Electricity, expropriation and South Africa’s gold mines

In 1948 the South African government, with the help of the Anglo American Corp, expropriated — with compensation — Victoria Falls & Transvaal Power Co (VFTPC), the largest electricity producer in the country. Coming in at a mind-boggling £14.5m (about R698m today), the deal was the biggest financial transaction in South African history at the time.  

In this day and age, the words expropriation and nationalisation might set people’s teeth chattering. As DA leader John Steenhuisen regularly claims, one of the greatest fears in South Africa is that a possible ANC-EFF coalition may in future nationalise and expropriate privately owned entities.

This fear didn’t always exist. But what is surprising is that the complete nationalisation of electricity in 1948 was facilitated and encouraged by the gold mines.

As prime minister Jan Smuts said at the time, electricity in South Africa was “as cheap as there is anywhere in the world because wasteful competition had been eliminated … certain industries, experience has taught us, can be driven better by government without loss through wasteful competition”.

This was hardly a controversial position. After World War 2 the world — and Europe in particular — needed some of the minimum requirements for growth. Nations needed education, a healthy population and electricity for both industry and human flourishing. Get these utilities up and running, the theory went, and growth would follow.

Nationalisation of the energy sectors, the establishment of national health services and the unprecedented rollout of basic education for all drove growth. Even the conservative British prime minister Winston Churchill saw this as not only good for the economy, but a moral good. As he once said in support of government-funded services: “There is no finer investment for any community than putting milk into babies.” That is, get people up and running and the rest will follow. 

In some senses (but certainly not all), South Africa was ahead of the game. And it is perhaps worth recounting just how and why Escom (with a “c”) was brought into being.

Certain industries, experience has taught us, can be driven better by government without loss through wasteful competition

—  Former prime minister Jan Smuts

South Africa’s Electricity Supply Commission (Escom) was set up in 1923, after the passing of the Electricity Act the year before. Smuts’s idea was to foster industry and solve certain problems on the railways: by producing and selling electricity at cost, the railways would run and the economy grow.

Escom was charged with providing “a cheap and abundant supply of electricity”. The act stipulated that the utility must operate at neither profit nor loss, and as a result would be exempt from paying taxes. The act also stipulated that in 35 years, all private energy producers would be expropriated by Escom.  

Power and transport were key to industrialisation in the 1920s, and Escom was at the forefront of this development. But the system wasn’t fully nationalised. Far from it, in fact: VFTPC remained the main electricity supplier in the country.

According to the Electricity Act, Escom could take any measure to provide electricity, as long as it “acted in the public interest”. This meant it could, for the first 35 years of its operations, allow private companies to build power stations and produce electricity. Escom, however, slowly took over the operation of these facilities, financing building and maintenance. VFTPC, however, proved to be an exception: while Escom similarly financed its power station at Witbank, for example, the facility remained in VFTPC’s hands. In theory, this could have allowed VFTPC to rake in the money — but for a legal caveat.

The mines were always wary of VFTPC, and they kept a close eye on the power situation. But electricity accounted for only about 6% of their overall costs in 1932, so this wasn’t a primary concern. What was more, under the Electricity Act, VFTPC’s “surplus profits” had to be handed back to customers in the form of a rebate. And the largest beneficiaries of these rebates were the gold mines. In 1933, they were receiving 70% of all the “surplus profits” from electricity.

Under these terms and conditions, electricity was cheap as chips.   

However, VFTPC knew that its time in the energy sector would be limited, and it began to hide its profits in the balance sheet. With sales soaring from 1933, the company hid large amounts of money in renewal funds (which it didn’t need to declare) and dividend payouts. It also managed to externalise large amounts of money through anomalies in exchange control regulations.  

By the late 1930s, VFTPC was still producing and selling nearly 60% of South Africa’s electricity to Escom. The national power utility was happy with the arrangement, viewing VFTPC’s “near monopoly” on power as “benevolent”. The system was working well and the cost of electricity was still relatively low.

But VFTPC was in real terms a foreign company, largely British-owned, and it continued to make abnormally high profits as industrialisation continued. More and more, however, this was coming at the expense of the consumer. That’s to say, it was affecting the main consumer of electricity: the gold mines. 

By the end of World War 2, the gold mines were beginning to doubt VFTPC’s “benevolence”. They also realised that, under a nationalised system, where Escom was forced by law to act in the public interest without making a profit, they could wrangle a better deal. 

And in any event, the Electricity Act had always placed a time limit on private companies’ involvement in producing electricity. With ideas of nationalisation sweeping across Europe, the mines decided to act, encouraging the government to buy out VFTPC. They then began to push the idea that VFTPC couldn’t be relied on to produce the electricity they needed.  

To avoid this “uncertainty”, Anglo American’s Richard Hagart went to the government in 1946 and demanded that VFTPC be expropriated — and soon. Though the government could, in theory, only buy out VFTPC in 1950, the gold mines wanted the deal done in 1948. 

This sudden urge was the result of several factors. A bloody mining strike in 1946, in which the police killed several miners, had got the mines thinking. They began to believe that labour conditions might necessitate further mechanisation, which would require additional electricity supply. What was more, mines were getting deeper and deeper, and human endurance had been strained to its limit.

Miners were suffering — and occasionally dying — from heatstroke. The mines required refrigerated ventilation to go any deeper and to improve productivity.

Another possible factor was the growing international need for uranium, which required large amounts of electricity to mine.    

The time was now right for the expropriation of VFTPC — or so the gold mines felt. The UK’s social democratic Labour government under Clement Attlee had nationalised the energy sector the year before, in 1947. But as academic Renfrew Christie puts it: “The issue in South Africa was not one of socialism. It was a question of lowering prices by eliminating the middleman. A state-run electricity-supply industry could distribute power ‘without profit’.” 

The belief, as expressed by Smuts and many others until the 1980s, was that electricity under capitalist conditions is most efficiently supplied by a government-controlled monopoly.

This doctrine remained true in South Africa right until the early 2000s — that is, until wholesale corruption and mismanagement sparked into life at Eskom.  

But getting back to 1948 and the fight to expropriate VFTPC. The negotiations were far from pleasant. When Hagart joined the negotiations to represent the gold mines, he dug in his heels, giving VFTPC an ultimatum to accept £13.5m without further delay.  

The head of VFTPC, Bernard Price, took exception to Hagart’s dogmatic approach, and claimed he wouldn’t take a penny less than £15.5m. After some back and forth and threats by VFTPC that it would complain to Smuts about Hagart’s abrasive tactics, an agreement was reached in May 1948 — the very month Smuts lost the national election to DF Malan’s National Party. A cheque for £14.5m was duly signed — the biggest transaction in South Africa’s history.

To pay for this expropriation of VFTPC, Escom had to float a loan of £15m. In a matter of three hours the loan was oversubscribed — with most of the money coming from Anglo American.  

Just what lessons this all has for South Africa today, given debates about privatisation of power, isn’t entirely clear. However, it might be worth pointing out one of the most interesting anomalies of the UK’s energy sector privatisation in 1990. 

Privatisation has allowed EDF Energy, the French state-owned utility, to make huge profits at the expense of British customers and for the benefit of the French. EDF supplies more than a quarter of all households in the UK with electricity, at a profit.

Last year, EDF’s UK division made a pretax profit of £1.1bn. In France, however, its parent company suffered a huge loss after President Emmanuel Macron protected French consumers by imposing a tariff “shield”, restricting the rise of energy prices.

So, do we privatise Eskom? You be the judge.

In the 1930s, South Africa’s largest (and private) electricity provider was making abnormally high profits. These came at the expense of consumers — the country’s gold mines in particular

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