This paper analyses the history of Escom/Eskom from its founding to the end of the 20th century, with the aim of establishing the key reasons why Eskom has become a failing parastatal. This paper ultimately found Escom/Eskom’s downfall to be inherent in its existence as a state company and its flawed price structure.
Introduction
As we approach the 100-year anniversary of Eskom in 2022, it becomes even more important to recall its founding and examine its transformation over the course of a century. From what started as a perceived model state institution, is now an underperforming parastatal facing corruption allegations, inefficiency and an inability to effectively perform its function. But was Escom a model angel institution that fell and became Eskom? No doubt, it once performed its function of supplying electricity admirably. So then, how did it fall?
Why did Escom/Eskom eventually fail to provide electricity to South Africa effectively? While it may have been founded as a means to generate cheap electricity for mining, as a power utility, it had an obligation to maintain power to the country at large.
This paper seeks to avoid the exhausted explanations. Corruption and mismanagement is a given, but how did it come to pass? What led Eskom from being a stalwart example of what state enterprise could apparently accomplish, to failing to keep the lights on? Corruption and mismanagement are a symptom and not the only one. This paper aims to establish the disease. To do this, it will be utilising a school of economics often ignored by economic historians – the Austrian school of economics. A brief primer on the methodology of the school will be provided in the subsequent section.
The Austrian school will provide a fresh look at a subject which has, relatively, been under threat of an echo chamber.[1] The importance of the mineral-energy complex (MEC) and the mismanagement of post-1994 South Africa has been explored in depth. What has not been are the actions of Escom/Eskom under the lens of economic theory. This relative lack of implementation of economic theory in the case of Escom/Eskom and the ensuing echo chamber means stagnant analysis and policy suggestions as a result. As such, this paper will be examining Escom/Eskom under this lens, focusing on its founding in 1922, its troubled period during the mid-1980s and transition into democracy during the 1990s. These crucial dates contain the key content needed to establish the reason for Escom’s downfall as Eskom. These include the fact that the state enterprise fell victim to the socialist calculation problem, a principle of Austrian economics that will be elucidated in the next section.
The historiography and primary case material will establish a groundwork that will show how Escom/Eskom did not transition into mediocrity, but that the rot was inherent all along. With the information garnered from this paper, hopefully researchers and policy-makers will be able to push policies that address the issue inherent in all state enterprises and avoid the continuing downfall of our economy and industrial society.
A Brief Primer in Austrian Economics
It is commonly argued in the historiography that Escom was an admirable institution that began to fall after it became Eskom. This argument falls for a common fallacy that Frédéric Bastiat addressed in 1850. He argued that people too often judge the merits of a policy or institution based on its immediate consequences, often ignoring the long-term consequences or the hidden opportunity costs.[2] While Escom did seem to perform, for the most part, effectively for much of its existence, we must not then think that something changed. The very structure of Escom itself may be at fault. As Bastiat argues, we must not judge something on its initial consequences alone, but by a review of its effects in their entirety, as well as what could have been.[3] This paper posits that the structures of Escom as an institution and enterprise were rotten from the beginning, due to its political foundation as a tool to provide unsustainably cheap electricity to the mineral-energy complex. This paper accomplishes this using Austrian economics.
The Austrian School of Economics hails back to 1871, when Carl Menger founded the school with the publication of the Principles of Economics.[4] Menger put forward the argument that the prime factor in economic analysis was the human.[5] The school, arguably achieved its popularity with the rise of Ludwig von Mises and Friedrich von Hayek in the 20th century, who popularised the school by merging it with its Classical economic legacy, while avoiding the pitfalls of that school.
Austrian economics is based in the idea of praxeology, the idea that a priori principles can be used to justify further propositions and principles.[6] The main a priori assumption of the Austrian school is that the domain of economics is the individual actor and its interaction in the market.[7] From this, Austrian economists posit a number of principles and theories. The two arguments this paper is concerned with are the Austrian (and Classical) view on prices and the socialist calculation problem.
Prices are integral for the economy and an ordered society. As Jim Peron (2003) argues, prices reflect the reality of the market.[8] Prices expose the state of the supply and demand of a product, allowing agents to understand its scarcity or abundance, as well as the demand of other people.[9] Henry Hazlitt (1979) contends that a proper price mechanism is only possible within a free market, with multiple contesting bidders able to send each other signals of demand and supply.[10] Prices are integral to the economic process as they allow the sharing of information and cooperation without explicit communication. Prices provide incentives to produce.[11] Leonard Reed’s short allegory of the creation of a pencil is an accessible and very illustrative explanation of the importance of prices in the production of all goods.[12] If left without distortion, a proper price mechanism feeds information to economic agents through fluctuating costs relating to their production and the prices they can reasonably charge for their products. This allows the business to run sustainably, as prices serve to provide a means of rationing scarce goods. The alternative to a free market is a planned economy, or heavily intervened one, where prices are distorted.[13] This distortion causes inappropriate behaviour by actors.[14] For example, there may be a shortage of beef. In a free market, producers would adjust by raising the price of beef. But a planned economy may have set prices for beef. This means that the price of beef is below the natural price. Selling for below the price causes over-consumption and leads to the business being unsustainable.[15] By price-fixing, the supply drops due to lack of incentive to produce and sell, and demand increases as a result of artificially low prices.[16] One can see how this is unsustainable: simply, a decreasing supply with increasing demand – with no ability to check that without political lobbying. The principle of pricing is crucial to the case of Escom/Eskom, as will be explained in detail in the analysis section.
