Submission to Parliament South Africa, ELECTRICITY REGULATION AMENDMENT BILL (B23-2023)

Opposition to the Unbundling of Eskom

5 December 2023

By Hügo KRÜGER

My name is Hügo Krüger, and I hold a background in Civil Engineering with a master’s degree in the Construction of Nuclear Power Plants. I have worked to various infrastructure projects, in Nuclear Power, Coal, Wind and Natural Gas. While I am based in Paris, I am submitting this statement as an engineer and concerned citizen of South Africa.

I am a member of Truth in Energy (TiE), a loose affiliation of engineers that are actively engaging in discussions on energy-related issues in South Africa. I host a YouTube channel focusing on energy and climate change matters, maintain a blog on substack, and serve as a regular columnist for Independent Online, where I share insights on energy-related topics. Throughout the last 2 years I have done various interviews, in public and private, with experts within the energy sectors to try and understand the phenomenon of load shedding and the decline of Eskom. I have interviewed various engineers, policy makers, workers, former CEOs of Eskom, head of think tanks, politicians, and economists.  

My submission today is to oppose the process ERA bill B23-2023 as it relates to the unbundling of Eskom in to three entities, transmission, distribution, and generation. My opposition does not stem from an opposition in the dogmatic sense. I do believe for example that unbundling of Eskom can work under the right conditions, but I do not believe that South Africa has those prerequisites and that the risk to South Africa’s social instability is incredibly high if this move continues. That the policy makers and pundits who support unbundling are ignorant of the risks involved or they are deliberately withholding them from the public.

That is precisely why I submit my opposition today.

I oppose the current move by the South African Government precisely because I have studied the history of unbundling in the developing world, the success stories, and the failures.

I do not believe that the government is being honest with the facts and straight with its intentions and I will explain briefly why below.

The purpose of unbundling

What is the purpose of unbundling a vertically integrated electricity utility? Generally speaking, countries move towards unbundling utilities when there is an intention to involve the private sector more significantly in the electricity market. This inevitably introduces competition, which, in turn, may lead to outcomes such as bankruptcy, job losses, and the displacement of various communities.

The key term here is 'intentionality.' No government pursues unbundling without an intention to embrace free market principles. Personally, I do not believe that South Africa has the political class that embraces such a notion and the backbone to carry it through if their own voters, that are likely to be the victims of unbundling, stare them in the face. Neither Minister Gordan, Minister Mantashe nor President Cyril Ramaphosa will carry the policy through.

Yet despite this, our own government for example has suggested the seemingly impossible notion that unbundling will not result in job losses. This claim is simply impossible. For example, almost one-third of Eskom's assets are under an unplanned capacity loss factor (UCLF) and there seems to be no intention from the South African Government to fix them.

It is practically impossible for these assets to become 'performant' in a competitive market where no government intervenes in the electricity sector. For bankruptcies to become the norm, South Africa must first have a political class that believes in it, and it must present the consequences of unbundling in an honest fashion to its voters.

We do not have that prerequisite.

The more likely outcome

In my view, it is more likely that Eskom won’t be unbundled in the classical sense. Instead, it may follow the example of failed forms of unbundling where the underperforming assets are written off from scratch, placing a burden on the taxpayers as various oligarchs loot the assets.

This is not a theoretical concern; it parallels what happened in Russia in the late 1990s when the clever 'Harvard boys' dismantled the Soviet Union's utilities without regard for the country's complex history. Consequently, former middle managers within the energy sector took over the former state-owned utilities, forming Russia’s Oligarchy. This led to a significant drop in life expectancy and many women being forced into prostitution.

South Africa's current socioeconomic data for example is even worse than Russia's during the last years of the Soviet Union. Our unemployment for example is the highest in the world. Imagine the revolutionary consequences if various communities across the country face uprooting during 'structural readjustments”.

Other examples of failed forms of unbundling include the experience of Lebanon, where the mafia eventually became Electricite du Liban’s competitor, because the government couldn’t carry the unbundling through.

Another form is more closer to home in Zimbabwe, where the national utility ZEZA had to be rebundled after private investors ran it into the ground.

What guarantee is there that it won’t occur in South Africa?

Literature on unbundling

The second point concerning unbundling revolves around the extensive literature available, particularly in the context of the developing world. Unfortunately, the South African government has not engaged with this literature in a factual manner.

For instance, the World Bank's comprehensive assessment “titled: Rethinking Power Sector Reform in the Developing World” of the 25-year history of unbundling in the developing world, as outlined in the attached document, reveals a crucial finding: the unbundling of various utilities has not ensured a security of supply, as evidenced in the extract below.

If the proposed amendment proceeds with the assumption that it will address load shedding, it must be clarified that this decision is not grounded in the most widely available empirical evidence, especially concerning the developing world.

It is further noteworthy that Vietnam, the fastest-growing country globally and incidentally a developing nation, achieves remarkable GDP per capita growth under a fully vertically integrated utility. Vietnam is among a select few countries where public ownership and fully integrated utilities outperform their counterparts in the public sector.

The world bank’s study highlights a weak correlation between public and private ownership, whether utilities are unbundled or not, and overall performance. There simply is no relation between public and private ownership as the world bank itself concluded in 2018.

The facts listed above represent only a fraction of the evidence that challenges the notion of unbundling.

In addition to this submission, I attach the world bank’s assessment as it relates to the developing world, as well as my article in IOL opposing unbundling where I spelled out many of these concerns in the public.

Yours Sincerely

Hügo KRÜGER