Privatization is the transfer of a business, industry, or service from public to private ownership and control. It is the buzzword largely mentioned as the first solution to any underperformance by state owned entities (SOEs). Eskom happens to be an example of an SOE which some people would like to be privatized.
Energy has been a hot topic, and multiple countries have been struggling with blackouts worldwide. The energy sector is critical to the functioning of any economy, and South Africa is no exception. Whilst energy is a common problem worldwide, different countries have unique challenges due to their different generation, supply and demand issues. The main problem that has given rise to South Africa’s energy crisis is an undersupply of energy.
South Africa’s energy shortages are due to several factors, including but not limited to ageing infrastructure that requires modernization, insufficient investment in new capacity, an unreliable supply of coal, poor maintenance of power plants, and financial challenges faced by the state-owned utility Eskom. Between 1961 and 1991, Eskom completed 14 new power stations with an installed capacity of 35,804MW. Over the next 30 years, between 1991 and 2021, Eskom only completed one new power station, Majuba, with an installed capacity of 4,110MW. Construction of Medupi and Kusile, with a combined installed capacity of 9,564MW, began in 2007, but these power plants are still not fully operational.
The current energy crisis in South Africa has led to calls for the privatization of Eskom and a shift towards running on renewable “green” energy. However, these solutions may not necessarily be the best for the country, given its existing socio-economic problems, regulatory and corruption challenges, and other relevant factors. First and foremost, South Africa has significant socio-economic problems, including poverty, unemployment, and income inequality. Unfortunately, the privatization of Eskom could lead to further marginalization of low-income and rural communities, as private companies may prioritize profitable areas and leave these communities without access to energy. With over 18 million people living in extreme poverty in South Africa as of 2022, according to Stats SA, where the total population is estimated to be around 60 million, any further marginalization of these communities will have dire consequences.
South Africa has also faced challenges with regulation and corruption in various sectors of its economy. These problems are deeply ingrained within society to the point where corruption scandals seem to be the norm. Unfortunately, corruption has also been a hot topic when it comes to the privatization of South African state-owned companies since 2000.
The government had planned to have Eskom and all other SOEs privatized by 2004. There was talk of creating an electricity market in South Africa to be modelled on something like Nord Pool Spot, Europe’s leading power market. The market would allow for independent power producers (IPPs) to go directly to large customers and enter contracts with distributors. Unfortunately, one of the reasons this was shelved in 2004 was the potential problems with the regulation of the industry once privatization happens. The independence of regulators in overseeing the energy sector may be called into question if they are seen as too closely aligned with private companies, and corruption in the energy sector could result in private companies engaging in unethical or illegal activities.
The issue of privatizing Eskom also comes with potential national security and political risks. It has been evident that the energy crisis in South Africa is being used as political ammunition by the different parties. It is also important to note that the energy sector is critical to national security, and private companies may prioritize their profits over national security considerations, leading to risks to the energy supply.
The same issues Eskom raised of having a lack of sufficient infrastructure investment in the period of 2000 till now could potentially still occur as private companies will focus on profits over distribution. Prioritizing profitability over energy security would lead to an inefficient allocation of resources. This can result in the country not having enough energy to meet its needs or in an oversupply of certain types of energy that are not in demand.
While green energy is seen as a solution to the energy crisis, it may not be as sustainable as people think. The financial capacity to transition to 100% renewable energy is a challenge for many countries, and South Africa is no exception. One of Eskom’s major problems has been investment, and this problem still remains even when the conversation relates to green energy. One of the major pitfalls of state-run companies is underinvestment. It is very tempting for governments to divert surpluses towards social spending instead of investing in infrastructure. The government unfortunately cannot totally fund any major infrastructure developments without foreign investment. This investment is largely dependent on the optics of the country, and reputation goes a long way towards negotiating loans at good rates on the international market.
Given the existing socio-economic problems, regulatory and corruption challenges, and other relevant factors, it is clear that the privatization of Eskom and an exclusively green energy focus may not necessarily benefit South Africa. A better solution may be to focus on modernizing and upgrading the existing energy infrastructure. The government must also make the environment conducive for entrepreneurs with scalable energy solutions to frow these privately whilst ensuring that low-income and rural communities have access to energy and that the energy sector is regulated in a way that protects national security and consumer interests. This could be done through increased investment in the energy sector by prioritizing infrastructure spending and the development of a regulatory framework that promotes competition, innovation, and sustainability. Now is the time for action and not just empty promises because the decline is rapid!