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Why ‘Eskom worked well in the past’ is a fundamentally bad argument

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    Nat Quinn

    South Africa’s electricity crisis is primarily a crisis of monopoly and regulation, not a crisis of corruption and incompetence.  

    Corruption and incompetence are foreseeable risks lurking in every enterprise, but when paired with monopolistic institutions, they have the potential to degenerate into a social existential threat. And it is because these risks were eminently foreseeable a century ago that ‘Eskom worked well in the past’ is a fundamentally bad argument.

    Taking the risk on behalf of millions

    In his article for the journal Cabo, Institute of Race Relations Council member and economic historian Nicholas Woode-Smith argues that corruption and mismanagement were not the main reasons for Eskom’s failure in the democratic era.

    Eskom’s ability to charge market prices for its product was severely restricted from the beginning. These prices ‘were only allowed to cover costs, loan repayments, and a small amount to go towards reserve funds.’ The profit motive, in other words, was denied to Eskom, disallowing it from ever taking advantage of the disciplining forces of market competition. Eskom was not permitted to receive direct public funding, but was also not allowed to charge a market-rate for electricity, creating a dire combination.

    1922 was not a pre-corruption or pre-incompetence era. It is pure fantasy to suppose that the architects of the Electricity Act, which began the process of giving Eskom’s predecessor ultimate power over the electricity affairs of all South Africa, did not comprehend that a corrupt or incompetent government could one day gain hold of this monopoly, strip it bare, and leave the millions of South Africans who depended on electricity in darkness. They understood that this could happen, and on behalf of millions, they decided to take that risk.

    We are living with the predictable consequences.

    Woode-Smith explains how Eskom’s establishment in the 1920s was a result of devious interaction between government and private mining interests, making it a clear instance of so-called ‘crony capitalism’.  The mines, effectively, wanted cheap electricity, and wanted the government to keep it cheap through regulation. The market price of electricity was quite irrelevant to corporate and political decision makers, and appears to remain irrelevant today.

    Eskom was only able to pull it off for as long as it did because South Africa had cheap and abundant coal and labour, explains Woode-Smith. Nonetheless, Eskom failed to meet demand in the 1950s, leading to the construction of new power stations. By 1975, the grid had surplus capacity.

    Most people reading ‘surplus capacity’ would think this is a good situation. However, surplus is often wasteful.

    One of the most significant pitfalls of communism, after all, is that central economic planners, in their wisdom, miscalculate market demands and end up producing useless junk at the expense of necessary goods. Rather than creating excess capacity, in other words, Eskom – had it been responding to market forces – could have utilised its limited resources on other necessary expenses.

    When entities like Eskom are not allowed to be influenced by market forces, primarily through price signals, they often produce surpluses or shortages. Market pricing ensures that actual demand is supplied, and that supply expands in response to demand. ‘[A]s a monopoly, Eskom cannot adequately account for shortages and surpluses, as it has no ability to gain information from price signals, consumer actions or competitors; it is effectively blind to the market.’

    In 1984 already, explains Woode-Smith, the De Villiers Commission of Inquiry was recommending that Eskom act in a fundamentally unsound way, by ‘conserving electricity without raising prices’, (a  ridiculous notion) and encouraging ‘increased involvement by government’. The Commission also felt Eskom’s monopoly was beneficial.

    Woode-Smith rightly notes that Eskom providing the ‘cheapest electricity in the world’ was nothing to boast about.

    These electricity prices were not market-related – they were arbitrary and artificial. And artificial pricing is never sustainable. The utility was forced by government to keep prices low and cut costs throughout the 1980s and 1990s, rather than responding to reality.

    Today, Eskom is playing catchup with its calls for astronomical tariff increases, consequently not allowing consumers to gradually adapt to higher electricity prices as they would have done had Eskom been allowed, from the beginning, to adopt market prices.

    Friendlier relations between the National Party (NP) and the African National Congress (ANC) in the 1990s, explains Woode-Smith, led to plans for privatisation of Eskom  – like the Iron and Steel Corporation (Iscor) – to be shelved.

    The NP never believed in privatisation – its economic programme was always one of State-led development. Instead, its overtures to privatisation were to deny important State assets to their former ANC enemies. When these enemies became friends – leading ultimately in 2005 to the two parties becoming one – the impetus for privatisation disappeared.

    Nonetheless, the so-called national democratic revolution remained high on the ANC’s agenda, and Eskom was not exempt from the revolution’s scope. Political appointments ensued, as the ANC tried to gain control of the ‘commanding heights’ of the economy.

