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The concessionary loans granted to Eskom are a monumental mistake


South Africa has received concessionary loans from the World Bank and the African Development Bank to help Eskom, the state-owned electricity utility, address its record losses. Indeed, the state-owned company incurred a 23.9 billion-rand loss ($1.2 billion) for the 2022-23 fiscal year. The loans, which total $1.5 billion, will be used to support Eskom's restructuring and turnaround plans, as well as to invest in new and renewable energy generation.

Eskom has been struggling for years due to a combination of factors, including mismanagement, corruption, and a lack of investment in its aging infrastructure. This has led to frequent power cuts, known locally as load-shedding, which have had a significant impact on the South African economy.

Eskom spent 84 billion rand on coal and almost 30 billion rand on diesel-fired open-cycle gas turbines. However, sales volumes dropped 5% amid the blackouts. Moreover, Eskom has been struggling to secure additional generation capacity from private producers, which would help to reduce its reliance on coal and improve the reliability of the electricity supply.

The fundamental reason for all of Eskom's woes is that Eskom is a monopoly. It is the only supplier of electricity in South Africa. The central features of a monopoly are that a monopoly has no incentive to innovate and can charge consumers a higher price since it faces no competition. As a monopolistic entity that uncompromisingly dominated the electricity sector in South Africa for decades, Eskom has a long history of mismanagement, which has contributed to its financial and operational problems. And this long history of mismanagement has been plagued by a long history of corruption, which has further weakened the company’s position.

The concessionary loans are a welcome boost for Eskom. And the South African government has also pledged to support Eskom, but it is facing its own financial challenges. It is therefore unclear how much additional funding the government will be able to provide to Eskom in the coming years.

The reality is that these concessionary loans were a colossal mistake made by the World Bank and the African Development Bank. And the reason why it is a colossal mistake is that these concessional loans will perpetuate the mismanagement and corruption that runs Eskom. These concessional loans are a bail-out rather than capital being supplied for improvement. Eskom never faced competition. It is the only power supplier in South Africa. Thus, what incentive does it have to produce high-quality services at low prices and to maintain innovation when it never had to face a competitor in the first place?

The $1.5 billion granted to Eskom will only engineer the continuation of its underperformance. The likelihood that Eskom will misallocate these funds is very high and such prediction is totally justified by the past performance of the utility company.

The only way for Eskom to improve as a utility company is to open the electricity market so that other electricity companies could compete with Eskom. This will force Eskom to innovate and improve the quality of its service. Competition will compel Eskom to allocate resources efficiently. So long as the South African electricity sector will be monopolized by Eskom, load-shedding will continue.

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