The solution to Eskom is clear


OUR directors at the Free Market Foundation South Africa have written extensively about what ought to be solutions to South Africa’s troubled state-owned electricity producer, Eskom.

They have argued the only way to curb power outages is to liberalize South Africa’s energy industry – to privatize Eskom and open up the market to encourage competition. I think that’d work.

The only reason why Eskom is mired in a crisis – that’s crippling our economy – is because it is owned by government.

Government exists because we taxpayers finance it – with no terms and conditions attached. Our money is taken away by force.

The portion of this money we are forced to pay also finances Eskom. So when this parastatal falters, we pay to pull it out of its mess.

The objective of the company isn’t to make profit – which is the reason why it’s been mismanaged. And now, it can no longer meet South Africa’s ever-rising electricity demand.

If you eliminate the profit motive in any business, you are eliminating the incentive for the owners to efficiently manage their business. This is what government has done with Eskom. It has guaranteed to write it a cheque no matter the mess it finds itself in. As a result, there’s no incentive for those in charge to get their act together, they have nothing to lose.

This special treatment has created an inefficient monopoly that fails to provide electricity. What’s made things worse is that the government has created barriers to entry – which has made it very difficult for independent power producers to enter the market. Consumers have been denied exposure to the market – where they may choose to whom they buy electricity.

In one of his columns for Business Day, our Executive Director at Free Market Foundation South Africa, Leon Louw, wrote “Eskom is a victim of bad policies and absurd expectations. Basic arithmetic makes it clear that Eskom alone cannot, with whatever subsidies the government can provide, supply enough electricity for prosperity. Only private investors in a deregulated market can do so.” He was correct.

Even though it is clear that government mismanages Eskom, many, including the South African Communist Party and the Congress of the South African Trade Unions, think that the company shouldn’t be privatized – in other words it should still remain in the hands of the political elite. They reason, if privatized, prices will rise and this will make life difficult for the poor.

But the rise in prices won’t be new. As Pierre Heistein of the University of Cape Town wrote in August 2014“Eskom itself has sought tariff increases of more than 8 percent. Last week the National Energy Regulator of SA granted permission for the power utility to raise its tariffs by between 3 percent and 8 percent next year.”

And again early this week, hearings into a request for an additional tariff were held in Johannesburg. Eskom has requested a 9.58% tariff hike. The National Energy Regulator of South Africa (Nersa) is expected to make a decision by the end of this month whether to grant the company’s plea.

So those who argue that prices will rise if Eskom is privatized forget that prices are rising anyway, even though the company is owned by the state.

Liberalizing the energy industry and privatizing Eskom is the solution to the power crisis we endure every day. It’s not the R23 billion injection announced by President Jacob Zuma early this year. Privatization and opening up the market will improve the service as independent power producers will be competing for consumers.

Yes prices will rise as producers need to remain profitable, but at least they will rise along with the improved and efficient service – and market competition will keep them stable. As more and more businesses enter the industry prices will decline.

Of course there are many who will not afford these market prices; but that won’t be a shock, because today as we speak, there are many who can’t afford the prices set by this inefficient monopoly. Life is becoming a misery.

The solution to Eskom’s problems is clear – government must get out of the way. It is the only way we can keep the lights on, and our economy productive. PM


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