Governments around the world have projected mandate which is always for the welfare of its citizens. They have managed enterprises large and small which has helped to bring in revenue. Since the era post 1980, there had been a remarkable shift in the government regulations and Privatisation of any industry had become the order of the day. Going by the trend, South Africa also looked towards Privatisation with times ahead. The story of South Africa’s struggle with economic and constitutional regulations has been well known.
Since the mid-90’s, Governments have charted out their focus on Privatisation in order to improve efficiency of the current state of State Enterprises thereby aiming at improvement of living standards of its citizens. Privatisation has been divided in South Africa in two distinct era such as pre-apartheid and post apartheid. Neo-liberals saw their ideas take shape during the pre-apartheid period and regulations were planned but not executed in an efficient manner. This led to nation wide unrest by the people and government has to make privatisation in a more defined structure.
Post mid-1990, the government of South Africa became more cautious in privatisation approach and implemented regulations which could support and state dimensions to privatisation. Socio-economic development of the nation with surplus availability of electricity in the country was mandated by the government. Enterprises were made to understand to increase operational efficiency with the introduction of foreign funds to pump up the spirits of the industry. In the 90’s World Bank and International Finance Corporation pumped in US $187 billion to develop the energy and power industry of 76 countries in the world.
This was part of the Liberalisation policy aimed at accelerating growth and improving economic efficiencies of different nations. Privatisation was introduced in two forms by World Bank as joint venture or Build-Own- Operate -Transfer (BOOT) methodology spread over a period of 15-30 years. The aim of Privatisation is to bring about development, economic sufficiency, and technological advancements. South Africa has been one of the largest producer of power among all African countries and been catering to the requirement of neighbouring countries.
Electricity is adequate in most part of Africa except in the poorest of the regions dominated by the original inhabitants of the country. Economic regulation saw a jumpstart in the year in 1995 and in 2005 the Government of South Africa went ahead with new age regulations for Privatisation of electricity in the country. It was intended to bring more competition into the country and provide citizens with electricity at lower tariff. The need to bring about drastic changes in the industry to make the service of international level, privatisation was understood as the best method.
Regulations to provide the industry more freedom were introduced. In order to aid Privatisation, Government also drafted Free Basic Electricity (FBE) Policy to provide 50kW/h of electricity at free of cost on monthly basis. However, competition in the electricity industry had not grown much wherein service levels had deteriorated considerably in the last decade. The industry has three distinct areas in electricity production namely generation, distribution and transmission. Eskom is one of the largest power suppliers in South Africa which controls maximum electricity generation in the country.
Privatisation was introduced in the distribution part of the industry where players had adopted differential pricing and provided deteriorated customer value. Although Privatisation had been advocated by the Government, a few players have been able to control market. This chapter aims to understand Privatisation of electricity in South Africa from a better perspective. The chapter evaluates the reason for privatisation and discusses policies that led to the restructuring of the industry. 2. 2 Overview of Privatisation
Privatisation refers to transfer of ownership of a national company to a private owner. It occurs in the following forms such as transfer of assets, public private partnership, on leasing the firm to a private owner, transfer of equity ownership to the private party. According to Kay and Thompson (1986:18) Privatisation is a word that is used to cover several distinct and possible alternatives, a way of changing relationships between government and the private industry. The aim of Privatisation has been to provide better life and increase income levels of the people in the country.
Various industries such as mining, manufacturing, telecommunication to name a few, have seen Privatisation as a means to improve the operational efficiency of the enterprises. Off late, electricity has been a major industry of target for Privatisation. After “apartheid” ended in mid 1990’s, Privatisation has been given a major boost to improve the economic condition of the citizens of South Africa. As per the concept of Washington Consensus market forces were given priority to solve economic problems over social issues at the cost of tradition and culture.
Privatisation was preferred choice over nationalisation as the work process of private companies are efficiently organised than public entities. Although Privatisation has been slow in South Africa and have not been able to attract many players in electricity industry, the main players like Eskom has been able to grow manifolds due to foreign investments. Public units have been providing electricity since ages at cost which are far lesser than provided by private entities. However, the need for private investment in the industry is felt in order to provide electricity to all the sections of the society at minimal cost.
This has however, been a distant dream as private companies tend to look for profits rather than societal benefit and the consumers have to bear the cost of each unit of electricity they use. The same has been affecting South Africa where the poor have still not been able to access electricity for use. As stated by Mackenzie (1998:363) Privatisation is not supposed to be undertaken to fill a hole in the budget. However, it is addressed as reuse of the infrastructure that has been operating inefficiently under government and would start working efficiently under private leadership.
