The South African Civil Society Information Service

Eskom's Five Billion Dollar World Bank Loan: Questions Abound, Answers Elude

By Michelle Pressend · 23 Jan 2009

Picture: publicinsomniac

ESKOM’s plan to take a US$5 billion World Bank loan is a cause for major concern. It raises a number of pertinent questions about South Africa’s energy policy arena and the energy choices being made on behalf of ordinary South Africans.

In the first place, why is South Africa taking a World Bank loan? Doesn’t our state have a role in addressing the current energy crisis or 'bail out' of ESKOM?

Considering the World Bank’s record of reigning in state power, what conditions - or conditionalities as they are commonly referred to in the development world - are attached to the loan? Whose interests are at stake? Will the loan be used to fund ESKOM’s environmentally harmful coal power strategy? And what of the World Bank’s position on climate change?  

To begin with, it's important to remember that the state was actively involved in building the economy of South Africa during the apartheid era. Historically, the generation of our energy and energy policy was closely linked to the industrial growth of the country.

In 1920, ESKOM was established to provide cheap energy to the railways and gradually expanded its power by constructing a national grid to ensure energy security for the country. ESKOM accounted for 96% of electricity generation; it controlled the high voltage transmission grid and distributed 58.5% of electricity directly to end consumers.

Although electricity was seen as a public good to be supplied by the state to industries and households, service delivery was racially skewed. The majority of black South Africans had no access to electricity.

In 2001, under the ANC government, ESKOM was converted into a company with government as the sole shareholder. While the electricity market was being unbundled and ESKOM privatized, a period of flux followed where government expressly prohibited ESKOM from building new generation capacity. ESKOM’s privatisation was eventually halted in 2004 and the South African government started investing in its expansion programme. However, early warnings about energy capacity constraints were ignored. 

Cue 2008 and the entire country was quite literally plunged into darkness as ordinary South African were faced with the rough reality of regular and sweeping power cuts as the national electricity grid was unable to cope with demand.

The decision to prohibit ESKOM from building new generation capacity caused the delay in the decision-making process within government to fall back more than two years.

As a result of incompetence, poor planning, the lack of investment to generate new capacity as well as the failure of coordination between government departments, South Africa is currently faced with an electricity crisis. 

But has ESKOM and the South African government learnt any lessons from the past and how far are they looking into the future? How much of this World Bank loan will be dedicated to generating power for domestic consumption and what proportion of it will be used to create renewable energy solutions for a sustainable future?

ESKOM says it needs US$33 billion over the next five years to increase power production and avert further shortages. This is a substantial amount of money, which all signs indicate will be used to maintain a socially and environmentally harmful status quo. Almost 90% of South Africa's electricity is generated in coal-fired power stations. It appears that the expansion of coal-powered stations is being prioritized as opposed to renewable energy, revealing ominous signs for South Africa’s ability to build a responsible and sustainable energy future.

Questioning whose vested interests are involved as ESKOM continues with unsound practises that have very broad social and environmental consequences is critical since South Africa’s economy was largely built on the minerals-energy complex in the first place. Is this loan in the public’s interest or is it predominantly to maintain the minerals-energy complex with mining companies and elite interests at the centre?

Moreover, while interest, power and politics need to be examined with respect to the decision to take the World Bank loan, the implications of the conditionalities of the International Financial Institutions (IFIs) also need to be understood.

The experience and implications of policy choices and policy spaces must be taken into account. Its been well researched and documented that conditions imposed on countries that have taken IFI loans, particularly in Africa, have drastically reduced the policy space for governments to develop flexible and innovative industrial, trade and social policies suited to there own circumstances. 

According to Professor Fantu Cheru, “Conditional lending has had major effects on African countries. Economically, donor controlled economic reform aimed at boosting exports to developed countries has led to the significant erosion of the living standards of the poor and dwindling investment in the productive sectors of the economy. Debt servicing has diverted scarce resources needed to expand health, education and nutritional services to the poor. Politically, many indebted countries have ceded their sovereignty and their right to determine their countries’ development to creditor institutions and governments.”

Cheru points out that by imposing political and economic directives, IFIs violate the sovereign will of states. World Bank and International Monetary Fund (IMF) energy reform programmes in Nigeria illustrate the consequences and critique of their involvement. 

Lucy Baker’s brief on the IFI’s influence in the Nigerian energy sector points out that while the corruption and embezzlement of public funds by Nigerian authorities and elites is central to the failure of delivering power to the nation, the IFIs’ influence is also a major factor.

She illustrates core elements of World Bank and IMF policy that include “the unbundling and privatisation of the state electricity company; a power bill to accelerate transformation of the electricity sector; legislation and technical assistance to promote domestic gas sector reform; liberalisation of the downstream petroleum sector; funding to address key infrastructure constraints; and legislation for bills on fiscal responsibility, procurement, and the Extractive Industries Transparency Initiative.”

The Nigerian experience that unfortunately unilaterally adopted these core elements could provide lessons for South Africa in our own energy policy.

In Nigeria, since 2001 the World Bank has given approximately US$300 million for the reform and privatisation of Nigeria’s energy sector. Nigeria’s National Energy Development Project, which began in 2005, is entirely Bank-funded. Despite Nigeria being Africa’s largest oil producer and having one third of proven gas reserves in Africa, at least 60 percent of its population lacks access to electricity.

The Nigerian Regulatory Commission (NERC) has the legal power to establish line tariffs for the poor and to discriminate in favour of essential services. Baker highlights that the commission called on government to provide subsidies to ensure affordability for the poor. However, the World Bank stated “in order to achieve full cost recovery with an adequate profit margin, the ‘reasonable average tariff’ should be 30 percent higher than the one currently in operation.” In sum, Baker states “The Nigerian case adds weight to the critical analysis of the World Bank and IMF energy sector reforms. The IFIs have pushed centralized grid-based models, and a framework based on utility privatisation and private-public-partnerships, which have failed to effectively provide pro-poor energy”

The South African government and ESKOM have largely adopted this model.  Intensifying these reforms in conjunction with the World Bank loan should be raising alarm bells for the South African public, particularly on affordability and access to electricity as well as renewable energy options. Civil society needs not only to monitor the nature of this loan, but also strongly advocate the use of electricity and energy as a public good.

Should you wish to republish this SACSIS article, please attribute the author and cite The South African Civil Society Information Service as its source.

All of SACSIS' originally produced articles, videos, podcasts and transcripts are licensed under a Creative Commons license. For more information about our Copyright Policy, please click here.

To receive an email notification when a new SACSIS article is published, please click here.

For regular and timely updates of new SACSIS articles, you can also follow us on Twitter @SACSIS_News and/or become a SACSIS fan on Facebook.

Read more articles filed under Environment.

Read more articles tagged with: renewable energy, climate change, Eskom, South Africa.

You can find this page online at http://sacsis.org.za/site/article/221.1.