Eskom needs protection against competition, says Ramokgopa

Minister of Electricity and Energy Kgosientsho Ramokgopa wants to introduce drastic measures to ensure Eskom can compete against private sector entities in a competitive electricity market.

This includes “liberating” Eskom from the Public Finance Management Act (PFMA) and subjecting private sector players, even those in bilateral contracts, to the same social obligations that Eskom has.

While Ramokgopa failed to give much detail, Krutham managing director Peter Attard Montalto questions whether the proposals are even legally possible.

Anton Eberhard, emeritus professor of the University of Cape Town Graduate School of Business’s Power Futures Lab, says the minister is seemingly not fully appreciating the need for deep structural reforms in the power sector and what Eskom’s role will be in future.

Which party is ‘disadvantaged’?

Eberhard says Eskom still holds about 70% of the market in generation and it is the private sector that is at a disadvantage, not Eskom.

Ramokgopa believes the opposite, saying at a recent Unisa School of Business Leadership event that Eskom will be hamstrung by the PFMA when it must compete with various other generators and on the South African Wholesale Energy Market (Sawem).

The utility does not have the flexibility that actors in the private sector have and cannot act fast enough to take advantage when an opportunity presents itself.

Ramokgopa said he will make a submission in this regard to Cabinet after consulting the Minister of Finance Enoch Godongwana.

“I can make the case, and I believe the case is compelling.”

Attard Montalto acknowledges that there are “justifiable procurement reforms that should happen to streamline approvals and process issues” for state-owned enterprises (SOEs) “with the Office of the Chief Procurement Officer which lacks capacity and strategic intent”.

However, fundamentally, “these are state entities” and “National Treasury will not give up oversight”.

Parallels

Khaya Sithole, chartered accountant and director at Corusca Consulting, says Ramokgopa’s argument is similar to that made by Vuyani Jarana when he resigned as CEO of South African Airways (SAA) in 2019.

Jarana was quite explicit that the PFMA put SAA at a competitive disadvantage against private airlines.

He compared it to “a horse that was used to racing alone with its hind legs tied up” and, when competition was opened up, its legs remained tied.

About the possible sale of a 51% shareholding in SAA, Sithole says it would “free SAA from the shackles of the PFMA” – allowing it to operate as a commercial business and compete with its peers.

The PFMA is an instrument to install discipline and prevent chaos in public procurement and resource management, he adds. It provides standardised rules and gives guidance but can be paralysing in a competitive environment.

But Sithole points out that “even with the current PFMA, Eskom keeps on getting it wrong”.

He says Ramokgopa must name the specific sections of the PFMA to be considered for exemption so that proper scrutiny remains while giving Eskom the necessary agility. “It can only be a carve-out,” he says, rather than an exemption of the PFMA in its totality.

Eberhard agrees that there are ways to ‘enable’ Eskom without a complete abolishment of the PFMA and says it has been done before, when the utility was given PFMA exemptions to negotiate directly with original equipment manufacturers (OEMs).

Social obligations

Regarding Ramakgopa’s proposal for the extension of Eskom’s social obligations to the private sector, Attard Montalto says it ignores the fact that private sector electricity entities do a huge amount themselves as part of their social licence to operate.

“This is a classic case of government wanting all things, when they should focus on cheapest power to maximise growth, which is the best developmental outcome.”

Electricity pricing expert Deon Conradie cautions against burdening the electricity supply industry with social objectives.

“Unless Eskom is compensated by the fiscus, it will lead to increased tariffs, which affects affordability and the country’s competitiveness,” he says. “Then everybody asks for special tariffs.”

Conradie argues that social and developmental obligations are better located elsewhere in government through instruments like tax incentives or direct transfers.

Eberhard says social packages can be funded through cross-subsidisation of tariffs or fiscal grants like those for Free Basic Electricity. Cross-subsidies can be recovered through transmission charges, but this must be transparent.

Eskom Green will provide ‘the test’

Eberhard also maintains that Eskom’s generation business must be split into a few units that compete against each other.

The clusters can be corporatised and run as companies, which may remain public or may have private equity.

Regarding Eskom Green, he says the South African renewable energy market is very competitive, and Eskom is entering it with very little experience.

Attard Montalto says any measures Ramokgopa may take to level the playing field as he sees it, will be tested at Eskom Green when conduct that is seen to be uncompetitive will likely result in court challenges.

This article was republished from Moneyweb. Read the original here.