With the principle of prices explained, this allows for the argument of the socialist calculation problem. Succinctly, this principle proposes that state enterprise is a bad idea. The reason for this is that state institutions cannot reasonably gain and utilise the information needed to run a centrally planned economy. This is due to the differing incentives of public institutions and the inability to utilise price signals in a non-free market. This paper proposes that while South Africa was not and is not purely socialist, the case of Escom/Eskom being a monopoly led to it suffering from the socialist calculation problem. Being a monopoly prevented it from observing and adapting to competitors’ signals, as well as having any incentive to work effectively.[17] As a state institution, even if unique in its structures, Escom was still state-owned and thus did not have the incentives that a free market alternative would have. State enterprises are ultimately political tools, as will be explored in the historiography and analysis and this leads to appointments based on political connections rather than merit.[18] Public institutions also fail to have any incentive to perform well at their economic function, rather existing for political agendas. When the private sector does a good job, it profits. When it does not, it loses money. The public sector is paid tax money regardless of whether it is doing a good job or not. This means there is no incentive to improve.
Austrian economics provides a theoretical framework from which to examine Escom/Eskom. The principles of a price mechanism and the socialist calculation problem present useful tools to understand why Escom/Eskom eventually fell to what it is today.[19]
Historiography and Primary Case Study
The historiography and primary case material have been combined chronologically to present a timeline of events and how other historians have interpreted the material. This paper was informed by many historians, but not all can be acknowledged. Some outperform others in their veracity. As such, only those who stand out as most relevant will be addressed.
The main debate in this historiography is based on Andrew Kenny’s assertion that the pre-1990s Escom was competent.[20] Other historians and the primary material suggest that this was not completely the case. The following case study will show this by way of analysis. After the case study, an examination of the relevant historians will be presented.
The relevant primary case material reveals the policies and decision-making that underlie Escom/Eskom’s downfall. This is most importantly seen in the legislation that established Escom and the annual reports in the 1980s and 1990s that suggest how Escom/Eskom tried to address its position and may have dug itself into a deeper hole.
In 1923, the Electric Supply Commission (Escom) was founded humbly as an electricity regulator and subsidiary supplier[21] – this is if a monopoly state entity can be considered humble at all. While private electricity producers were still allowed, the Electricity Act of 1922 began the process of nationalising electricity. This started by giving Escom regulatory control over everything electrical.[22] To accomplish this endeavour, Escom was expected to be run as a meritocratic organisation.[23] It was to be self-funded, but able to borrow money from the public treasury.[24] Inherent in the act was, what this paper aims to show as one of the prime causes of Escom’s downfall, restrictions on Escom’s pricing system. Prices of electricity provided by Escom were only allowed to cover costs, loan repayments and a small amount to go towards reserve funds.[25] Escom was not permitted to receive direct public funding, but was also not allowed to charge a market-rate for electricity, creating a dire combination.
As Nancy Clark (1994) argues, Escom was founded with many inherent internal contradictions.[26] It was meant to be independent, but be state supervised. It needed to expand electrification, but without profit. It was meant to run like a business, but was not allowed to raise its price.[27] It is crucial to keep this in mind while examining Escom. It tried to act like a business all the way into the 90s, but was restrained from invoking proper market strategies, such as a floating price of electricity. This internal contradiction is possibly explainable by the twin founding factors of Escom. While it was founded as a state regulator, its first chairman, HJ van der Bjil, was very much anti-state intervention.[28] With the restraints of the Electricity Act, however, Van der Bjil would not achieve his wish of a private sector led electricity growth. Without the ability to change its prices to meet the market, Escom was toothless.
The Electricity Act was not introduced in a vacuum. Rather, it was the product of close relations between government officials and the mining and railway industries. Leonard Gentle (2008) argues that electrification was shaped by a ‘mineral-energy complex’ (MEC).[29] It is true that Kimberly, a mining town, was the first town to be electrified in 1882.[30] Electrification around mines also makes economic sense. They were the capital holders and needed electricity the most. Electrification around mines makes market sense. But, not satisfied with their already preferential treatment, mining magnates attempted to distort the market by lobbying for the current largest electricity producer, the Victoria Falls Power Company (VFPC), to be nationalised.[31] William Hoyt of South African Railways was also instrumental in his call for the VFPC to face state competition or even expropriation.[32] The Electricity Act, after much deliberation with mining magnates (and very little with electricity producers), was passed in 1922 and shifted power production from profit-making to electricity production.[33] This removed a vital incentive for the industry, which perhaps led to the VFPC’s eventual, somewhat willing, expropriation in 1948.
In Escom’s first annual report, it highlights cheap power as its number one priority.[34] What the annual report also reveals is a close relationship with railways and the MEC.[35] This further highlights the role of mining magnates selfishly manipulating the political system to benefit their industry. The victim of this relationship was the VFPC, who was put under the control of Escom, even if indirectly.[36] Even while private suppliers were still meant to be the primary suppliers, the annual report does discuss calls for government power stations near mines.[37] What is clear is that there was a major linkage between private and public sector, to the point that market mechanisms were distorted and profit was banned in an entire industry.
Escom did manage to function relatively well for a while without profit, however. This is explainable by its use of South Africa’s cheap and abundant coal, as discussed in the 1923 annual report.[38] Renfrew Christie (1984) expands on this by not only stressing the cheap coal, but also South Africa’s cheap labour.[39] To provide profundity to this point, Escom did have to undertake a huge rationalisation policy when World War 2 caused coal shortages.[40] This further highlights the importance of cheap coal for Escom’s performance and may explain more recent difficulties in Escom’s functioning, as coal prices go up due to mismanagement and rising labour costs.
