Government Ownership Sucks

February 15, 2019

The Wall Street Journal today profiles South Africa’s electric power company, Eskom. What a mess—something we have seen many times with government-owned businesses. Eskom has a bloated workforce, provides terrible service, fails to maintain its facilities, and is transmitting economic damage in every direction. It has rotten management and apparently corrupt dealings with politicians.

Three decades after Margaret Thatcher this should not be happening. Governments should not own businesses that can earn revenues in the marketplace. For citizens, there is no advantage to government ownership—there is only high costs, debt bombs, cronyism, and lousy service. It was same story with Puerto Rico’s government power company. The way ahead for South Africa is privatization.

The word “sucks” is not a technical term, but it is surely what South Africans are thinking and it is the logical takeaway from the WSJ article:

Africa’s most-developed economy this week is experiencing its worst blackouts in years, with households, businesses and key infrastructure left without electricity for up to nine hours a day. The power cuts have hobbled the country’s mining sector, paralyzed traffic behind disabled stop lights and forced people to cook dinner outside on paraffin stoves—less than three months ahead of national elections that will determine whether President Cyril Ramaphosa, who ousted his scandal-battered predecessor last year, can win a full term.

At the center of the shortages is South Africa’s state-owned power utility Eskom, which supplies some 90% of the country’s electricity, but has been rattled by years of mismanagement and alleged corruption involving senior management. On Wednesday, the company warned that it was technically insolvent and would go bankrupt by April unless it gets a multibillion-rand government bailout.

Saddled with some 420 billion rand (around $30 billion) in debt—much of it government guaranteed—Eskom has become Mr. Ramaphosa’s biggest political headache. The company’s failure to generate sufficient electricity is eroding already anemic economic growth, while another bailout would add to the government’s rising debt load.

“Eskom’s current situation is the single biggest risk to South Africa’s economy,” Mike Fraser, chief operating officer of Australian miner South32, said at a Cape Town mining conference last week.

… Government officials and Eskom’s board—installed by Mr. Ramaphosa last year—say the utility is failing on multiple fronts.

Its former chief executive, chief financial officer and a dozen other senior executives have been implicated in a government corruption scandal, in which a family with close ties to former President Jacob Zuma was allegedly handed billions of rand in contracts and other favors. The former executives, Mr. Zuma and the family all deny the allegations, which are being investigated by South African police and a commission of inquiry.

Amid the management failures, Eskom for years neglected maintenance on its aging coal-power stations, which are now breaking down, Pravin Gordhan, the minister in charge of Eskom and South Africa’s other state-owned companies, told parliament. The completion of two new coal plants meant to make up for the generation shortfall, meanwhile, is seven years behind schedule and three times over budget, he said Wednesday.

“The issue of money mismanagement, getting rid of good people, replacing them with compliant people and in particular allowing the level of corruption that took place has all together damaged this very important institution,” said Mr. Gordhan, who was appointed by Mr. Ramaphosa. “Today we are dealing with the cumulative effects.”



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