Privatisation has benefited banks and other financial agencies and corporations at the expense of poor citizens who have to bear the aftermath of Privatisation. In the electricity industry privatisation has been important to improve the operational efficiencies of the organisations which were sick and which had been running in bad shape. Privatisation of electricity has led to rise of unemployment; high cost per unit of electricity available which further led to deterioration of living standards of the poor.
South Africa has been blessed with surplus resources for electricity production which has led revenue generation from dependence of neighbouring countries on the surplus electricity generated in South Africa. Rapid economic growths in neighbouring countries too have created a demand growth of electricity in these countries and South Africa has stated to feel the pain of the same. This has further made South Africa to evaluate newer avenues to generate investments in power industry leading to Privatisation.
Privatisation was supposed to bring reduction in price, better service and wide spread availability of services however; this has been not achieved till date due to the profit centric attitude of private organizations. Close to 20,000 households in Soweto has to face disconnection of electric connection due to high cost and inability of citizens to repay the arrears. The Privatisation of basic services (water, electricity, healthcare, education and housing) in South Africa has only made these services inaccessible and affected the poorest community to a greater extent.
As stated by the constitution of South Africa in 1996, every citizen has the right to these basic services, and a better lifestyle in a free country but in reality 33% of urban households have no electricity connection even now. High price rise has led to demonstrations and protest from anti-Privatisation forum. This could be attributed to the slow privatisation process in the country which has affected the consumers. Ever since apartheid, South Africa had to face challenges of international sanctions being blocked and this led to very slow entry of foreign players infusing funds into the country.
Multinational corporations were sceptic about the entire process and did not entered the market till sanctions were lifted and a free economic structure was established with equality for all the citizens. 2. 3. Reasons to apply Privatisation Since 1990 governments around the world have risen to improve the living conditions of its citizens. This has however, led to formulation of certain regulations and restructuring which may not be beneficial for South Africa. Amazed with the success of Privatisation in many European countries, African counties have followed to go the same path and often faltered in their pursuit.
South Africa saw regulations in the electricity industry being implemented in the year 1995 and Privatisation was imposed in the year after a decade. The main aim behind this initiative was to improve the living conditions of people by bringing in competition that would help to make power available at cheaper rate. Ironically, this led to a rise in price to an extent that natives started demonstration against Privatisation. The main reasons behind privatisation would be dealt in details in this section. The initiative could be summed up using the following sub heads. Performance Improvement
Public units offering basic services including electricity has been suffering due to inefficiencies of the governments. It has been imperatively difficult for the government of South Africa to make electricity available to 100 percent of its population. This led to undertake Privatisation initiatives which were envisaged to bring competition and money that could be used to spread the reach of electricity to every household in the country. Foreign Direct investment has been constantly being deployed into power industry to improve the efficiency of working units in South Africa.
Availability of finances The government of South Africa introduced Privatisation in almost all the potential industries far and wide in the country. Heavy capital investments from foreign banks and multinationals not only helped to restructure the sagging electricity industry but also provided finances for rapid economic growth. With the objective to achieve 6% growth rate for GDP by the end of 2010, the government has invited interest of private players to improve the power accessibility in the country. Ownership transfer
Transfer of owner of a pubic entity to private owners is often referred as privatisation. This objective was mainly concentrated to improve the efficiency of the sick units under government purview. The government has been quiet concerned about provision of electricity to citizens and provide cheaper supply of electricity. Redeployment of public assets to private owners can help governments to revamp the sick units. Competition The markets have always been competitive in the private industry and every firm has tried to gain market share.
The initiative to privatize the electricity industry in South Africa has invited lots of private players into competition, but the leading player Eskom has more than 95% electricity supply in the country. Eskom is a 100% government owned entity which was transformed into a company in the year 2002. This was pioneered to develop competition into the market and invite private players in the distribution part of the electricity industry, and also to fulfil the need for alternate sources of production of electricity in South Africa. Technological Advancements
Technological advancements have always been the cynosure of any industry. It has been evident that government owned entities have been lagging in this aspect and have always attracted private players to provide better and alternate sources in the same domain. This has also led to competition on technological front and citizens have received better services. Eskom has been using conventional methods of electricity generation using coal fired stations, and gas turbines which do not seemed to be sufficient to provide electricity to every corners of South Africa.
