Fixing the government’s power mess
I have advocated turfing out the government whose national socialism got us into this power crisis. It is a grave crisis, after all, which will probably cost this country most or all of its economic growth, all its capacity for job creation, most of its capacity for heavy industry and manufacturing, all the central bank’s admirable work to keep price inflation low, all the treasury’s admirable work to pay down fiscal deficits, all the investment credentials painstakingly built up in the face of skepticism and fear, and all the growth in small- and medium-sized businesses that would have formed the bedrock of our economic and employment growth. I used to be optimistic about our ability to host the 2010 World Cup, but no longer.
In any sensible democracy, such a disaster would precipitate not only a swath of resignations and firings, all the way to the top, but the collapse of the government and its banishment to the electoral wilderness for years to come. That is what should happen here. The ANC used to have a moral right to rule. It has forfeited that right, by failing both its own constituency and the electorate in general, in the most serious fashion.
I haven’t however, advocated an alternative, and will continue to leave such a decision open for now. I think there is space in South Africa for a new party, one that is committed to free people and free markets, rather than paternalistic and unrealistic “government service delivery”. One that is economically conservative but socially liberal, and represents the true non-racial ideals that define the hopes and dreams of ordinary South Africans.
That said, it is worth perusing the proposals made by the Democratic Alliance to address the energy crisis. Although I remain of the opinion that alternative, green energy sources are too expensive and inefficient for a developing economy, and would view their proposals along these lines with some skepticism, we may have no option given the circumstances. The point about Eskom’s monopoly in particular is well made and well worth heeding. It’s no coincidence that the worst obstacles to South Africa’s development is that some sectors are dominated by monopolies and cartels, whether they’re state-owned or state-protected private companies.
Here are some key points:
- Diversify energy sources — in particular, expand solar water heater and wind power projects.
- End Eskom’s monopoly, not only in generation, but also as purchaser of power. Remove any obstacle for small and independent power producers to generate and sell electricity, not only to Eskom, but to any other company or individual wishing to purchase power.
- Improve funding, both from the budget surplus to bolster Eskom’s traditional power projects, and by exploiting international funding avenues for alternative energy.
- Fix human resources policies to focus on skills, not politics, and stop paying massive bonuses to non-performing managers.
- Make generators tax-exempt and tax-deductible, to save at least some of the businesses most critically affected by the power crisis.
- Stop exporting power to neighbouring countries.
- Improve regulations that help consumers minimise their demand.
- Solve the drain on Eskom caused by non-payment and illegal connections.
I’m not convinced by calls for increased regulation and mandatory measures (though we may not be able to avoid them, temporarily), and I’d add a call to deregulate electricity prices all along the supply chain, especially if the DA is hoping to attract private energy producers into the market. Still, these proposals would do much to change the failed policy directions that the government has followed for over a decade.
More on these proposals over at Moneyweb.
Eskom always was a natural monopoly with a social conscience, it produced the cheapest electricity and delivered socially benefiting electrification projects.
A natural monopoly increases efficiency in proportionately to its increase in size. As long as this cost benefit is passed on to the consumer, (which it was through price/unit), there is no justification for ending its monopolistic status.
Social electrification projects are essentially overheads that can only be financially borne out by massive quasi-government companies. ESKOM has a great track record historically in this department as well.
Smaller private companies have insuficient resources and even less profit incentive to deliver these social projects.
Let us be clear, monopolies have the potential to be exploitative, but it is not compulsary. History shows ESKOM to have been the best kind of natural monopoly.
Eskom monopolistic status did not contribute to this present crisis.
This crisis is directly attributable to government interference in the day-to-day free market operation of big business. Politicians used ESKOM policies, employees and even international contracts for their own portfolios. They all thought electricity was a by-product of their influence.
So, whilst I may agree that some of your suggestions have merit, it is compulsion to act on someone else’s demands that has dropped ESKOM and SA right in it.
Dare I say, without the imposition of political agendas in Eskom’s engine room, SA would still have enough of the cheapest electricity in the world and sufficient skills to maintain it.
So zero for two from me on the agreeometer.
ESKOM should remain a natural monopoly with a social conscience, and the only additional regulation imposed should be one which limits government/political interference.
Left to its own devices ESKOM was a world class operation, beneficial to SA’s economic growth,look what happened when politcal agendas compelled it to run ‘better’ for the good of the country.
Which consumer or even employee amongst us would rather have the ESKOM of today over the ESKOM of yesteryear?
I think we can treat this question as rhetorical.
No, IVO I disagree with you, it is not about what must be done in the future, it is about what must be undone in the future.