Escom eventually became a full monopoly in 1948 when the National Party nationalised the electricity industry.[41] This was just ceremonial in practicality, for the Electricity Act of 1922 had already granted regulatory power to Escom and prohibited profit-making, destroying any incentive for private competition anyway. A monopoly was the inevitable way forward, especially keeping in mind the Apartheid government’s strategy of securing the state sector to enforce its social engineering policies.[42]
Escom faced trouble throughout the 50s, as it failed to meet demand, constructing new power stations funded by debt in response.[43] By 1975, Escom had established an extensive national grid with more than acceptable production.[44] Grove Steyn, however, argues that the production was over capacity, and that Escom was in fact producing a wasteful surplus.[45] Steyn continues to contend that Escom had not produced the correct amount of electricity since the late 60s.[46] The 70s saw much of this come to the fore, when Apartheid’s strangled economy and Escom’s surplus saw three coal stations being mothballed.[47] Throughout this, Escom continually lowered its prices, as was its mandate. After the 1973 Oil Crisis, Escom was shocked and had to raise its prices to meet up with new costs.[48] In 1981, load-shedding occurred as Escom failed to effectively scale up production.[49] This could have possibly been avoided in a free market, as competitors would have been able to pick up the slack and a floating electricity price would have sent the appropriate signals to herald good decisions.
Regardless, this period of faltering saw protests against Escom, with people calling to “stop the rot”.[50] Cooling international relations also saw a tightening of Escom’s ability to receive foreign loans, integral for its expansion.[51]
In response to Escom’s flagging state, the government called for a Commission of Inquiry into the Supply of Electricity in the Republic of South Africa in 1984, colloquially referred to as the De Villiers Commission.[52] Steyn maintains that the commission had an ulterior motive of ousting the incumbent Escom leadership, but nothing in the primary case material backs up that assertion.[53] The De Villiers Commission set out the overarching goal of improving the prices and effectiveness of electricity production in the country, as well as reshaping the leadership and functions of Escom itself.[54] The initial investigation found that Escom had been performing adequately up till the mid-70s.[55] This finding is contradicted by Christie, who argues that Escom’s state was much more precarious.[56] This paper contends that Escom did as good a job as it could with the restraints set out by the Electricity Act and with its role as a monopoly that could not gain proper information from price signals. The Commission then went on to establish that Escom’s prices had been increasing due to high inflation, rising costs and a bad scaling program.[57] The Commission also criticised Escom’s forecasted inability to meet demand, stating that forecasts worldwide since the 1973 Oil Crisis have been inaccurate.[58] The Commission suggested that electricity availability, a supply-side emphasis, should take priority.[59] Over and above all of this, Escom is expected to remain self-sufficient without raising prices.[60] As a monopoly, the Commission argues, Escom bears responsibility for surpluses and shortages.[61] On the contrary, as a monopoly, Escom cannot adequately account for shortages and surpluses, as it has no ability to gain information from price signals, consumer actions or competitors. As a monopoly, it is effectively blind to the market. Overall, the Commission suggests that Escom maintain low prices, decrease costs and aim at conserving electricity.[62] Its recommendations are as follows:
- Replace Escom’s leadership structure with a two-tier structure that allows increased involvement by government and consumers.[63]
- Conserve electricity without raising prices.[64]
- Achieve maximum availability of power stations.[65]
- Revise consumption forecasts.[66]
- Allow for a sounder income structure that enables profit.[67]
- Revise tariff structure.[68]
It is clear that these recommendations are contradictory. Conserving electricity without raising prices is economically unsound. Higher prices are the best way of conserving supply. What the Commission suggests here is merely a marketing campaign aimed at convincing consumers not to use as much electricity. It is a thin hope that this will work. If conservation is to be taken seriously, then prices need to rise accordingly to control supply. Recommendation two and five are also contradictory. Number 5 suggests a sounder income structure that enables profit, but number two wants to prevent any rise of prices. As is seen in the Escom annual reports, this is achieved by cutting costs.
The Commission argues that Escom’s monopoly status allows it to take advantage of economies of scale in order to implement vast electrification and infrastructural development.[69] But without sustainable pricing, this will fall apart.
Brian Kantor (1988) strongly condemns the De Villiers Commission.[70] He suggests that the Commission believed that South Africa couldn’t afford electricity at an economical cost.[71] The Commission would be completely wrong if this was the case. As supply and demand principles dictate, people will pay what they are willing and suppliers will charge what they must. The problem was that Escom was charging under the amount that it needed to, leading to inflated demand and unsustainable production. Kantor claims that the Commission recommended financial management over sound economics.[72] Kantor then proceeds to argue a salient point: that if Escom (now Eskom) is to be a monopoly, it should act like one.[73] Eskom is acting as if it is a private business that needs to appeal to consumers, but it isn’t. It is a state institution with monopoly power. Its pretense at playing private sector is costing it dearly, as it refuses to take advantage of its status. Kantor expands on this by stating that if efficiency in electricity was the government’s real goal, then they would end Eskom’s monopoly and allow in private competitors.[74] As a state enterprise, Eskom should take advantage of the public sector to minimise costs.[75] Over all of this, Eskom got its pricing all wrong. It tried to price according to what it thought the market could bear[76] – but it could never properly know this. As a monopoly, it cannot test prices or rely on competitors and consumers for signals. As said earlier, Eskom was blind. What it could have at least done, which it did not, is price to cover costs.[77] Even a blind monopoly should understand how to properly balance a budget – not by downscaling, but by raising prices to cover the essential costs.