Privatisation has invited new players like Kelvin Ltd. that would employ renewal sources of electricity to reach and cater to additional 2000 MW of power per annum. Ideology This aspect could be divided into neo-liberalisation and post liberalisation ideologies. During the period between 1970-1980’s governments were involved in cost cutting initiative that would employ Privatisation of all public services and deregulation of the public entities were idealised in order to bring about competition, increased efficiency and better economics.
However, post apartheid in mid-90’s the market forces have shifted and a regulated economy was promoted in a big way by the government. Privatisation post 2005 has not been significantly able to help restructuring of electricity in South Africa. The country has still not been able to address to the electricity needs of its poorest areas. Development of nationalized assets Privatisation was also looked from the point of view of restructuring the national assets. Finances available could also be used to develop and restitution of national assets.
The government of South Africa used the income generated by selling stakes in state owned enterprises to create competition and also make life easier for people of the country with availability of proper services at the disposal. Employee satisfaction The workers in the electricity industry of South Africa had suffered and shifted into more secure jobs with better prospects. The sagging state of the industry in early 1990’s had only created drift among the workers and heavy transition of employees was seen in the industry.
Privatisation introduced newer employment opportunities for people and better rewards for diligent work. The return on capital investments were reaped by the employees of the organisations. 2. 4 Policies Privatisation was made the part of economic policies of the South African government due to large funds available by World Bank and International Finance Corporation (IFC), to meet the debt and shortage of funds. In 1985, it was decided that sale of state owned assets could solve the problem of debt and economy could be revived. This was employed as a tactic to suffice the electoral constituency.
In 1987, the government of South Africa came up with a white paper (White Paper on Privatisation and Restructuring, 1987) to finally give shape to Privatisation in all its form. However, till 1990 the process was slow and nothing much took shape. This policy was opposed by Anti- apartheid organisations and had to be stalled for the time being. Moreover, multinationals were not ready to take stake into state owned assets for reasons of debt that the governments had, coupled with international sanctions against South Africa. This led to Privatisation of only ISCOR (steel company), out of five organisations short listed.
As stated by Sekgobela (2003:6) “the Privatisation pressure in South Africa was motivated by financial pressure experienced by government due to sanctions in 1980 and increasing burden by debt repayment”. Several international banks closed offices in South Africa and demanded immediate loan repayments. International sanctions imposed heavy burden on South Africa as state owned enterprises had borrowed money from these banks. Post apartheid in 1994 the government finally came up with a Reconstruction and Development Programme (RDP), in order to revive the economy.
The conflict between the government and the labour organisations was finally resolved in 1995 by National Framework agreement signed by National Development and Labour council (NEDLAC), Federation of Unions of South Africa (FEDUSA), National council of Trade unions and government of National Unity. A separate ministry of Public Enterprise was established in order to drive privatisation in a structured manner. In the year 1997 the government of South Africa drafted Growth Employment and Redistribution (GEAR) policy which provided a broad dimensions to privatisation and involved public private partnership (PPP) to deal with the issues.
The government of South Africa was derided for its slow approach to Privatisation and held responsible for contradicting RDP proposal with GEAR. GEAR was aimed at creation of employment and provision of favourable economic conditions which would sustain development and privatisation. The newly elected government in 1994 took a new initiative which was called as Accelerated Shared Growth Initiative in South Africa (ASGISA); this policy was aimed to reduce unemployment and poverty to half by the year 2014 and encouraged privatisation.
It also encouraged people and government to work in sync with each other and promote harmonic economic development in the country. The government in the year 1999 drew a policy which was more comprehensive than earlier one’s and aimed at restructuring the economy. The Interministerial Cabinet Committee on Restructuring of State Assets (IMCC) decided on this policy of the 21st century. This was followed by Department of Public Enterprises (DPE) drafting a policy to accelerate the growth of economic development in the country.
Four key enterprises in different industries Telkom (telecommunication), Transnet (Transport), Eskom (Electricity) and Denel (Defence) were identified as part of major restructuring programme in tandem with government policies on privatisation. Off late, to counter the electricity shortage in South Africa the Department of Mineral and Energy (DME) has been shaping a bill which would allow investment in the electricity generation from renewal sources of energy. South Africa’s energy policy encourages congenial atmosphere for foreign investments and alluding shortage which need to be dealt.
Department of Mineral and Energy enlists the following points in the energy policy:- • Inviting private players into the market • Promote competition in order to make cheaper sources of electricity available for citizens • Evaluate alternate sources of electricity production through private players’ involvement • Use of transmission system to improve current power shortage in the country. National Electricity Regulator was instituted as a regulatory authority to regulate market forces to drive prices of electricity. Electricity Act of 1987 (amended 1994) provides NER with power to regulate prices in the distribution segment.
