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The Energy Crisis: How will Investors look at South Africa now?


The Energy Crisis: How will Investors look at South Africa now?

The Energy Crisis: How will Investors look at South Africa now?

South Africa has traditionally been associated with Africa’s best infrastructure, giving it an obvious advantage in terms of attracting investment and boosting further industrialization.[1] The validity of that assumption is in jeopardy. The main reason is the implosion at Eskom. The President recognises the enormity of the situation but his State of the Nation Address (SONA) proposals make for some uncomfortable reading.

  • Eskom is in crisis and the risks it poses to South Africa are great. It could severely damage our economic and social development ambitions.

  • We will lead a process with labour, Eskom and other stakeholders to work out the details of a just transition, and proper, credible and sustainable plans that will address the needs of all those who may be affected.

  • As we address the challenges that face Eskom, we also need to safeguard our national fiscal framework, achieve a positive impact on our sovereign credit rating, and pay attention to the rights and obligations of Eskom’s funders.

  • It will need more revenue through an affordable tariff increase. We need to take steps to reduce municipal non-payment and confront the culture of non-payment that exists in some communities.

  • Government will support Eskom’s balance sheet, and the Minister of Finance will provide further details on this in the Budget Speech. This we will do without burdening the fiscus with unmanageable debt.

  • To ensure the credibility of the turnaround plan and avoid a similar financial crisis in a few years’ time, Eskom will need to develop a new business model. This business model needs to take into account the root causes of its current crisis and the profound international and local changes in the relative costs, and market penetration of energy resources, especially clean technologies.

  • To bring credibility to the turnaround and to position South Africa’s power sector for the future, we shall immediately embark on a process of establishing three separate entities – Generation, Transmission and Distribution – under Eskom Holdings.

Will investors and the Rating Agencies be convinced? How will other African investment destinations now be evaluated? Not surprisingly one of the first responses to SONA and the 2019 Budget has been Moody’s indication that it wants more details of Eskom rescue plan. This ratings agency also warns of trends indicative of the deterioration of public finances.[2]

Rescuing Eskom is not the only infrastructural challenge. Infrastructural needs are typically discussed in terms of hard or tangible infrastructure (transport, energy, ICT); soft or intangible infrastructure (education, health) or the policy environment; financing infrastructure, relating to which needs are funded how; regional infrastructure or on-the-ground programmes; and technological infrastructure (e.g. digitalisation).[3]

Some of these aspects (e.g. education and health) are mentioned in the President’s address, but not in an integrated manner and not focusing on the infrastructure dimension. In this regard South Africa still needs a coherent policy, with ample emphasis on services. The key to building well-targeted infrastructure connecting African economies to global value chains is “governments dedicated to the task”.[4]

[1] According to the African Development Bank Africa’s infrastructure need is $130bn - $170bn annually. The continent’s available capital is insufficient to achieve this. https://www.businesslive.co.za/bd/companies/investors-monthly/2019-02-19-rmbs-8th-where-to-invest-in-africa-edition-hones-in-on-infrastructure-in-africa/

[2] https://www.businesslive.co.za/bd/national/2019-02-22-moodys-wants-details-of-eskom-rescue-plan/

[3] https://www.businesslive.co.za/bd/companies/investors-monthly/2019-02-19-rmbs-8th-where-to-invest-in-africa-edition-hones-in-on-infrastructure-in-africa/

[4] Ibid.

About the Author(s)

Gerhard Erasmus

Gerhard Erasmus is a founder of tralac and Professor Emeritus (Law Faculty), University of Stellenbosch. He holds degrees from the University of the Free State, Bloemfontein (B.Iuris, LL.B), Leiden in the Netherlands (LLD) and a Master’s from the Fletcher School of Law and Diplomacy. He has consulted for governments, the private sector and regional organisations in southern Africa. He has also been involved in the drafting of the South African and Namibian constitutions. He grew up in Namibia.

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