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Concern mounts for South African electricity utility Eskom

By Xolisa Phillip, in Johannesburg
Posted on Monday, 30 September 2019 20:17

Eskom's chairman Jabu Mabuza gestures during the 2018/19 interim results at the Eskom's head office at Megawatt Park, in Sunninghill, South Africa, 28 November 2018. REUTERS/Siphiwe Sibeko

It is crunch hour for Eskom, South Africa’s troubled power utility.

  • Eskom provides more than 90% of the country’s electricity supply. If it sneezes, South Africa will catch an economic cold.
  • The behemoth is the biggest originator of government debt, accounting for the majority of the state’s contingent liabilities. But there is little to show for this heavy investment.
  • Last month, Moody’s warned about the utility’s unsustainable capital structure and highlighted the urgent need to implement Eskom’s turnaround plans.

Governance failures

The story of Eskom is one of unfulfilled potential and self-inflicted troubles. It is also a cautionary tale of what happens when governance fails. What was once a well-oiled, award-winning operation has been reduced to a shadow of itself.

There is now broad consensus the power utility, which is supposed to be the government’s most strategic asset, is technically insolvent and is a liability on the fiscus.

Eskom is wholly owned by the government. Over the past 10 years, the power utility has been the recipient of successive bailouts, however, satisfactory results have not been forthcoming.

Eskom is overseen by the department of public enterprises, the custodian and oversight authority for most state-owned entities, including, among others, the debt-laden national carrier South African Airways.

Nature of the afflictions

Eskom faces uphill battles on all fronts.

  • Its finances are in shambles. Its debt spiral has resulted in $29bn owed to creditors and high interest repayments.
  • The power utility is borrowing to service interest costs and to pay for salaries while its customer base is dwindling and its cash flows are under pressure.
  • Eskom’s operations have been adversely affected by an oversupply of staff in non-core areas and an undersupply of technical expertise in strategic units of the business.
  • Its plant maintenance programme has been severely curtailed, compromising the utility’s power electricity reserve margins.
  • Its building programme, primarily comprising the Kusile and Medupi coal-fired power stations, has been riddled with structural, operational and administrative challenges.

CEO hunt futile?

KW Miller, a veteran energy executive and independent consultant based in the United Arab Emirates, said Eskom’s bid to appoint a new CEO may not help resolve its problems.

Bloomberg reported 29 September that Eskom has shortlisted three candidates for the position.

But “the utility is so far gone that […] hiring another CEO is a futile exercise,” Miller said.

Bitter medicine

What Eskom does need, Miller argued, is an independent chairperson who will make politically unpopular decisions like reducing the power utility’s large staff complement.

Such a chairperson would need the support of a non-South African chief restructuring officer (CRO) to conduct the tough task of turning around an insolvent operation.

Eskom already has a CRO.

In July, public enterprises minister Pravin Gordhan appointed Freeman Nomvalo, a chartered accountant, as Eskom’s CRO. But the appointment was met with mostly negative reactions.

Political quagmire

“Eskom is in a tight political bind with the unions. President Cyril Ramaphosa has promised that there will be no retrenchments. The reality is the company is insolvent. So hiring another CEO to run an insolvent company is not what you do. You hire a global CRO and four to five deputies from the global markets who understand generation, transmission and distribution finance,” said Miller.

Over the years, the lack of management and board stability has compounded Eskom’s problems. Previous CEO Phakamani Hadebe, a national treasury veteran and a former bank executive, quit in May on the one-year anniversary of his appointment.

There is a sense that all the different stakeholders are in gridlock because of how overwhelming the problem is. There is also the element of political inertia that prohibits tough decisions from being taken, said Miller.

“The South African government is on the hook to carry this albatross,” he added.

Long-term outlook

However, breaking up Eskom into generation, transmission and generation units will not necessarily solve its monumental financial and operational challenges in the immediate term, cautioned Miller.

New build disaster

Then there are the issues afflicting Kusile and Medupi.

The two power stations were meant to be South Africa’s answer to its energy crisis. But the plants are years behind schedule and nowhere near completion.

Furthermore, Kusile and Medupi have incurred massive cost overruns. But what is of concern is that, structurally, the plants are nowhere near the initial engineering standards envisaged. They will require more funding to correct their structural faults.

No good for economy

Miller said he is working on a comprehensive status report on Eskom that will be shared among stakeholders. It is scheduled for release in the first week of October.

Enoch Godongwana, the African National Congress chairperson of the governing party’s sub-committee on economic transformation, hinted in an interview last week that there would be a major announcement in October about the future of Eskom.

The bottom line: The situation at Eskom is so dire that it poses a threat to the South African economy.

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