/Mpumelelo Mkhabela: A blueprint for Eskom from 1936

Mpumelelo Mkhabela: A blueprint for Eskom from 1936

2019-11-15 09:00

The crises many SOEs face today prove that government guarantees and hard cash injections have become a perverse incentive for executives to run the companies like government departments, writes Mpumelelo Mkhabela.

“The general average price of electricity throughout the country has been lowered by approximately 50 percent and today South Africa is one of the most electrically-minded countries in the world…What else could we expect when electricity costs only about one halfpenny per unit.”

This is a statement all South Africans would wish to make today. But it came from the mouth of Dr Hendrik van der Bijl. The year was 1936. Van der Bijl was the founding chairman of the Electricity Supply Commission (“Eskom”) in 1923.

A South African, Van der Bijl had been recalled by General Jan Smuts from the United States where he had pioneered the evolution of the wireless telephone and telegraph while working for the American Telephone and Telegraph Company. Before then, he had studied electron theory in Germany.

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These and other details about the history of South Africa’s industrial evolution are contained in Alice Jacobs’s book South African Heritage: A biography of H.J van der Bijl.

In South Africa, Van der Bijl was the government’s key industrialist. After the mining moguls of the mid-19th century, he was arguably the most influential person who set the country on a path to modern industry.

In large-scale steel manufacturing through the development of Iscor, which would later become ArcelorMittal, and state-backed industrial financing through the Industrial Development Corporation, Van der Bijl’s mind was where it mattered most on matters economic.

If ever there was an example of what the economist Mariana Mazzucato in current popular parlance calls the entrepreneurial state, it had long existed in South Africa during the Van der Bijl era. The basics haven’t changed.

If the current democratic state is to be entrepreneurial, as stated by Public Enterprises Minister Pravin Gordhan, and as implied by the inclusion of Mazzucato on President Cyril Ramaphosa’s economic advisory panel, then it needs entrepreneurs no different to Van der Bijl. We can learn from our own history.

Eskom established as non-racial company

It is politically palatable to refer to Van der Bijl because he was different to Helen Zille’s colonialists. From the outset, he established Eskom as a non-racial company. Under Van der Bijl, Eskom’s headquarters in central Johannesburg were engraved with a dedication “to the ideal of cementing together by common endeavour for achievement, all the peoples of South Africa, regardless of race, creed, into the brotherhood of mutual trust and goodwill for the welfare of our country and the glory of the Almighty.”

So, how did Eskom become successful so early on, achieving a 50% reduction in the cost of electricity in a short space of time and maintaining relatively low tariffs for over decades until recently when developments began to the form of a pear? There are many factors. Its legislated purpose was from the outset to provide cheap electricity at neither loss nor profit. In addition, South Africa has always had an abundance of easy-to-mine and good quality coal to burn.

These two factors have not changed. Yet, the tariffs have spiked in recent years and Eskom is asking Nersa, the energy regulator, to grant permission to impose more hikes on over-stretched consumers and manufacturers who are already closing shop due to expensive electricity.

The financing of Eskom has changed. Although it was established by an act of Parliament, at inception the government did not give Eskom free money. Its initial capital of eight million pounds, borrowed from the Union Treasury at an interest rate of 5%, had to be repaid.

In its first 10 years of operation, Eskom paid back the government over two and a half million pounds. It raised the balance through public capital raising initiatives and eventually settled the entire government debt. Ordinary people subscribed – in fact, over-subscribed – to capital-raising initiatives.

Original Eskom not run like government entity

It was Van der Bijl’s duty, not the government, to raise money for Eskom. Jacobs records in Van der Bijl’s biography that Eskom was not run like a government entity. It was operated in the same manner as any private business concern – except that it didn’t have to make profit or loss.  

Eskom had a right to expand power generation. At some point in recent times, it needed permission from government to do so but this was rejected even as the need to expand access to electricity post-1994 increased.

It was pleasing to hear Finance Minister Tito Mboweni suggesting recently that Eskom and other state-owned companies should be run like private businesses. He is right. But it’s not clear if he is getting the necessary backing and whether, if he does, it’s with the necessary urgency.

The government must not give state companies money for free. It is clear from the crises many state-owned companies face today that the ever-green government guarantees and hard cash injections have become a perverse incentive for executives to run the companies like government departments.

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The government itself has been caught in the vicious circle of cash injections to support the diminishing of state entrepreneurship. Because the government itself pumps a lot of taxpayers’ money into state enterprises that it has no intention of recovering, it creates a self-imposed perverse incentive to intervene in the operations of these companies. The consequences have been disastrous: from small scale corruption to state capture.

Van der Bijl was a white, Afrikaner industrialist. Today, we have South Africans of various racial backgrounds well qualified like him who can rescue our state-owned companies and inject much-needed state entrepreneurship. The government must look around for those patriotic South Africans who want to make a contribution and give them space to run the companies.

What a pleasure it would be to one day declare, as Jacobs did in Van der Bijl’s biography: “An individual station might fail – and it might even blow up – but the flow of electricity to industries, factories and homes would continue uninterruptedly without the consumers being aware of disaster.” Or even to wake up to a catchy headline, “SAA has paid all its debts and has turned a profit!”

– Mkhabela is a regular columnist for News24.

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