SONA 2019: What South Africa needed Ramaphosa to say about Eskom

In the earliest days of ancient Rome, defaulting on your debts was very rare.

As with South African law, an insolvent Roman’s estate was divided proportionally amongst his debtors. The key difference was that, for the purpose of this payment, the debtor’s body was a part of his estate.

Disbursements went hand-in-hand (pun very much intended) with dismemberments, as the insolvent was cut into pieces and each of his debtors was granted a body part that most closely resembled the size of his respective stake in the debt.

Strange, but true.

Even though we live in more enlightened times, it is amusing to note that we haven’t given up on this last resort – as President Ramaphosa announced his plans, during his State of the Nation Address on Thursday, to break Eskom up into smaller (presumably more efficient) companies. They will, respectively, be tasked with the generation, transmission and distribution of electricity.

This is understandable. After all, it is a given that Eskom is probably the worst debtor in South Africa – even though, in most other countries, companies like SAA and the SABC would have given it a run for its money. Not that any of them have said money, of course.

Eskom’s total debt now approaches R500 billion – which puts it in a league of its own. Running the numbers reveals that this comes to about 10% of South Africa’s GDP. Obviously, that’s a lot of money – but let’s put that number in context.

If Eskom’s debt was all government had to pay, that would mean that South Africa’s debt to GDP ratio would still be higher than that of Libya, Afghanistan and Estonia. In fact, we would be hovering close to Russia’s public debt-levels, which trends around 15% itself.

Some may object – after all, the Government hasn’t guaranteed all this debt. Debt guarantees to Eskom only amount to about half of its total debt, after all.

But these ad hoc interventions by the state, in the form of bailouts, debt guarantees and so forth, serve to demonstrate one incontrovertible fact: Government will not – cannot – allow Eskom to fail.

What this means, in practice, is that setting Eskom’s allowable revenue, as NERSA is currently doing, is largely a cosmetic exercise. Should Eskom fail to achieve profitability, regardless of where rates will be set, we will still be paying for it.

It is high time we demand a better roadmap from Government – and so we should not be too easily pleased with Ramaphosa's announcement.

Just breaking Eskom up into three specialised companies will do nothing to address the underlying issues which currently cripple it – especially if each of those companies are, in themselves, state monopolies in their respective areas as well.

If they are, we should not be confused by the optics that will be employed by Government to hide the underlying rot. These new companies will be paid bailouts, as per usual. They will be granted debt guarantees from Treasury, as per usual. And we will keep on paying taxes, as per usual. But all this boils down to – in the final instance – is that taxpayers’ money will be used to keep a new set of SOE’s afloat.

It is beyond contention that Eskom is currently entirely dysfunctional. Despite producing selling no more electricity than it did in 2008, its ranks have grown with more than 13 000 additional personnel. Its revenue has swelled from R44 billion to about R180 billion. Its rates have increased by more than 250%, all told.

This, quite simply, cannot continue. If it does, there is no guarantee that the South African fiscus will survive it.

But the problem lies deeper than merely the management of Eskom in recent years, or its corporate structure. The real cause of the problem is probably the way in which the electricity sector in South Africa has been sheltered from the free market – and, with it, free market competition.

Eskom’s cost-plus contract, enshrined in legislation and by NERSA’s rate-determination methodology, ensures that it can always pass along its costs directly to consumers. In the absence of market forces, regulators can, at best, hope to control obvious mismanagement and misallocation of resources.

It is not, however, these, more obvious, problems which should most concern us – instead, we should be worried about myriad small ways in which revenue is being siphoned off for counterproductive purposes.

Obvious corruption and mismanagement have seriously wounded Eskom. But it will be the hundreds of tiny cuts caused by inefficiencies, redundancies and small mistakes at all levels of the company that will kill it.

The only way to cure the patient – or, at the very least, electricity provision in South Africa – would be to open the route for private sector participation. And, having done so, to work towards reallocating the resources locked up in Eskom for more effective purposes.

Ironically, the best strategy is likely to be more radical than anything than Ramaphosa is likely to propose – and definitely more radical than just splitting Eskom into three SOE’s.

We might need to cut Eskom into even tinier pieces and allow these smaller parts to be sold to private power producers. After all, it might already be too late to save Eskom – but its power stations and infrastructure will still exist.

It seems the Romans had the right idea.

Strange, but true.

Daniel du Plessis is a legal analyst at Sakeliga, an independent business community.