As the customer base has increased the government has tried to induce policies which could make electricity available at a cost cheapest in the world. The energy policies are drafted by Ministry of Mineral and Energy through its Department of Mineral and Energy, the industry is being controlled by National energy Regulator of South Africa (NERSA). The regulation act forbids generation, transmission and distribution of electricity except authorised by a license. NERSA issues licenses to players which are competent enough to support countries initiative for improvement of life.
The policies in South Africa aim to evaluate demand for electricity in the future. The regulations help to understand current state and provide solutions for next generation demands. Free Basic Electricity policy was instituted with the aim of providing electricity to all the citizens of the country. This was aimed at provision for 50 kW/h of electricity per month to the poorest of the areas which had been neglected earlier. The policy also helped to make electricity more affordable and subsidised electricity was made available to the citizens. 2. 5 Privatisation Drivers
The major need for privatisation was the economic freedom which South Africa wanted to achieve in future. Pre-apartheid era was marked by poverty and unemployment in South Africa. With the new government taking charge in 1994, the government was committed to change the face of South Africa. In order to introduce development in South Africa the government brought many economic policy changes which was aimed restructuring the state owned enterprises to reduce unemployment and introduce competition in the economy. The electricity industry was restructured in order to bring about the best in service to the customers.
To do away with unemployment, the government wanted more players to enter into the industry and create more job opportunities. However, the government faces problems in the more job creation and faced with opposition from the anti privatisation forum. Privatisation was also triggered by the availability of competition in the electricity industry so that alternate energy sources are explored and newer avenues of power generation could be evaluated. The largest power supplier in South Africa is Eskom which supplies more than 95% of electricity in the entire country.
However, it is much dependent on conventional sources like coal to produce electricity. The government introduced privatisation in electricity to provide competition to monopolistic behavior of larger corporations and also to explore alternate sources such as renewal energy for electricity production. The need for more power to the tune of 2000MW has also driven the privatisation so that the alternate sources could be used to generate electricity in South Africa. Around 92% of electricity is generated from coal and 6 % comes from nuclear and remaining 2 % from hydro and gas turbines.
This is not sufficient to support the electricity requirement of South Africa and to meet the same; Eskom has boosted its projects to meet the requirements. New players like Kelvin Ltd. and City Power have been evaluated to provide wind energy as alternate source to support the electricity demands of South Africa. The Eskom Conversion bill of 2001 was amended in order to restructure electricity production models in the country. Department of Public Enterprise in tandem with Department of Mineral and Energy has been major force in driving privatisation in the electricity in the 21st century South Africa (Winkler, 2001:1-2).
As stated by Eberhard (2001:9) the purpose of the bill was to bring efficiency to the electricity industry and expose Eskom to global forces. The drive to bring about the raised standard of living for the people of South Africa, the government has instituted policies to make electricity available at cheaper cost, ensuring socio-economic development of the country, meeting targets to make electricity accessible to every household in Africa and make electricity industry financially sound is the aim as establish by Department of Mineral and Energy (DME, 2001: 2)
The dedication of South African government to establish electricity industry as a major cause of development in the country, the government took initiatives to bring about the restructuring of the electricity industry. International events were the keen drivers of changes in the electricity industry coupled with internal forces and requirement for a better standard of living for the citizens. As Eberhard (2001: 6-7) describes the major driver of restructuring in the industry as:- • Making sure for maximum foreign direct investment.
• Improving customer service and making alternate sources available to the citizens • To make electricity industry operationally efficient and provide cheaper electricity per unit to citizens. • To drive New Africa initiative to position the industry at the helm of development. • Socio-economic development of the society both urban and rural. • Achieving environmental friendly modes of electricity production and bring about sustenance in economic benefits for the poor. • To bring about technological advancement with newer and alternative methods of electricity production.
• Ensuring surplus electricity production in order to meet the current demands and also cater to neighbouring countries demands. Some of the other drivers of privatisation in the electricity industry were:- Financial crises in the pre apartheid era forced Eskom to go into bad debt as many customers could not pay in the event of economic fallout. Distributors were on the verge of bankruptcy and entire country was financially weak to sustain electricity industry. Unemployment was at its peak and people had shifted to more secure jobs than in the industry.