Escom/Eskom annual reports post the De Villiers Commission reveal an unfortunate propensity for uneconomic behaviour. Some recommendations of the Commission were implemented, such as leadership restructuring.[78] Others, such as better forecasts, were not and Escom suffered by following their own inaccurate forecasts.[79] This led to them going overcapacity.[80] Above all this, Escom/Eskom continued a dire habit of lowering prices and picking up the short-fall purely through cutting costs.[81] An inability to take foreign loans also led to increased financial strain.[82]
Escom annual reports, during the late-half of the 80s, keep stating a desire to transform from a “bureaucracy” to a “meritocracy”.[83] Andrew Kenny (2015) would disagree that this was needed. He argues that Escom, prior to these events, was meritocratically run.[84] The Electricity Act of 1922 also required this in its provisions.[85] What is seen in Escom/Eskom’s actions here is a vast misjudgement of its new role and vision. In line with the De Villiers Commission and internal Escom decision-making, the enterprise wanted to transition into a business. This is also due to the possibility forwarded in 1988 to privatise Eskom.[86] But Eskom’s transition to a business-like institution is misguided, as Kantor’s earlier arguments have shown. Eskom desires efficiency and thinks being business-like will achieve that. But acting like a business doesn’t make it efficient. Businesses are effective because they are forged in the fires of free market competition and because market mechanisms force them to subscribe to appropriate pricing and actions. Eskom’s pricing policy and monopoly position prevent it from reaping the fruits of being a business. Rather, it should have acted like a monopoly. Better to be a self-aware monopoly than public sector playing dress up.
Rather than take their new business-like persona seriously, Eskom continued to keep prices well below inflation, even stressing that they couldn’t handle this forever.[87] They sure did try, though, with price decreases continuing right till 1996, when they proudly emphasised that South Africa had the cheapest electricity in the world.[88]
Throughout the rest of the 80s, Eskom faced a tumultuous time, attempting to cut costs rather than raise prices. This became harder as labour prices rose in 1987 in line with the growing power of the trade unions.[89] In 1988, however, good sales and lowered costs seemed to encourage Eskom from adopting sounder prices, despite it receiving permission to make a profit.[90] This was short-lived, as 1989 saw costs rising due to a bad economy.[91] This was worsened by limitations on foreign loans.[92] Over and above that, Eskom continued to refuse to raise prices![93] It attempted to stress that cheap prices were helping people, but one may argue that all they did was pass the problems onto the future people, who now suffer from even greater electricity prices.[94] In the 1989 annual report, the Chairman also stressed that their production capacity was satisfactory and that new plants would only need to be built in 2000.[95] This was a gross miscalculation, but that will be dealt with in due course as we approach the new decade.
As Eskom entered the 90s, politics was shifting to try and reconcile a possible new dispensation.[96] The economy was still bad, however, but Eskom did not need to cut costs going into the year.[97] Despite this, prices continued to be lowered.[98] Most notably in this year, plans to privatise Eskom were cancelled by government.[99] This was to be expected as the National Party (NP) achieved increasingly peaceful relations with the African National Congress (ANC). As James Jude Hentz (2000) argued, the NP’s privatisation strategy was not a case of desiring efficiency.[100] That would not tie into the National Party’s professed and practiced economic beliefs of economic nationalism – simply, they didn’t believe privatisation worked, so why would they do it for positive gains?[101] Apartheid was, Walter Williams (1991) explains, a case of ethnic socialism.[102] The NP understood this and why they did it, so privatisation was, in fact, undoing their own strategy. It was an “exit strategy”.[103] Basically, planned privatisation was aimed at removing state assets from the future government’s control.[104] As negotiations continued between the NP and ANC, however, the need for a substantive exit strategy evidently declined, even though the ANC did, in fact, do as the NP feared post-1994.
In the 1992 annual report, electricity is stated to be becoming increasingly political, as the need arose to electrify the homelands.[105] In 1993, the tides began turning as economic growth started returning, leading to higher demand.[106] During this year, Eskom began earnest marketing campaigns to sell electricity.[107] This is another case of Eskom not understanding what it is. There is no point marketing as a monopoly. Electricity is an essential resource. Electrification of areas is sufficient to generate demand. Marketing is a blatant waste of money. Rapid electrification did happen during this period, as well.[108] One can argue that it was too rapid, as the 1994 report states that non-paying customers are a huge threat to Eskom’s financial stability.[109] Going into 1994 and the new democracy, Eskom was given a grouping of Reconstruction and Development Programme (RDP) goals.[110] The goals relevant to this discussion are:
- Reduction of the real price of electricity by 15% in order to become the cheapest in the world.
- Mass electrification.
- 50% of management staff being black.
- Education for skilled workers, among others.[111]
The 1994 election and settlement provided some certainty for the markets, but slow growth and high crime were still restraints.[112] Electrification continued, but had to be funded by cost-cutting elsewhere.[113] The Eskom Chairman at this time made some appropriate requests, calling for the government to enact more economically liberal policies to encourage foreign investment.[114] This was heeded, in theory, by GEAR later on, but as will be argued, GEAR did not make any substantive changes towards liberal free market policies in actuality.
After 1994, the National Party’s attempts to rout were ended and the African National Congress (ANC) took charge. What Hentz suggests the National Party feared did occur, as the ANC implemented strategies such as the “National Democratic Revolution” and “Transformation”. What this saw was vast restructuring of South Africa’s bloated public sector, with new political appointments across the board to ensure the loyalty of the enterprises to the new government. Bill Freund maintains that this process allowed the ANC to seize the mineral-energy complex.[115] Through the ownership of the commanding heights, the ANC had firm control over the economy. But, despite this transformation and politicisation, Eskom was doing well – recording profits and vast electrification from 1994-2000.[116] But, this success was due to its monopoly position, where it could expand at will.[117] The Financial Mail maintained that, while looking good in the short term, this expansion was not effectively planned, as no long-term sufficiency was considered, such as renewable energy.[118]
In 1995, Eskom recorded great successes in reaching RDP goals.[119] It continued to decrease the price of electricity (misguidedly), achieved electrification far beyond the goals specified and was on track to grow black representation in the leadership. Most uneconomical of all is the simultaneous call for ever more decreasing prices while demand increases – basically making a situation where it wouldn’t be able to control demand.[120]
In 1996, while celebrating South Africa’s new status as having the cheapest electricity in the world, the government opened considerations to privatise Eskom.[121] These considerations were opposed by trade unions, among others, who thought prices would then rise.[122] And hopefully they would – at least be enough to cover costs effectively. Privatisation attempts will be discussed in earnest later in the study.