Put it back to before it was broken, we know that setup works. Restructuring to some third solution, that may or may not work, is just more economic stress than what SA as a country can bear right now.
Exploitative pricing isn’t the only risk with a monopoly. With a state-owned, price-controlled monopoly, another risk is that they don’t have an incentive to supply demand and don’t get price signals. Another risk is that they can act only with the say-so of government. Another risk is if they mess up for whatever reason and fail to supply demand, consumers can’t go somewhere else to satisfy their demand.
What’s the use of social do-goodery and low prices if there isn’t enough power to sell at that price? It’s a fundamental failure of central planning. True, central planning could work, if it’s done well, but unlike a competitive market, central planning depends on it being done well. If it’s not done well, people have nowhere to turn.
And going back to a central planning model that was only good enough for 10% of the country isn’t going to solve the problem, or remove the risk of the exact same thing happening in future.
I disagree completely Phil, and I think you have fundamentally misunderstood the nature of the situation.
First, Eskom is not a natural monopoly by any definition of the term. It is a wholly government-owned entity, with most of its capital expenditure having been funded by taxpayer money and legislation in place to protect it from any competition. It’s a monopoly because the government said so, and there’s nothing natural in that.
Second, the low price of electricity was artificial and unsustainable. It came about because the National Party overspent wildly on power generation capacity in the 1970s (wasting billions in taxpayer money in the process) only to face a massive power surplus after the economic stagnation of the 1980s. This is the surplus that the ANC and Eskom have lived off until now, in the apparent belief that it would never run out. At the same time, almost nothing was spent on building the new power plants that we desperately needed or on properly maintaining those that existed, which is why the price of electricity was low.
Had the price been allowed to rise by 10% or so a decade ago in order to fund the necessary expansions, today we’d have sufficient power for a reasonable price. Instead, not only do we not have enough power, but the expensive last-minute scramble to build stations will result in a 14.2% price hike this year followed by at least four similar increases in the coming four years. The end result is that we’re getting screwed over both ways; so much for the low electricity and social conscience myth.
A free market in power generation, as Ivo suggests, will result in the most efficient supply of power and the lowest prices in the long run. Companies will actually be forced to perform or the market will punish them. This differs from the current situation, where the ANC and Eskom can commit the most heinous screw-ups without the resignation of a single person.
Truth be told, I’ve never understood the aversion most South Africans have to privatisation and the free market. You’d think we’d all be tired enough of socialist government policies and government monopolies after the debacles with Telkom, Eskom and a dozen others, but it seems we’re suckers for punishment.
Very well said, Darren. Now you’ve gone and depressed me all over again…
Performing any business task poorly has a consequence. This is a given in the nature of any business, not just limited to ESKOM.
I take your point about there being no alternative supplier, but bear in mind :
1.) This mess was directly brought about through government delaying ESKOM expansion to see if any independant power producers stepped up to the plate, they didn’t.
2.) The main reason they didn’t was that alternative suppliers could not compete with ESKOM’s efficiencies and margins.
Furthermore, Eskom predicted for itself, 10 years ago that it would run out of generation in 2007.
Pretty much on the money, I’d say.
Lets recap:
So you had a natural monopoly that was efficient, would have become more efficient through further expansion, had the lowest prices in the world,and a spot-on expansion plan.
Then the government then decided to introduce competition to drive efficiency, and introduce alternative suppliers. It aimed to achieve this by curtailing ESKOM’s modus operandi.
This directly resulted in todays crisis, nay disaster.
It is not that central planning by ESKOM itself could work, it did work.
Until the government decided to fix that which wasn’t broke. This was based largely on a theoretical ideal much the same as your own.
It was this attempt to remove ESKOM’s status as a monopoly that resulted in this predicament, you are only advocating the same thing in a different guise.
Addressing your final paragraph:
I assume your reference to 10% of the country is a reference to the now other 90% of the population that weren’t previously catered for.
Two points, firstly it largely through ESKOM’s social projects then, that these people are now catered for. There was no profit motive for this to be done by private industry.
And secondly, I call this a social project because in terms electrical usage in SA this extra domestic supply fairly negligable. Costly infrastructural outlay for very small revenue through usage.
I’d estimate the entire SA domestic usage to be less than 15%.
So your final point doesn’t hold water as the other 90% is not only electrical chicken feed in generation terms, but would not even exist if it had been left up to private companies to develop.
Come on Phil, surely you’re having us on. Did you even read what I wrote? I appreciate your willingness to engage us in debate here but again, I think you have a fundamental misunderstanding of the situation.