Non efficient distribution of electricity in the industry was at its peak. It was extremely cumbersome to manage the distributors who were asynchronous with the industry requirements and heavy loss in terms of reaching economies of scale was being experienced by the industry. Customers met with indifferent behaviours of the distributors. Some of the poorest areas did not receive any benefits as compared to their requirements. The tariff was inequitable and varied across the industry.
Customers did not get any benefits from government owned electricity units and had to suffer. Only 45 % of the areas in South Africa had electricity availability, this was very less and the need to develop the industry was imminent. The industry was not upto international standards and was characterised by high cost, a little competition and anomalies in bill amount. The problem was such that people could not pay bills and it led to a crisis at Soweto. The measure to counter this was to introduce players in the distribution of electricity for better customer facilities.
Introduction of privatisation in the distribution of electricity helped the government to make the industry efficient and customer centric. 2. 6 Conclusions Privatisation in South Africa in the distribution segment has been slow since initial days. This has however, improved the dynamics of the electricity industry to a greater extent. The new players have defined the market and provision for low cost power has been realised in many areas of South Africa. The poorest areas have been given a special attention now and the system has become customer centric.
The movement to newer mechanism is still slow and need lot of restructuring to meet the surplus demands of the country. The effect of pre- apartheid is still evident in the operational flow of the electricity industry and this is responsible for slower advancements in the restructuring process. The newer policies (ASGISA, GEAR etc. ) and regulatory bodies (NRE, ESI etc. ) have helped to make it easier for the industry to function efficiently. Socio-economic development has been the main target for the government towards privatisation of electricity.
Eskom still maintains monopoly when it comes to production and newer way to produce electricity need to be evaluated on urgent manner. The government has succeeded in bringing about changes in the industry but more structured efforts need to be implemented. Privatisation has mainly concentrated at improving social status of people and has helped citizens to receive service at cheaper rates. The urgent need for restructuring in the industry has been addresses in order to make it a financially strong and has invited many foreign players.
Driving growth, reduction in poverty has been addressed using public private partnership and liberalisation of the market forces which has shaped the future of the industry. As Basson (2003:1) states Market driven (electricity prices and restructuring) and poverty reduction (grid electrification and Free Electricity) policies have been introduced. Measures to improve fiscal position of the industry thereby reducing the tariff loads on customers. Reduction in billed amount amounting to non payable scenario has been resolved to a greater extent and customer centric attitude has been developed to understand their needs.
Equitable distribution of electricity has been the mandate of the government and polices have been framed to improve life of the citizens. The government has made introduced more regulatory reforms in order to accelerate the development in electricity which serves as a backbone of industrial revolution in South Africa. List of References Abram L (2006), Impact of Privatisation on the Electricity industry with specific reference to Gauteng, Faculty of Economics and Management Studies, University of Johannesburg.
Ariyo, A. and Jerome. A, 1999. “Privatisation In Africa: An Appraisal”, World Development, Vol. 27, No. 1 201-214. Allen N (2004) Issues in Privatisation: Critical Success factor Pricewaterhousecoopers Nicole-hilton, Abuja Bedder Charon (2005) Critique of the Global project to Privatise and Marketise energy. http://herinst. org/sbeder/privatisation/critique. html [online] (April 30 2010) Bond P(2002) Power to the people of South Africa. Operation Kganyisa and the fight against electricity privatisation 23(1 & 2): 20-25
----- (2005) South Africa: Resistance to Privatisation Continues [online] http://www. greenleft. org. au/node/27750 (April 30 2010) Brittan S(1986) Privatisation: a comment on Kay & Thompson. The Economic journal. 96(381): 33-34 Bunn D(1994), Evaluating the effects of privatizing electricity. The journal of Operational Research society 45(4); 366-375 Clark A (2001) Power sector Reforms in South Africa. National Electricity regulator, Pretoria. De Fraja G(1991) Efficiency and Privatisation in imperfectly competitive industries, The journal of industrial economics. 39(3) 311-312
Department of Mineral and Energy(2001) Reform of Electricity Distribution Industry(EDI) in South Africa : Strategy and Blueprint, Pretoria: DME EDI (2004) Annual Report 2004, Pretoria EDI Eskom(2001) Annual Report Johannesburg Eskom(2003) Privatisation and Liberlisation of the South African Electricity Industry, Energy Management 9(4):4-9 Galen S (1998) Grappling with Change: The South African Electricity Supply Industry. National Energy Laboratory Golden: Colorado Giersch H (1997) Privatisation at the end of the century. Egon- Sohomen-foundation. Harsch, E. 2000. “Privatization