Stop funding failure: Why SA’s utilities need a radical economic reset

I’m not sure that our utilities have correctly figured out their place in economic society.

Mark has spent some 35 years in positions of leadership in finance, banking, private equity and, more recently, in government, since he graduated from University of Cape Town in Actuarial Science. Mark’s understanding of capital markets and his ability to distil the essence of business models have enabled him to effectively engage with all related stakeholders to bring about change. He is a devout South African and an ordinary man.

Our state-owned enterprises (SOEs) are in the news daily. We are constantly reminded what they need and how they must be financially sustainable, regardless of how well they manage their businesses or their accounts, or how much economic damage their subsidised survival causes for the rest of South Africa’s economic participants – all of us.

We celebrate when they declare a profit, without ever understanding the fundamentals of why they make a profit, or what their profit may have cost their customers. If they make huge losses, then the focus turns to the extent of their borrowing capacity or the bailout they may require.

We accept all of this because we have no choice. Our utilities are monopolies and they can’t be allowed to fail, so the bailout happens and the money has to come from somewhere, from somebody – that would be us, the taxpayers, the few who are left.

Because all the money goes into and comes out of the same pot – National Treasury – the extent of cross-subsidy is invisible, never mind open to analysis or criticism. Blanket guarantees wash over all of this, so there is no need for specific entity performance or bankability.

We have become used to borrowing from our future, if not our past. That, if nothing else, is certainly not sustainable, despite its general acceptance as the go-to crutch of our various utilities’ flawed economic models.

If we’re going to stay stuck with this central funding apparatus then, for goodness’ sake, let’s rethink, nationally and holistically, what to do with it. If Treasury had as its primary decision driver the financial wellbeing of SA Inc and all of its peoples then our utilities would serve us, not dictate terms to us in their selfish best interest. The logic of what has to be done applies to any and all utilities, pick your favourite.

Eskom, for instance, cannot be allowed to increase electricity tariffs by 8.8% while inflation is at 4.3%, population growth at 1.1%, GDP growth at less than 1% and unemployment at 33.6%. It just doesn’t add up. There must be another way.

What if Eskom decided to purposely enable growth in the economy rather than retard it through unaffordable input costs? If you take this SA Inc first approach then a very different strategy emerges (driven by a virtuous capital circle), which goes something like this:

Eskom approaches its major industrial users to engage with them on a partnership-driven understanding of and sharing in their economic models.