    While this all was happening, Eskom continued to lower the price of electricity without market influence.

    When pragmatists in the ANC government flirted with privatisation in the late 1990s – abandoning plans for government to build new power stations at the same time – the left wing of the Tripartite Alliance rejected it, rightly fearing there would be price increases. Privatisation was abandoned, and alongside the creep of corruption and mismanagement, South Africa’s fate was sealed.

    ‘No aspect of Eskom’s and South Africa’s electricity policy really reflected sound economics under any conception’, concludes Woode-Smith.

    Risk must be decentralised

    Had Eskom not been in government hands, the ANC’s revolutionary, corrupt, and incompetent political appointments would not have been a problem. Or, even if Eskom remained in government hands, but was demonopolised, it would, at least, have been a lesser problem, as private providers of electricity would have been able to pick up the slack.

    Of course there would have been price increases had Eskom been privatised or private providers allowed to gain dominance of electricity provision. The artificially low price of electricity that Eskom was charging was a figment of fantasy, not reality, expressing itself in the real world.

    Corruption and incompetence are features of life. Public or private, big or small, there will always be some degree of corruption and incompetence in every context imaginable. These are risks to manage. But the risks are significantly exacerbated under conditions of centralisation and monopolisation.

    When a necessary economic good or service, like electricity, is shielded from market forces and competition, the solvable and reparable problems of corruption and incompetence become a crisis of unimaginable scale.

    Eskom’s greatest weakness, then, has always been part of its basic constitution. The ANC did not introduce this weakness – they exploited it. Monopoly and overregulation, not corruption and incompetence, are therefore the real problem.

    We all want Eskom to root out corruption and incompetence, simply because the reality we are faced with is that Eskom is, in fact, a monopoly. While all our eggs should not be in this one basket, they in fact are.

    For a long time still, even if Eskom is substantively demonopolised and the sector deregulated, the utility will be providing a significant share of our electricity capacity. But if our involvement in the discourse about the electricity crisis is limited to corruption and incompetence, we are missing the fundamental point.

    Risk must be decentralised. One is playing reckless, existential games when an entire society’s well-being is made dependent on the good morals of a handful of middle and senior executives at a single company.

    Whether it’s water, food, electricity, the internet, the construction of housing, or the manufacturing of clothing, there must be decentralisation. Imagine in how much trouble we would be today if there existed a monopolistic State Agriculture and Food Corporation, even if it functioned acceptably well during the previous century.

    Privatisation and deregulation are therefore not simply ‘neoliberal’ policy preferences. They are imperatives.

    Embrace the imperfection of the free market

    It is not only Eskom’s monopoly that has made corruption and incompetence phenomena that threaten South Africa’s very future, but also overregulation in the electricity sector.

    Even if Eskom had its monopoly revoked – as the formal desire by government to purchase power from private, renewable sources seems to indicate it has been – if environmentalist zealots like minister Barbara Creecy are empowered to reject a proposal to build coal or nuclear power plants because they pose some risk to the environment, we would be in the same boat. If solar panels and wind farms are all that government allows the private sector to utilise, then Eskom’s monopoly will remain unchallenged.

    What is necessary is significant deregulation. Private enterprises and communities must be allowed to generate power for themselves and their customers from whatever source, subject at most to common sense regulations that stop them from doing direct harm to the interests of third parties.

    The free-market economy, of course, is not a sentient or conscious being. It will not go out of its way to solve all our imaginable problems. The market economy is nothing more or less than an expression of the economic decisions and preferences of all economic actors: everyone. The market is the purest expression of democracy man has yet been able to devise.

    If South Africans desire a green economy, then this will find expression in only offering their support to power companies that exclusively use renewable sources of electricity. If, however, this is not what South Africans want, then they will likely support whichever electricity providers are able to supply them the best and cheapest power.

    But above all, the market economy is a fundamentally decentralised risk model. Even if Eskom is demonopolised and privatised, and all five or ten of its successor private companies provide expensive and incompetent service, it would be a preferable option to a ‘well-run’ monopoly. Because if one or a few of these private companies fail, the whole economy and society will not fail at the same time, which is the very real risk we have with the monopolised Eskom.

    It is important for the rational and reasonable participants in South Africa’s public discourse to abandon the argument that ‘Eskom worked well in the past’ and that we simply need to root out corruption and incompetence. This is only one part of the problem. The far more significant threat to eliminate is the stranglehold that the State has on the electricity market.

    Why ‘Eskom worked well in the past’ is a fundamentally bad argument – Daily Friend

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