Gabriel Crouse
“Eskom is too big to fail”. This is one of the catchiest headlines and bottom-line analyses of 2019. It is the effective message behind finance minister Tito Mboweni’s earmarked R69bn Eskom bailout.
The phrase “bailout” trended globally during the US-led financial crisis of 2008, putting dollar signs in bureaucrats’ eyes. The Troubled Asset Relief Program (Tarp) “bailed out” ventures with toxic assets through purchases of about $411bn. By the end of 2014, Tarp had almost totally unwound its position with a profit, for the fiscus, of $15.6bn. That is about equal to Eskom’s total revenue.
In addition, US taxpayers bailed out the key SOEs (technically government sponsored enterprises) at the heart of the crisis, lenders Fannie Mae and Freddie Mac. But the US fiscus made a profit there, too, of just under $40bn in the first six years. Combined, the Fannie-Freddie and Tarp bailout profits to the US fiscus approached the total value of Eskom’s assets at roughly $60bn.
Total bailout windfall was bigger even than that. In 2015, the Washington Post published an estimated grand profit for the US bailout of $350bn, which is equal to South Africa’s entire GDP.
Too big to fail can be the slogan of a major profit opportunity. One precondition of the Obama-Bush recovery was, however, to recalibrate the financial dynamos so that they only remained on the grid if they added more energy than they sucked up.
In a case that fell between success and failure GM, the US’s “too big to fail” car marker, turned out to be too big to prop up. Even during the boom years in the 2000s, GM shed tens of thousands of jobs.
In the bust, GM continued to shed workers despite a $50bn bailout, more than 20% of which will never be repaid. After a brief reversal at the end of 2018, GM announced that it would cut another 14,000 jobs. This, incidentally, is about the number of jobs by which chair of the Eskom board, Jabu Mabuza, estimates the SA utility is overstaffed — 33% of the total workforce.
Although the GM cuts are tough, “the company’s decision was a rational response to many worrisome factors”. That judgment does not come from an anarcho-libertarian with a vendetta against trade unions. Published in the New York Times, they are the words of Steven Rattner, head of Obama’s US auto industry bailout team and great champion of GM as a job provider.
Behind the partisan manoeuvring, Rattner writes to a largely neo-socialist audience in defence of massive job cuts on the presumably shared premise that there is a connection between work and product. Rattner sees it as no fault of the GM workers themselves that many of the jobs they do are just not productive, given shifting tastes and demands. But fault is not the issue to hand, productivity is. Jobs that fail to add value must soon fail to exist if work is to maintain a useful meaning.
To say that Eskom is 33% overstaffed, as Mabuza does conservatively, and to note that its wage bill has tripled in a period during which electricity provision flatlined, is to say that the material reward for work and product have disconnected one from the other at SA’s largest SOE.
This is unaffordable at two levels. First, the difference between value paid and the value added must be filled somehow. Eskom’s near monopoly, 90% of generation, creates the temptation to bridge the gap through super-economic prices. This always incentivises extralegal behaviour and Eskom claims that Soweto alone owes over R15bn. Meanwhile going off grid gains increasing “green” status in luxe suburbs. Energy-intensive business divests; manufacturing has flatlined by volume in the last decade and almost halved in its relative GDP contribution in the last two decades to 13%.
In short, actual sales decline as tariffs get pushed up in what is sometimes called the “utility death spiral”. So the work-value gap has largely been filled with debt, now valued at R420bn. This costs R45bn per year and rising to service, which is now unaffordable.
The indirect costs could be far greater. The Centre for Risk Analysis estimated back in 2014 that the low-to-zero growth in actual energy capacity put a cap on potential economic growth at 3%. That estimate has subsequently been brought down to a ceiling of 2% GDP growth.
Eskom is a ceiling to growth, but the ceiling is moving — downwards — as the debt burden rises. The only sustainable lift to Eskom will be increased demand, but the market is stretched near its limit, so that can only be achieved by the kind of growth obstructed by Eskom itself — as well as other caps on business, such as the ongoing erosion of property rights.
The minimum step-up requires that those people are removed who rest atop the ceiling without pulling their weight. Mabuza’s 33%, surely a conservative estimate, must not be considered with contempt. To act in one’s own self-interest by bargaining for the most reward at the least expense of effort is every person’s right. We should hold ourselves responsible for letting them get away with this blatant extractionism for so long.
Mboweni seems to understand the fundamental problem, saying “we must prune and pluck away at the rot, until there is growth”.
In addition, he understands the absurdity of supposing that Eskom is an attractive investment even by national bailout. The R69bn is earmarked as a grant, not a loan, precisely in order to protect the fiscus from seeming to irrationally believe they can expect to get the money back. This must be remembered by those who claim that pension funds must invest in Eskom as if this were a Tarp scenario. It is safer to give money to Eskom than to make it a loan.
Eskom is too big for its own good. Promises about Eskom turning around have come from this president, and the last is cheap in the blind state of load-shedding. The only credible evidence will be an actual lessening of the load. That will require Eskom to make more than it takes.
• Crouse is the George FD Palmer Financial Journalist Trust fellow at the Institute of Race Relations.
https://www.businesslive.co.za/bd/opinion/2019-02-26-eskom-may-be-too-big-to-prop-up/
