FACULTY OF ECONOMICS MANAGEMENT SCIENCE
SURNAME : MHANA
NAME : AXOLE
INITIAL : A
STUDENT No : 217226523
LECTURER : Miss T XABA
MODULE CODE : ECN23M0
MODULE NAME : ECONOMICS 2
DUE DATE : 20 MARCH 2019
South Africa is currently facing Economics problems in all its state owned entities (SOE.s) one of the options that needs to be explored is to privatize SOE.s. In light of the statement above you are required to investigate cost and benefits of privatizing SOE.s, chosen Eskom.
TABLE OF CONTENT
Introduction .. 3
Cost of Eskom privatization 4
Benefits of Eskom privatization 4 -5
Conclusion . 6
A state owned enterprise (SOE) is a legal entity that is created by a government in order to partite in commercial activities on the government behalf. The South Africa based on power utility Eskom is the 11th largest company in the world in terms of electric generating capacity, and it is an SDE of the South African Government.
Eskom is the one of the state owned entities, that cause problems in the economy of South Africa E.g Eskom is currently the main electricity suppliers in South Africa, they one pretty much entitled to do what they, and also in a large way are able to bully the government and also consumers, by increasing tariffs to counter their weak performance in the creation of electricity.
I will be investigating whether the privatization of Eskom is a solution to economic problems of South Africa or is not, I will be focusing on costs and benefits of privatizing.
COSTS FOR ESKOM PRIVATISATION
Since energy can often have fixed costs, the scope for competition between smaller energy provides is significantly reduced. Potential waist case scenario for consumers all offering the same inflated price for energy, which has been seen in the United Kingdom.
REDUCE GOVERNMENT REVENUES
Privatizing Eskom would certainly increase government revenues, for a short term, shifting these revenue from the government to the private sector would mean that the long term cash flow would not go straight to the treasury, who would only take a position through taxation.
For private companies the bottom line will always be providing returns to shareholders and boosting profits which could mean that untold numbers of skilled works could lose their jobs and become dependent on government welfare programmes, thus increasing costs for the state.
In our last piece, we noted that politicians were often prone to short termism but the same can often equally apply to those in the private sector. It could very well be the case that a company is reluctant to invest in new generation facilities if the profit potential is not high enough.
BENEFITS OF ESKOM PRIVATISATION
The main argument for privatization is that private companies have a profit incentive to cut costs and be more efficient. If you work for a government run industry, managers do not usually share in any profits however, a private firm is interested in making a profit, and so it is more likely to cut costs and be efficient. Since privatization, companies have shown degrees of improved efficiency and higher profitability.
LACK OF POLITICAL INTRFERENCE
It is argued governments make poor economic managers. They are motivated by political pressures rather than sound economic and business sense. For example a state enterprise may employ surplus workers which is inefficient. The government may be reluctant to get rid of theworkers because of the negative publicity involved in job losses. Therefore, state owned enterprises often employ too many workers increasing inefficiency.
It is argued that a private firm has pressure from shoulders to perform efficiently . If the firm is inefficient them the firm could be subject to a takeover. A state owned firm doesnt have this pressure and so it is easier for them to be inefficient.
Often privatisation of state owned monopolies occur alongside deregulation i.e. policies to allow more firm to enter the industry and increase the competitiveness of the market. It is this increase in competition that can be the greatest spur to improvements in efficiency. For example, there is now more competition in telecoms and distribution of gas and electricity.
Privatisation is one of those market factors that are extremely difficult to measure, making a big grey area. There is no right or wrong answer to whether a country or company should privatise and is very case sensitive. Public enterprises can and do work all around the world, but this is all good and well when it comes to a government that still operates on the basis of honesty and integrity, but once you have a government that is corrupt and fending for themselves industry is definitely an option for Eskom as the positives outweigh the negatives.
Eskom announced that they would introduce IPP (Independent Power Producers) to the industry. Semi privatisation is a step in the right direction for Eskom whilst also limiting the risk one they were already in trouble and needed to find a ways to alleviate the burden of the loan from the world banks. So hopefully the private companies can improve on current service delivery and restore the faith in a government which is able to look past its own faults and do what is best for the country.
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