Eskom 'needs overhaul'

8 December 2009

Economists said Eskom's request for a 30% equity investor to help pay for its R140bn Kusile power station is "a step in the right direction", but a complete overhaul of the country's power generation industry is required.

Econometrix economist Tony Twine said the South African government was "managing to save face" as it had not hesitated in the past to rubbish the notion of privatisation.

"It is a step in the right direction as it demonstrates a recognition that the government cannot recapitalise Eskom by itself through the fiscus," said Twine.

Asking the private sector to invest in Kusile also means South Africa has to "expect electricity prices to rise more rapidly than we have become used to in the last three decades," said Twine.

As long as investors can be assured of a substantial long-term return, they will put their money in Eskom.

That's because for anyone to invest in electricity generation, they must be assured of a high enough yield to make the investment justifiable.

"There are always funds available around the world, at various prices of course," said Twine. "As long as investors can be assured of a substantial long-term return, they will put their money in Eskom."

Another economist, Mike Schüssler, said government must urgently sort out structural problems in respect of electricity provision and prices in order to attract investment for its latest venture.

"There must be competition in the industry," said Schüssler who last week stridently criticised Eskom's top brass at a public meeting for trying to shoehorn South Africa into a false, socialist agenda.

"Eskom cannot be the single buyer of electricity," he told Fin24.com. Power producers need an independent entity to which to sell electricity at competitive prices in order for them to start investing in electricity generation, he said.

Schüssler said he was certain pension funds, such as the Public Investment Corporation, would invest in a "proper electricity utility" if the return was worth it. "And we need this type of investment," he said.

A substantial electricity price increase would make it attractive for private investors to come in. "But the structural problems need to be sorted out first," he said.

Other parts of the world that had faced similar supply deficit problems have managed to secure the required funding for their electricity organisations, said Schüssler.

Eskom cannot be single buyer of power

Schüssler also called for a more decisive strategy on the part of the government.

"Selling only one power station doesn't make sense," said Schüssler when asked if the sale of 30% of Kusile was the correct approach.

He said Eskom had to be split into three separate units: distribution, generation and resellers. "That would ensure proper competition and avoid another 35% tariff increase in the years to come," he said.

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