The year 1997 saw the appointment of the first black chairman of Eskom, Reuel Khoza. The new chairman in the 1997 annual report stated the government’s desire to privatise Eskom by 1998 as well as Eskom’s adoption of Black Economic Empowerment policies.[123] Going towards 2000, the annual reports reveal nothing more substantial. Rather, it is more of the same and a slow move towards Eskom’s eventual total failure in the late 00s.
In line with GEAR policies to manage the national debt, Eskom faced potential privatisation.[124] This took its most substantial form in the White Paper on the Energy Policy of the Republic of South Africa (henceforth: the White Paper). The most substantial point of this paper was stating a need for competition in energy markets and the need to remove market distortions and introduce realistic pricing.[125] This policy would have, no doubt, benefited Eskom. Unfortunately, the White Paper didn’t make it into law. Disastrously, in anticipation of the possible privatisation, government banned Eskom from constructing new power plants.[126] As Kenny argues, the White Paper made attempts at privatisation, but without any commitment or coherency.[127] Private competitors who were asked if they wanted to enter the market declined, as they could not compete with Eskom’s ludicrously low prices.[128] Rather, all the White Paper accomplished was the government strangling Eskom’s already struggling ability to keep up with the demand generated by its electrification. The state only allowed Eskom to build new stations in 2004[129] – four years after its original estimate and possibly long after it actually needed to do so.
The primary material of this study, from the legislation to the annual reports, reveals a policy and decision-making strata that didn’t understand economics. This is not only my bias against non-Austrian schools, but actually an observation that no aspect of Eskom’s and South Africa’s electricity policy really reflected sound economics under any conception. Its prices, above all, show a failure to follow kindergarten level common sense. You price to cover your costs, even if you aren’t going for a profit. If you don’t, you are unsustainable. Eskom proved this again and again – with it all coming to the fore in our present time, as Eskom fails to provide enough electricity to power our stagnating economy.
The Historians
The historiography of Escom/Eskom is, unfortunately, at risk of forming an echo chamber. While a myriad of historians have approached the topic from slightly different angles, the ideologies and theoretical approaches of each historian remains similar, at the risk of not examining the material with a new lens. The previous historiography and case study aimed to examine the secondary material with the lens of Austrian economics, setting forth a history of Escom/Eskom while reviewing past examinations.
While important, the MEC is a very tired topic in terms of study. Many historians, such as Fine (2008), Gentle (2008) and Freund (2010), among others, cite the MEC as the prime factor in Escom’s establishment and decision-making. This explanation is credible. As explored in the case study, the MEC played a pivotal part in the formation of Escom and the elimination of private electricity competitors. It is also true theoretically that the MEC would play a huge role. As the main source of capital in the country, of course the MEC would wield political power. As a point of contention, there is little to no argument over the role of the MEC in Escom’s foundation.
All the aforementioned historians have concerned themselves mainly with the MEC. Interestingly, all of them are also broadly Marxist. As such, it is no wonder that their research concerned laying Escom and its failures at the feet of capitalist interests. They put private interest as above that of public authority. In this way, they are diametrically opposed to the position of this paper, that puts forward that it was public sector domination that led to Escom’s downfall.
Clark (2008) and Southall (2007) provide more interesting insight into the foundation of Escom, through an analysis of the ideologies influencing the founding. Southall analysed the racial dynamic inherent in much of Apartheid’s state sector.[130] Clark provided, among a broad and insightful analysis of Escom up till 1994, an argument that Escom was founded in a confused state of wanting to be capitalist, but being dominated by statist policies.[131] This argument sets forth the basis of an argument in this paper. Southall’s contribution to this paper was the establishment that Escom was a part of Apartheid’s Afrikanerisation employment policy. Interestingly, Andrew Kenny (2015) disagrees that Escom faced Afrikanerisation.[132] This is a point of contention in the historiography. Both Southall and Kenny agree, however, that a departure from meritocracy caused the downfall of Eskom. This is quite odd, as the primary material seems to suggest that the Escom leadership thought it wasn’t meritocratic and needed to become so. For this paper, this argument is irrelevant as the failure of Escom/Eskom is economically inherent.
Southall provides useful insight by being able to observe Apartheid and post-Apartheid Escom/Eskom in his analysis. Kenny provides the same. Kenny, especially, provides the only insight from an avowedly libertarian historian.[133] The Austrian school is highly interlinked with libertarianism, so it was interesting to see another libertarian perspective on the issue. Kenny, however, believes that Escom’s problem is purely present day governance.[134] This paper disagrees with that assertion.
Hentz (2000) provided a unique analysis of Eskom’s almost privatisation in the late 1980s. While being a Marxist and condemning privatisation, a position contrary to this paper, he does provide a valuable analysis of the Apartheid government’s economic policy of economic nationalism. This examination feeds into this paper’s study of Escom/Eskom’s monopoly, as will be explored in the analysis.
As highly relevant historians go, Kantor (1988) is not an historian but an economist who condemned the De Villers Commission prescriptions. His scrutiny provides some of the more issue-specific backing to this paper’s analysis on Eskom’s prices.
All in all, the historiography of Escom/Eskom reveals much of the same with a few varying departures. Even Kenny, who should depart heavily from the Marxist historians, doesn’t change much in his analysis. Hopefully, this paper will provide a decent departure from the orthodoxy and reveal the uneconomic nature inherent in Escom/Eskom, rather than just its face-value political activities and importance.
