Bayliss, Kate

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The contents of this Development Viewpoint reflect the viewsof the author(s) and not necessarily those of CDPR or SOAS.Centre for Development Policy and ResearchSOAS, University of LondonThornhaugh Street, Russell Square, London WC1H 0XGwww. soas.ac.uk/cdprTelephone: +44 (0)207 898 4496Centre for DevelopmentPolicy and ResearchSchool of Oriental and African Studies University of LondonLessons from the South African Electricity Crisisby Kate Bayliss, Centre for Development Policy and Research      No. 3   May, 2008Installed and Operational Capacity Added (Megawatts)South Africa is suffering an electricity crisis. Blackouts havebeen widespread and the impact disastrous. Electricity supply ispredicted to constrain growth for at least the next five years. Howcould this have occurred when until recently South Africa had a surplusof cheap electricity? This Development Viewpoint explores the causes.The origins of the crisis stem from an ambitious electricity restructuringand privatisation programme started in the early 1990s. The processhas been protracted, reforms have been difficult to implementand the private sector has failed to respond. Meanwhile, publicinvestment has stalled; this is the main cause of the current crisis.The focus of reform was on bringing market forces to bearon the electricity supply industry. Eskom, the state utility,was corporatised and in 2001, its core activities (the generation,transmission and distribution of electricity) were separated, withtheir finances ring-fenced.The fragmented national distribution system was to be reorganizedinto six electricity distribution companies, owned by Eskom and themunicipalities. Ultimately, the goal was competition and privatesector participation in distribution. However, this process hasinvolved complex legislation regarding the transfer of assetsand has been painfully slow. By 2005, just one company hadbeen created, only to be disbanded soon afterwards.Crucially, policy uncertainty has contributed to a collapse ininvestment, in some cases falling to 1-2 per cent of the asset baserather than the desired level of 10 per cent. Lack of investment inthe distribution infrastructure is a key factor in the crisis. There arenow calls to drop the restructuring programme in favour ofstrengthening the existing structure.In generation, the restructuring programme also aimed to createcompetition and bring in private sector participants. There was amoratorium on investment by Eskom in order to prevent crowdingout of the private sector. In addition, public expenditure wassteered away from investment to boost the economy following theremoval of capital controls. There was, however, virtually no interestfrom the private sector: investment in new generating capacitydropped to zero between 2002 and 2006 (see Figure).During the recent power cuts, a very high proportion of generationcapacity was out of service. During January 2008, for example, thisreached 23 per cent, mostly due to unplanned maintenance.The Eskom plant is under severe strain due to factors such as poorcoal quality, staff shortages and a high load on its capacity. A viciouscircle has developed: a high proportion of plant is out of action, sofurther strain is placed on the existing plant, which becomes evenmore likely to break down.Underlying the low level of plant availability in the longer term isthe lack of investment in generation capacity, which has stemmedfrom unwarranted optimism in the willingness of the private sectorto invest. The result has been a fall in Eskom’s reserve margin(the ratio of peak-load unused capacity to total capacity) frommore than 20 per cent to a precariously low eight per cent.Because of this additional strain on the system, frequent outagesare inevitable. Similar reform packages have been repeated in muchof sub-Saharan Africa. But the ‘unbundling’ of the electricity supplyindustry to facilitate private sector participation has failed to elicitthe critically needed investment (Bayliss and Fine 2008).Across all developing countries, private sector investments in thepower sector declined from US$ 47 billion in 1997 to US$ 14 billionin 2004. However, international advisors have continued to adhereto the orthodox package of restructuring policies, claiming thatobtaining private sector investment is unavoidable because ofa widening ‘investment gap’ in the power sector.Meanwhile, a dramatic and rapid scaling up of financing is requiredin South Africa. Eskom plans to invest about US$ 44 billion over thenext five years to raise capacity in the energy sector. This is projectedto be financed by a combination of borrowing, price hikes and agovernment loan of US$ 7 billion. But the additional capacity willtake several years to come on stream.The electricity crisis of South Africa demonstrates that thewidespread efforts across developing countries to encourage privatesector investment in the electricity industry are unlikely to succeed.So the government and state utility must continue to scale up publicinvestment in order to maintain and expand electricity capacity.Reference:Bayliss, Kate and Ben Fine, eds. (2008). Privatization and Alternative Public Sector Reform in Sub-SaharanAfrica. London: Palgrave MacMillan.Source: UBS Investment Research.

Lessons from the South African Electricity Crisis

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