions in order that the utility could more accurately resemble the demographics of the country.
Estimates vary but Eskom has lost thousands of skilled personnel since 1994, and often paid a premium for it via costly severance packages. Many were taken up by individuals who could smell the blood in the water and for whom retirement or employment abroad presented a more attractive offer than sticking around for the looming apocalypse.
The choice between retaining mostly white expertise and developing a future cohort of talent was always a false dichotomy. The instant gratification of a radically transformed workforce came at the expense of a smooth transition which might have in part ensured that Eskom had the personnel capable of guiding it through ambitious projects and the disruption occurring at both the local and international level due to decarbonizing and the rise of renewables.
Malaysia’s Bumiputera policy
Perhaps because race-based policies have become such a hegemonic idea in South Africa, and perhaps too because ‘context’ is used as an excuse for narrow South African exceptionalism Malaysia and its ethnocentric redress policy have received limited attention in South Africa.
In the early 1970’s after nationwide protests between the Malay and Chinese populations the government of the day introduced the New Economic Policy (NEP) giving Malays (‘bumiputera’) preference in almost all spheres of the economy; cheaper housing, access to scholarships, government contracts and shares of listed companies. The vision in 1971 was that in two decades Malays, who then accounted for 53% of the population should control 30% of wealth. At the time Chinese and Indians in Malaysia were wealthier and better educated; the situation of a dispossessed majority was clearly untenable, and the NEP was the answer.
Today Malaysia’s population is two thirds Malay, and the Malay continue to be disproportionately less educated and less wealthy compared to minority populations. In addition, despite bumiputera policy being applied by big business as well as government-linked companies, after four decades bumiputera businesses are largely uncompetitive and cannot survive without government intervention.
Jayant Menon, Lead Economist in the Office of the Chief Economist at the Asia Development Bank, writing for the Institute for Democracy and Economic Affairs says that the bumiputera policy “instead of engendering a new class of self-reliant and independent Bumiputera enterpreneurs, we see much of the opposite occurring: a rise in crony capitalism, state-dependence, regulatory capture and grand corruption.”
There almost was a turning point for Malaysia in 2009. The Prime Minister, Najib Razak, tasked a group of economists with developing a new economic plan. At the core of the recommendations was replacing racial preferences with need-based policies ‘that would help any Malaysian, regardless of ethnicity.’ However, the idea was stillborn in the face of vested interests.
Now with the election of Prime Minister Mahathir Mohamad there is renewed hope that Malaysia will see the back of a policy that has hobbled progress for the poor and disadvantaged. In July 2018 the government announced that it would ‘review the decades-old affirmative action New Economic Policy (NEP) to align economic policies with needs and not race.’
Prime Minister Mahathir said there would be no more “easy contracts” to Bumiputera companies to sell even if it means losing support in the next general election. Mahathir was quoted in The Straits Times as saying, “although there is a possibility of the government being ousted for this, it's okay.”
Conclusion
Eskom has myriad challenges: an ageing generation fleet, poor maintenance, loss of skills, coal shortages, municipal debt etc. And maybe they would all be present in the absence of race-based policy. But the counterfactual is often unknowable. What we do know is that BEE and affirmative action have too often been used as the vehicles of choice to facilitate corruption and patronage networks in South Africa. If we care about redress and creating opportunities for all then we must be prepared for a national conversation about empowerment policy where there are no holy cows.
Many understand that generally increased competition leads to better outcomes; competition in policy in South Africa right now is no less important as competition in industry. There should be no idea that enjoys a protected monopoly. It would do no harm to keep watch of Malaysia and President Mahathir with keen interest, perhaps if those left out by the bumiputera policy succeed and find their voice- in South Africa we will eventually find ours.
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