Unbundling ESKOM is a misguided response against economies of scale

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FILE PHOTO: The City of Cape Town said that they are doing everything possible to move away from sole reliance on Eskom for their energy needs.

A decision to unbundle a company always comes as a result of an acknowledgment, based on certain assessments, that a huge vertically integrated company operates poorly than smaller specialized companies producing the same product. This means when you weigh all the advantages of a company like Eskom or SAA, it’s economies of scale, the integration, the reputation, they come up short to a group of specialized companies interacting to provide the same product. Moving from vertically integrated companies to smaller specialized companies happens sometimes as a result of creative destruction, although, smaller companies quickly become big companies. 

A huge vertically integrated company has clear advantages. Out of painful experiences, many huge companies choose to own the whole value chain to minimize disruptions and dependency on others which increases their vulnerability. Minimizing dependency on others is the reason electricity supply is a government monopoly. It’s unthinkable what would have been our fate if somehow our electricity supply was tied to companies like Steinhoff and other rich execs who care more about their yarts than our llights. 

Unfortunately once companies become vertically integrated, with multiple focuses in their value chain, they begin to forget just which business they are in and what is their core task. Eskom is so big, with high ‘interactive costs’ there may well be thousands of employees who have worked for decades at Eskom without ever seeing what Eskom really does. Unbundling then remind the company just what it’s business core is. 

The business of Eskom is transmitting electricity. For me, It would make more sense to unbundle Eskom into two, operation and transmission. Transmission would give Eskom clarity on what assets they have and what do they need to keep transmitting electricity. Eskom has a huge asset base but a huge percentage of that has nothing to do with transmitting electricity. Unbundling is therfore not a bad idea. 

The real question is whether unbundling is the proper and adequate response to current Eskom challenges. The first problem is that by the time companies choose to unbundle, they are already performing poorly, highly indebted and need to raise capital, and/ are an operational nightmare. This means that even though unbundling can have clear advantages, it’s usually mired in multiple intentions, giving rise to suspicion and blame, even a possibility that the prerequisites to unbundling were staged. 

This means if Eskom had performed better and kept its books in good health, we would not be talking about unbundling. This may lead to a belief that Eskom had to be made a mess in order to justify unbundling. To avoid Naom Chomsky’s theory that the Eskom problems may be deliberate in order to privatize it at a later stage, we need to be able to explain Eskom problems in detail, how unbundling becomes an appropriate response, given the inherent challenges with its current vertical integration. Here I maintain that unbundling is infact not an appropriate and adequate response. 

So what are Eskoms known problems. ‘In 2008 Eskom had R40 billion in debt, today, Eskom owes R419 billion’. However ‘R300 billion of that debt was borrowed to build Kusile and Medupi coal fired power starions. This is where the problems starts. In 1998, our government was told by Eskom to build electricity power stations because at the rate the economy was growing, the existing grids would not be able to endure. As admitted by Thabo Mbeki when the country experienced load shedding for the first time in 2008, government did not heed Eskoms call. 

12 years later, Eskom began to build these two power plants, Kusile and Medupi. How did a task that was supposed to be done by government through injecting new capital expenditure end up in Eskoms balance sheets. In that case Eskom had no reason to approach government even in 1998 but should have just borrowed money and built the plants. That R300b to build power plants was supposed to come from the shareholder as new capital and not be a debt burden to Eskom. Eskom does not own itself and the shareholder was supposed to inject capital for expansion and building new assets. It’s mischievous for Tito Mboweni to say ‘Eskom made the debt so Eskom must pay the debt’, especially because in 1998 when Eskom approached government for capital injection, Mboweni was a Banker to the government, busy with Arms deal and other inconsequential purchases. 

It’s clear then that, either the task of overburdening Eskom was deliberate or Eskom got tired of waiting on government and moved on to build new power plants. Either way this R300bn debt should be moved from Eskom balance sheets into government books. This will leave Eskom with only 100bn in debt. It also means Eskom will be freed from paying the R40bn debt servicing expense, leaving it with enough money to buy coal, diesel and maintain the plants. 

That is the first solution, not unbundling. It’s also worth mentioning that there is a wide sense of misrepresentelation of Eskom debt to create shock value of a company with a runaway debt without mentioning the Asset that was acquired and the necessity to acquire those assets. 

According to Eskom Financial Statements ending March 2018, the State Owned Entity had ‘R19.6bn in irregular spending since 2012’ . ‘Eskom had 10 CEOs in 10 years and six boards in 10 years’. The political interference at Eskom and the deployment of corrupt officials and political puppets by our erstwhile leaders gave room for both leadership instability and looting of Eskom meagre revenue. Given the new leadership of Ramaphosa, the new board and CEO, that corruption tap has been closed and we are beginning to see more accountability and willingness to make hard decisions. 

Again unbundling will not solve corruption. In any case more effort has already gone in cleaning up Eskom. Whatever other problems Eskom may have, unbundling is not the cure. In fact, Eskom has not taken advantage of its size, the economies of scale, which would have helped it negotiating better prices from its supplies of coal, diesel, and other inputs. We know now that this was deliberate in order to enrich a few friends. Unbundling will make Eskom lose these economies of scale. 

In the end, if this unbundling is a precursor to selling off assets, then there will be policy clash between the ANC and its President.The ANC policy conference concluded that SOEs are one of the strategic livers available to the State for fundamental transformation of our country which largely remains unequal, and sadly along racial lines. 

The task of the President is to recapacitate these SOEs, both technically, skilled human resource, and give them better orientation. These SOEs are suppose to influence the behavior of the private sector which remains unwilling to prioritize transformation and equal sharing of the business space. To sell SOEs to the very business elite would be an assault against black people, who remain largely marginalized with their hope remaining firmly on the state to crack the whip and open up the business space. Eskom problems are not insurmountable. The shareholder must not cede its responsibility to the company executives. The shareholder has a responsibility to the people of this country, and it must not shirk on that responsibility. 

Yonela Diko is a communications strategist.