South Africa's state-owned electricity generator and distributor, Eskom, which was traditionally seen as one of the world's flagship electrical utilities, is, today, merely a dark shadow of its former self.
Paul Hunter, Manager: World Class Finance at EOH Consulting, believes it is now fair to pose the question of how the electricity giant came to be in this dire situation. Economic theory, he says, might hold some of the answers.
The majority of Eskom's power stations have been specifically designed to burn cheap, low-grade coal and this, Hunter says, has allowed it to produce "cheap" electricity for a long period of time, on a fairly sustainable basis.
Borrowings from capital markets, sometimes at rates even lower than those on SA government bonds, assisted by reducing Eskom's cost of capital. Not factored into the equation were the hidden costs of artificially "cheap" electricity.
"By burning huge amounts of cheap, low-grade coal, thousands of tons of polluting greenhouse gases like carbon dioxide were pumped into the air, a common problem with coal-burning power stations around the world," Hunter says.
"In economic terms, pollution on this scale is called an externality. If not controlled, through environmental legislation, taxes, fines or other penalties, the polluter will typically produce too much of whatever it is they are producing at too low a price, as they do not bear the full cost, including the full long-term environmental costs, of production."
Economic theory, Hunter says, tells us that whenever a commodity is artificially priced below its fair market value, over consumption and wastage will occur. "It's no wonder then that many South Africans probably feel like they have whiplash when now suddenly faced with the possibility of 100% price hikes in a single year combined with monetary penalties for consumers who now use 'too much' electricity!" Hunter says.
The second part of the puzzle relates to an organisation's fundamental mandate and purpose within the broader community, Hunter says. Over the past 10 years, many large organisations have been devoting increasing amounts of management's time and investors' money to causes outside of their core business. These causes are collectively called corporate social responsibility (CSR) initiatives.
CSR initiatives would typically include organisation-wide initiatives like transformation, education, procurement from a wide variety of socially-qualified vendors, as well as the potential provision of products and services at discounted or sub-economic rates to disadvantaged communities.
"Critics argue that CSR initiatives may distract the organisation from the fundamental economic role of businesses and, ultimately, impose a cost on society far greater than the intended original benefit of the well intended CSR," Hunter says.
He adds that according to Nobel Prize-winning economist Milton Friedman, "the (only) social responsibility of business is to increase its profits." In so doing, it will be forced to act in the best interests of all relevant stakeholders including investors, customers and employees, and will also be forced to become as efficient as possible in each of its core business processes, which in Eskom's case is electricity generation and distribution.
Hunter believes that although this point of view may seem at odds with today's triple bottom line business ethos principles, in this case it still provides valuable insight into the causes of some of the problems being experienced.
To the extent that CSR initiatives cause the organisation to divert resources away from its primary objective, and when performance management and incentive schemes reward senior management for such deviations, such will be the extra inefficiencies and costs imposed on customers and other stakeholders.
"The direct costs include time and money that could otherwise have been devoted towards managing and growing the core business while the indirect, but no less important costs, come through a lack of attention and focus on business strategy and in managing the core business in a sustainable and efficient manner," says Hunter.
In the case of Eskom, these social costs are huge in terms of lost productivity and output as well as the loss of investor confidence and future investment opportunities in South Africa. These costs are likely to, ultimately, far outweigh any purported benefits associated with CSR activities, no matter how well intended.
"In order for CSR to not spoil the plot and for organisations to still be compliant with today's triple bottom line principles, it needs to be done in a controlled and business-like fashion, and never at the expense of the efficiency and sustainability of the underlying core business," Hunter says.
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