Government knows Eskom solution but lacks resolve

by Peter Attard Montalto 0 views0

Peter Montalto is struck by the lack of panic around the situation at Eskom-no panic by households, industry & business and SA's government.

The African National Congress (ANC) performs best when it is pushed right to the edge.

By this I mean that as a broad-spectrum political church, it can overcome its internal ideological conflicts and crosscurrents and become more risk-taking in using its political capital to take difficult decisions and successfully transfer them into action. The stable and sensible core can emerge.

That happens moderately frequently in the formulation of policy, or around the fussier concept of “knowing” what is the right thing to do.

However, implementation is often the biggest hurdle when ideas get lost in a storm of ideology or when political capital is being used elsewhere, such as in cadre deployment and tenderpreneurship.

The ANC is starting to care more about vote retention as its share of support slowly falls. Part of this will be “negative” in the sense that action will be taken through legislation on boosting the powers of traditional leaders, land reform, etc. Only a smaller fraction might genuinely be described as shifting policy to win popular support in a “positive” manner, such as trying to boost job creation.

This is where Eskom is interesting and worrying in equal measure. Having spent quite some time in SA already this year, I have been struck by the lack of panic around the situation at Eskom — no panic by households, industry and business, the government or the ANC.

South Africans seem to have become too used to load shedding and the lack of energy security. Richer households have generators; the middle class simply accepts it as part of life. Poorer households are still grateful to have access to any electricity at all thanks to widespread electrification since 1994. Businesses adapt by reducing investment and changing their patterns to align with load shedding timetables (lower output and job creation) leading to inventories becoming more volatile (which has costs).

The government, however, seems to be content with inquiries, task teams and internal discussions.

Panic is good. It makes people realise time constraints, breaks through the fluff of unimplemented plans and forces people to quickly make the right decisions. We are not there — the fact that there is no panic is deeply worrying. It means the ANC still does not see sorting out energy security as a necessary component of positive voter reinforcement.

Denial is not the right word. I think that in every level of government, down to the most junior public servant, there is a deep understanding of the constraints and issues Eskom faces and the policy options on the table. But there is contentment with governmental business as usual, and no impulse to jump out of the status quo to find solutions. A lack of real public or business pressure maintains the situation and is again an example of how business is too quiet in standing up for the creation of better growth and job creation. How many businesses have we heard from about lost output since the start of the year? Or the lack of jobs created?

What will really shake policy makers into the right place? Mass protests on the streets? A proper brown-out? Having virtually no electricity for two to three weeks would certainly focus the mind. Of course we should never get to that point, as it would have profound implications for investors’ perceptions of SA for many years to come and it would never be a path Eskom deliberately takes. However, the present environment is one where mistakes can be made, of which the consequence will be a brown-out.

The problem is not primarily capacity — the Treasury and the Department of Public Enterprises have enough technical policy, analytic and legal capacity to be able to turn the situation around. This may well be what we see now from South African Airways under direct Treasury control. The Treasury has the ability to rapidly appoint banks and sell off noncore assets. The problem is not its technical ability but the external political and ideological pressure that has slowed the process and put the June deadline in question. As ever, the government seems to have too much time.

I think it is worth remembering one thing. I recently said to someone: “It’s unfortunate the government chose to have an energy crisis in the same year as the US Federal Reserve hiking rates.” While somewhat imprecise, the word “chose” is actually very appropriate. The Eskom crisis is not the fault of apartheid or “dark forces” that sometimes get blamed for what occurs in the economy by more fringe elements of the political spectrum. It is a result of the inaction of the government in the face of evidence and policy advice. As such, the government did indeed “choose” the path that led to this outcome. Therefore, it is within its power to shift SA out of it.

So what is the policy prescription? Scrap the inquiries and the task teams and the war room. The knowledge to solve the Eskom problem is already within the government. Remove the politics, the tenderpreneurship and the cadre deployment. Allow the Treasury and the department to jointly control Eskom through an independent board that has properly demarcated limits and appoints (even reappoints) strong executive management. Accept that very high tariff increases in the short run are necessary to plug the gaps in Eskom. Spin out an independent energy buyer that opens up the murky world of energy pricing to competition. Open up the energy market to private investment in the model of the renewable energy tenders and allow rapid-build flat-pack coal and gas (and, yes, even nuclear) investments by the private sector to be made at low cost.

That prescription is nothing new to those inside the ANC or the government. It is often discussed. Let us just hope the right decisions are made before we fall over the edge. The first test will be the appointment of a new chairman of Eskom’s board. We have seen too often across huge numbers of public institutions that the government cannot arrest its appetite for cadre deployment. I am sceptical about whether the crisis at Eskom is enough for this time to be different, but we shall wait in hope.

In the meantime, the energy security story this year is increasingly intertwined with the sovereign credit rating, regardless of bail-outs or fiscal spillover. Investors are watching to see whether the government can make difficult political trade-offs between growth and energy security. For instance, hiking tariffs would mean a double hit with the second-round effects on core inflation and higher interest rates leading to slower growth. The alternative would be slower growth through not stabilising Eskom’s balance sheet through tariff hikes.

To me, the effect is, in the short to medium run, the same. It is a more secure longer-term outlook that we can hope for and the government should be aiming for through taking those difficult policy choices.

*Peter Montalto is senior emerging markets economist at Nomura, London