Analysis
Escom may have only been declared an official monopoly in 1948 when the National Party nationalised the electricity industry but, for all intents and purposes, it already wielded monopoly power.[135] Its role as a prime regulator, with the power vested in it by the Electricity Act of 1922, gave it power over the industry. With the stipulations and regulations wrought by Escom, incentive for private competition fell away. As such, monopolisation of the industry was inevitable. This was combined with the Apartheid government’s strategy to secure the commanding heights of the economy to ensure their political security.[136]
As explored in the Austrian theory and classical economics, monopolies are not ideal in an industry. Without competition, an entity can retain control over an industry and direct it along their whims – raising prices to exorbitant levels or conducting business with inferior competence due to little to no incentive to perform admirably. As has been explored, Escom/Eskom did not raise prices – leading to other problems. Rather, Escom/Eskom’s monopoly status led to the more fundamental problem of the socialist calculation problem. As a single entity within the industry, Escom/Eskom struggled to rely on the signals of non-existent competitors to price their electricity. Instead, they were given political instructions to inform their pricing.[137] Kenny seems convinced that the Eskom leadership and staff were competent pre-1994.[138] This may be the case, but their leadership definitely was not competent in matters of economics, as will be seen in the subsequent section.
The problem of Eskom being a monopoly is most profoundly felt in the lack of alternative power suppliers. Eskom’s legal protection as a monopoly and complete lack of incentive to make a profit meant that no other power generator could form, which has led to a dangerous state of which we are seeing the results now. Competitors aren’t only needed to provide a switch to the machinations of business, but to act as an alternative in case of failure. They exist for damage control. Eskom didn’t have this damage control and this meant that when Eskom did fail, nobody could pick up the slack.
Eskom illustrated in its annual reports a desire to act like a business, while ignoring the fundamental virtue of business – that it has to compete for a profit. Eskom thought that merely changing its rhetoric and wearing suits was sufficient to raising its competence. They were wrong.
Without competition, Escom/Eskom lacked the proper price mechanism to determine a prudent cost of electricity. As a result, it maintained an unrealistic price that led to unsustainable demand. The Electricity Act put forward restrictions on electricity prices forbidding profit. This in itself established a deep rot in the industry. Prices aren’t just means to make individuals rich. They produce incentive but, as explored in the theoretical section of this paper, they are most importantly used to produce price signals that the economy needs to plan and sustainably grow. Succinctly, Escom’s prices didn’t reflect real world pricing. They were artificially low and this prevented the economy from being able to adjust to real world pricing. As we can see in contemporary South Africa, our economy could not handle the shock of raised electricity prices. But if they had been used to the prices from day one, then there wouldn’t have been a shock. They would have established their businesses to function with higher prices. Electricity is a crucial resource of commerce. As such, it doesn’t need to be coddled by government. If the market wants it, they’ll pay for it.
The Electricity Act’s restrictions, combined with Escom/Eskom’s refusal to raise prices (and their pride at lowering them!) led to a dangerous state where Eskom chose to downscale rather than raise prices. This means that while demand was rising due to economic growth and low prices, the ability to meet it was shrinking. Eskom can’t blame the government for this. It was their obsession with cheap prices that led to them shrinking their business rather than raising prices.
Kantor (1988) argues convincingly that Eskom should have at least just priced to cover its costs. Not only was Eskom avoiding profit, it was pricing under its production costs.[139] Apparently, Eskom didn’t think the market could absorb higher costs.[140] As explained earlier, this is nonsense. The market will do what it must. Costs might rise, but that is a small price to pay for sustainability and the avoidance of crisis.
Escom/Eskom fed into the socialist calculation problem by sending incorrect signals to the economy. As monopoly controllers of electricity, they had the responsibility to at least price their product according to production costs. While they may have thought they were benefiting South Africa, they were rather hooking them on an unsustainable drug. The economy became accustomed to unrealistically priced electricity. Because the price was unrealistic, it had to eventually rise – which shocked the economy. As such, when examining Eskom today, we shouldn’t try to address its problems by reducing prices once again.
Prices and government agendas led to another fundamental problem – over electrification. Eskom, despite being a monopoly, actually marketed its electricity to consumers.[141] This was no doubt a waste of time and money, as consumers needed to buy electricity anyway. But combined with their pricing practices and government orders, this was disastrous. They were attempting to raise demand, without raising supply and while lowering prices. It is no wonder this system fell apart!
After 1994, with RDP and the new government, Eskom set forth on a vast electrification program of rural areas. The electrification exceeded expectations. But it was too rapid. Debt collection and non-paying customers became a huge problem.[142] This was doubtless going to happen as a result of South Africa’s crime problem anyway, but steadier electrification may have contained and spread out the problem. Rather, Eskom rushed in, built the infrastructure and then wasn’t even making the minuscule income it could with its prices due to non-paying customers.
This over electrification is fundamentally to do with a calculation problem. It was ordered by decree and not by market demand. In a free market, an industry expands as it can to fulfil demand. Here, electrification expanded to people who could not or would not pay. Now, this may have been necessary due to a need to uplift much of the people of South Africa, but Eskom could have done it while retaining economic sense. They should have raised their prices so that richer consumers could subsidise expansion into rural areas. Instead, they unsustainably expanded demand.
Finally, the government directly interfered with Eskom’s productive capacities. The proposed White Paper of 1998 and planned privatisation led to the government banning Eskom from constructing any new power stations till 2004. This is an oft cited reason for Eskom’s eventual productive failure. It happened because the government interfered in the industry. If left alone, hopefully Eskom would have seen the writing on the wall and built more power plants. The government didn’t even give them this option, skewing the market and causing dire consequences.
Conclusion
This paper has demonstrated how Escom/Eskom did not pay heed to economic principles and, as a result, skewed the market and led to the downfall of its ability to keep South Africa’s lights on. A theoretical framework inspired by the Austrian tradition was used to demonstrate this – identifying Escom/Eskom’s prime theoretical flaw to be the socialist calculation problem. The primary case material and historiography was developed to show how Escom/Eskom’s ignorance of economics led to its downfall. Analysis of this already insightful section established that Eskom fell due to its monopoly status, its dire pricing system, over electrification and government interference.
