Why shaking up South Africa's power utility matters for the economy

Cyril Ramaphosa, South Africa’s deputy president who was recently elected as the leader of ruling party, is seen to be fighting corruption. EPA

What do you make of the shake up at Eskom?

The announcement of a new board at Eskom is welcome for a number of reasons.

Firstly, the previous board and top executive layer proved to be incompetent if not downright destructive. Secondly, the power utility had sunk into dire financial difficulties on their watch. Recent reports suggested that the power utility has run out of funds and wouldn’t be able to meet its obligations unless government stepped in with another huge bailout. This, after the government injected R23 billion in equity and and wrote off about R60 billion over the past five years.

Over the past five years or so, Eskom has been hit by a series of corporate governance breaches of the worst kind. These included the former CEO Brian Molefe trying to secure a R30 million payout for only 18 months at the helm.

And it’s become clear from the Gupta leaks that the power utility had come to play a central role in a raft of activities related to state capture. It appears to have served as a conduit to transfer government resources to well-connected and corrupt individuals and families in South Africa.

Given the damage that’s been done, the previous board at Eskom simply could not continue. It had no plan to turn the company around or stop corruption. Its only strategy was to lean on the South African government for more financial assistance.

The Eskom shake up is also significant because it’s a signal that the new president of the ANC Cyril Ramaphosa is committed to fighting corruption in both the public and private sectors.

Why does Eskom matter?

Eskom is arguably South Africa’s most important state owned enterprise. The South African economy depends on continuous and uninterrupted power supply. This puts Eskom in a different league to other embattled state owned enterprises like the national airline, South African Airways (SAA).

SAA is also dependent on government bailouts, but the South African economy will continue to function without it. Eskom, on the other hand, is a monopoly power supplier. All South Africans depend on it for power.

There seems to have been an urgency to make changes. Why?

It seems that Ramaphosa moved quickly to wrap up the Eskom shake up before he left for the World Economic Forum in Davos. It’s not difficult to understand why. South Africa has had some very bad headlines over the past few years, including downgrades by international rating agencies, and its economy is in the doldrums.

A significant portion of South Africa’s economic pressure originates from declining confidence of local and international investors in the country’s economy. This is evident from the South African business confidence index, which has plummeted. Since 2013 business confidence has been on a declining trend from above 50 to a current level below 35.

Replacing the Eskom board before the Davos meeting was a smart and necessary move. Davos is a rare occasion to showcase South Africa as an investment destination of choice for international investors. One condition for attracting international investment is a clear commitment to addressing corruption and instilling sound management in government enterprises.

What in your view is the long term solution around Eskom?

The long term solution to the problems at Eskom and other troubled state owned enterprises is a rethink of their role in the South African economy.

Some, such as South African Airways, are really unimportant and their disposal or even their closure would have little impact on the domestic economy. Disposal or closure are necessary options as these entities add an unnecessary burden on the national fiscus.

But others, like Eskom, are more strategic and matter enormously and the government should retain them.

It has also become necessary for South Africa to rethink the remuneration policies for executives of state owned enterprises. They earn salaries that aren’t commensurate with the risks they face. The consequences of failure are much more severe for executives in the private sector. Executives of state owned enterprises simply apply for bailouts when they’re in trouble.

So there’s no justification for exorbitant remuneration at state owned enterprises. And no executive at any state owned enterprise should get a bonus: how can a bonus be justified when the South African government provides the bailout in the event of financial difficulty?

The new Eskom board should urgently revise the company’s remuneration policy to restore some sanity in the level of remuneration. The board should also review business practices to ensure that Eskom remains financially viable without any financial assistance from the government.

It is also important that the South African government and the board of Eskom should make it clear to the general public and to investors that the proposed nuclear procurement project plan will not go ahead: neither the South African fiscus nor Eskom can afford such a project.

Jannie Rossouw, Head of School of Economic & Business Sciences, University of the Witwatersrand

This article was originally published on The Conversation. Read the original article.