Again, Eskom’s low prices were not due to efficiency (it’s actually a remarkably inefficient corporation), but due to the massive power surplus it inherited combined with its reluctance to spend the money required to build new stations and properly maintain the existing network. It was artificial and unsustainable, and any idiot could’ve foreseen the current power crisis.
The Independent Power Producers, which the government supposedly invited into the market, never had a chance. That’s because they were forbidden from selling to anybody but Eskom, and they had to sell power to Eskom at the same ridiculously low price that Eskom and the government artificially maintained. They weren’t kept out of the market by Eskom’s (non-existent) efficiency, but by government policy.
And even though Eskom predicted a decade ago that SA would run out of power, it conducted almost zero planning with regards to new sources of power or their locations. The current management, who are not the same guys that made the warning ten years ago, were content to sit back and hope for deliverance from some deus ex machina. Fact is, Eskom were given the green light in 2004 to embark on a massive power station construction project, yet four years later not a single new base station has even *begun* construction. What has the company done in the past four years to justify those massive multi-million Rand bonuses it awarded to its executives?
You keep mentioning the country’s low electricity prices, but what you fail to realise is that those were symptoms of the problem, which was a lack of spending on capacity. Besides, those low prices are a thing of the past now with Eskom’s planned price hikes and consumers saw little benefit in any case, as the low prices were reserved for industry only. SA consumers have long paid electricity rates comparable to or higher than those of consumers in other countries. And now we’re looking at a 30-40% price hike by 2013…
Lastly, the claim that private industry would not have supplied power to the poor is ridiculous. Not only does it go contrary to proven example elsewhere in the world, but it doesn’t make economical sense. Domestic consumers account for 17% of electricity demand in SA, but they are a proportionately more lucrative market, paying a much higher R/Kw rate than industry and mining do. It therefore makes business sense to roll out electricity services to as many consumers as possible, even poorer ones.
@ Darren Regarding the definition of a natural monopoly, you imply that per definition this is ownership dependant.
Sorry, but a national-grid is a textbook definition of a natural monopoly, the efficiency of the entire grid system is raised by the adding an extra bit to it. It has nothing to do with ownership. That is the definition of a natural monopoly, ever increasing efficiency through expansion.
In contrast, generation is not, but the many supplier economic model would dictate that as supply exactly matches demand the price is set by the least efficient (read highest cost) generator on the system.
IOW because of the instantaneous market it is true cartel also regardless of its make up.
When an entity is owns many generators it is privy to the production costs of the various generators and can cross-subsidise cheap and expensive generation.
This is stark in contrast to separate entities which must recover costs on a per generator basis.
I am interested to hear your proposals as to how the customer intends to punish the supplier in this instantaneous inelastic goods market.
You say the present price is artificial, I agree, this is one of the many external ESKOM interventions that should be within ESKOM remit. However, before the regulator and their price setting mechanism. ESKOM, factoring in and funding it’s own previous surplus expansion, had electricity prices amongst the cheapest in the world.
The rest of your post and mine is not mutually exclusive, bar that I draw a distinction between government-owned and government controlled.
I prefer government-owned because of the tendency toward a social conscience, but I want government out of the engine room.
Pure freemarket privatised capitalists will never supply Sipho’s hut on the Tintwa Trail with lights.
I say Sipho as a SA’n has a right to benefit from the exploitation his country’s natural finite resources.
@ Darren, no by the time I replied I had not read what you wrote.
Sorry, but I did not even realise you had entered the discussion.
Likewise when I replied to you I had not read what you have just written in your second post.
Phil, I agree that a national grid can qualify as a “technical public good” (a term I prefer to “natural monopoly”, which I’d rather apply to something like eBay). I disagree, however that economies of scale in generation justify it being a monopoly too.
Reminds me of the old question: What is more efficient, one railway line between Johannesburg and Cape Town, or two? The answer the government would give, on the basis of capital expenditure, duplication, and economy of scale, is one. The correct answer, on the basis of prices charged to freight customers and passengers, is two.
I made this distinction between the national grid (transmission), a natural monopoly and generation, a true monopoly or true cartel,(if it is divided ownership).
Transmission lines are not analogous with railway lines. I will expound technically on this, if you wish, but suffice it to say, the per/unit tranmission losses would halve if the available tranmission paths doubled.
There are other technical advantages.
What is having a “moral right to rule”?
The moral right to rule, in a democracy, derives from the consent of citizens, or the social contract, if you will. By this agreement, the people sign over some of their liberties to a government, and grant it certain rights (such as the power to tax). In return, they expect a given set of services (such as common defence, independent justice, or social services) to be performed. If those services are not performed, because of incompetence, negligence or willful disregard, the government is in breach of the social contract, and consequently loses the moral right to rule.