As a lesson, this paper hopes to reveal the solution to Eskom’s current plight. The answer isn’t increased government control over electricity, but vast liberalisation of the industry. Competitors may not have been interested in entering the market in the 90s, but now that prices are normalised, South Africa is ripe for a free market in electricity. Not only will this act as damage control against the dying parastatal, but will lead to a more sustainable industry led by an incentive to do well and to keep the business afloat.
Overall, this paper has shown how dire government control and intervention in the economy can be. No matter the intentions of the state or Escom in its pricing, it led to our predicament today. Rather some suffering now and benefits later than complete disaster for our descendants. In this way, Austrian economics has addressed why Escom/Eskom fell, and how future economies should avoid the same fate.
References
Primary Sources
Commission of Inquiry into the Supply of Electricity in the Republic of South Africa. Report of the Commission of Inquiry into the Supply of Electricity in the Republic of South Africa. Pretoria: Government Printer, 1984.
Department of Minerals and Energy. White paper on the Energy Policy of the Republic of South Africa. Pretoria: Government Printer, 1998.
Eskom. Annual report. 1923. Johannesburg: Eskom, [1924].
Eskom. Annual report. 1985-2000. Johannesburg: Eskom, [1986-2001].
Government Gazette. Electricity Act 42 of 1922. Pretoria: Government Printer, 1922.
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Footnotes
[1] This will be explored in the historiography.
[2] Frédéric Bastiat, “That which is seen and that which is not seen,” in The Liberal Tide: From Tyranny to Liberty, ed. Jim Peron (Auckland: Institute for Liberal Values, 2003), 59.
[3] Ibid., 60.
[4] Austrian School of Economics, Library of Economics and Liberty, accessed Oct 10, 2017, http://www.econlib.org/library/Enc/AustrianSchoolofEconomics.html.
[5] Ibid.
[6] Jonathan M. Finegold Catalan, A Primer on Austrian Economics, Mises Institute, accessed Oct 10, 2017, https://mises.org/library/primer-austrian-economics.
[7] Austrian School of Economics.
[8] Jim Peron, “Two-Minute Reads on Economics,” in The Liberal Tide: From Tyranny to Liberty, ed. Jim Peron (Auckland: Institute for Liberal Values, 2003), 98.
[9] Henry Hazlitt, Economics in One Lesson (New York: Three Rivers Press, 1979), 106.
[10] Ibid., 107.
[11] Ibid., 106.
[12] Leonard Reed, “I, Pencil,” in The Liberal Tide: From Tyranny to Liberty, ed. Jim Peron (Auckland: Institute for Liberal Values, 2003), 85-92.
[13] Peron, “Two-Minute Reads on Economics,” 99.
[14] Ibid., 100.
[15] Hazlitt, Economics in One Lesson, 110.
[16] Ibid., 119.
[17] Jasson Urbach, “Problems with State Ownership of Enterprises,” in Nationalisation, ed. Temba A. Nolutshungu (Johannesburg: Free Market Foundation, 2011), 99.
[18] Ibid., 101.
[19] While Escom was founded in the service of a few mining magnates and their government allies, this paper is analysing Escom as an economic entity with an intended purpose. While Escom was founded to provide electricity to the MEC in actuality, it had a stated goal of keeping the lights on across South Africa.
[20] Andrew Kenny, “The rise and fall of Eskom – and how to fix it now,” @Liberty 18, no 2 (2015) http://irr.org.za/reports-and-publications/atLiberty/files/liberty-2013-the-rise-and-fall-of-eskom-2013-and-how-to-fix-it-now, accessed April 5, 2017.
[21] Leonard Gentle, “Escom to Eskom: From racial Keynesian capitalism to neo-liberalism (1910-1994),” in Electric Capitalism: Recolonising Africa on the Power Grid, ed. David MacDonald (HSRC Press, 2008), 52.
[22] Government Gazette, Electricity Act 42 of 1922, Pretoria: Government Printer, 1922, 71.
[23] Ibid., 69.
[24] Ibid., 72.
[25] Ibid., 73.
[26] Nancy Clark, Manufacturing Apartheid (Yale University Press: London, 1994), 58.
[27] Ibid., 58.
[28] Ibid., 57.
[29] Gentle, “Escom to Eskom: From racial Keynesian capitalism to neo-liberalism (1910-1994),” 53.
[30] Ibid., 52.
[31] Ibid., 58.
[32] Clark, Manufacturing Apartheid, 51.
[33] Ibid., 52.
[34] Escom, Annual report, Johannesburg: Eskom, 1923. [1924], 5.
[35] Ibid., 6.
[36] Ibid., 6.
[37] Ibid., 11.
[38] Ibid., 5.
[39] Renfrew Christie, “Better than van der Bijl dreamed: Escom 1948-75,” in Electricity, Industry and Class in South Africa (State University of New York Press: Albany, 1984), 150
[40] Ibid., 152.
[41] Roger Southall, “The ANC, black economic empowerment and state-owned enterprises: a recycling of history?” in State of the Nation: South Africa 2007, ed. Sakhela Buhlungu, John Daniel, Roger Southall & Jessica Lutchman (Cape Town: HSRC Press, 2007), 203.
[42] Ibid., 203-204.
[43] Christie, “Better than van der Bijl dreamed: Escom 1948-75,” 157.
[44] Ibid., 168.
[45] Grove Steyn, Eskom: Are we missing the opportunity to learn from history? https://www.gsb.uct.ac.za/files/BusinessDay_newspaper_article.pdf.
[46] Ibid.
[47] Kenny, “The rise and fall of Eskom – and how to fix it now,” 5.
[48] Steyn, Eskom: Are we missing the opportunity to learn from history?
[49] Ibid.
[50] Ibid.
[51] Escom, Annual report, Johannesburg: Eskom, 1985, [1986], 6.
[52] Steyn, Eskom: Are we missing the opportunity to learn from history?
[53] Ibid.
[54] Commission of Inquiry into the Supply of Electricity in the Republic of South Africa, Report of the Commission of Inquiry into the Supply of Electricity in the Republic of South Africa, Pretoria: Government Printer, [1984], 1-2.
[55] Ibid., 3.
[56] Christie, “Better than van der Bijl dreamed: Escom 1948-75,” 157.
[57] Commission of Inquiry into the Supply of Electricity in the Republic of South Africa, Report of the Commission of Inquiry into the Supply of Electricity in the Republic of South Africa, 3.
[58] Ibid., 5.
[59] Ibid., 9
[60] Ibid., 11
[61] Ibid., 14
[62] Ibid., 15
[63] Ibid., 15
[64] Ibid., 16
[65] Ibid., 16
[66] Ibid., 16
[67] Ibid., 17
[68] Ibid., 17
[69] Ibid., 22
[70] Brian Kantor, “The Pricing of Electricity in South Africa: A Critical Assessment of the De Villiers Commission of Inquiry,” Managerial and Decision Economics 9, no. 4 (1988): 309.
[71] Ibid., 301.
[72] Ibid., 306.
[73] Ibid., 307.
[74] Ibid., 307.
[75] Ibid., 308.
[76] Ibid., 309.
[77] Ibid., 307.
[78] Escom, Annual report, Johannesburg: Eskom, 1985, [1986], 6.
[79] Ibid., 7.
[80] Ibid., 7.
[81] Ibid., 7.
[82] Ibid., 7.
[83] Ibid., 7.
[84] Kenny, “The rise and fall of Eskom – and how to fix it now,” 5.
[85] Electricity Act 42 of 1922, 69.
[86] Escom, Annual report, Johannesburg: Eskom, 1987, [1988], 9.
[87] Ibid., 7.
[88] Escom, Annual report, Johannesburg: Eskom, 1996, [1997], 8.
[89] Escom, Annual report, Johannesburg: Eskom, 1987 [1988], 7.
[90] Escom, Annual report, Johannesburg: Eskom, 1988 [1989], 7.
[91] Escom, Annual report, Johannesburg: Eskom, 1989 [1990], 9.
[92] Ibid., 8.
[93] Ibid., 8.
[94] Ibid., 10.
[95] Ibid., 11.
[96] Escom, Annual report, Johannesburg: Eskom, 1990, [1991], 8.
[97] Ibid., 8.
[98] Ibid., 8.
[99] Ibid., 9.
[100] James Jude Hentz, “The Two Faces of Privatisation: Political and Economic Logics in Transitional South Africa,” Journal of Modern African Studies 38, no. 2 (2000): 203.
[101] Ibid., 206.
[102] Ibid., 206.
[103] Ibid., 203.
[104] Ibid., 205.
[105] Escom, Annual report, Johannesburg: Eskom, 1992, [1993], 11.
[106] Escom, Annual report, Johannesburg: Eskom, 1993, [1994], 9.
[107] Ibid., 10.
[108] Ibid., 10.
[109] Escom, Annual report, Johannesburg: Eskom, 1994, [1995], 9.
[110] Ibid., 3.
[111] Ibid., 3.
[112] Ibid., 8.
[113] Ibid., 8.
[114] Ibid., 8.
[115] Bill Freund, “The significance of the minerals-energy complex in the light of South African economic historiography,” Transformation: Critical Perspectives on Southern Africa, no. 71 (2010): 19.
[116] Southall, “The ANC, black economic empowerment and state-owned enterprises: a recycling of history?” 215.
[117] Ibid., 216.
[118] Ibid., 216.
[119] Escom, Annual report, Johannesburg: Eskom, 1995, [1996], 4.
[120] Ibid., 9.
[121] Escom, Annual report, Johannesburg: Eskom, 1996 [1997], 8-9.
[122] Southall, “The ANC, black economic empowerment and state-owned enterprises: a recycling of history?” 205
[123] Escom, Annual report, Johannesburg: Eskom, 1997, [1998], 14-15.
[124] Southall, “The ANC, black economic empowerment and state-owned enterprises: a recycling of history?” 214
[125] Department of Minerals and Energy, White paper on the Energy Policy of the Republic of South Africa, Pretoria: Government Printer, 1998, 8.
[126] Kenny, “The rise and fall of Eskom – and how to fix it now,” 6.
[127] Ibid., 8.
[128] Ibid., 9.
[129] Ibid., 7.
[130] Southall, “The ANC, black economic empowerment and state-owned enterprises: a recycling of history?” 203.
[131] Clark, Manufacturing Apartheid, xi.
[132] Kenny, “The rise and fall of Eskom – and how to fix it now,” 5.
[133] Andrew Kenny is a policy fellow at the classical liberal South African Institute of Race Relations and revealed to me that he is libertarian in a conversation on the 27th of July 2015.
[134] Kenny, “The rise and fall of Eskom – and how to fix it now,” 7.
[135] Kenny, “The rise and fall of Eskom – and how to fix it now,” 5.
[136] Southall, “The ANC, black economic empowerment and state-owned enterprises: a recycling of history?” 203-204.
[137] Escom, Annual report, Johannesburg: Eskom, 1995, [1996], 4.
[138] Kenny, “The rise and fall of Eskom – and how to fix it now,” 7.
[139] Ibid., 307.
[140] Ibid., 309.
[141] Escom, Annual report, Johannesburg: Eskom, 1993, [1994], 10.
[142] Escom, Annual report, Johannesburg: Eskom, 1994, [1995], 9.
