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South Africa’s window to deliver radical action on Eskom is closing

By Xolisa Phillip
Posted on Monday, 28 October 2019 10:27

Eskom has been without a permanent CEO since Phakamani Hadebe stood down in May. REUTERS/Siphiwe Sibeko

The continued mobilisation of scarce state resources to bail out Eskom serves only to delay the inevitable: making hard decisions about the power utility.

An independent report on the governance profile of the state-owned power utility shows Eskom has run out of time. The report, compiled by United Arab Emirates-based CRO Advisors, shows Eskom locked in a downward spiral.

Eskom is one of South Africa’s most strategic state-owned entities (SOEs) because it generates, distributes and transmits more than 95% of South Africa’s electricity.

Since 2008, the utility has been mired in controversies, including South Africa’s prolonged power crisis.  It has had 10 chief executives and a succession of boards. It is currently without a chief executive following the resignation of Phakamani Hadebe in May 2019, just a year after he was hired. Eskom has been without a permanent CEO since.

The appointment by the administration of President Cyril Ramaphosa of a new board at Eskom was widely expected to help resolve some of the power utility’s deep structural issues. The market also anticipated a final resolution on breaking up Eskom into three operating units: generation, distribution and transmission.

However, stakeholders are increasingly losing trust in the new board. They are also fast running out of patience with the government about the slow pace at which structural changes to Eskom are taking shape.

Governance failures

The CRO Advisors report notes that: “While Eskom is a vertically integrated utility on paper, it has devolved into an operationally dysfunctional, financially insolvent, unreliable and corrupt entity.”

The government has not seized the initiative because of “continued protracted political disputes, archaic ministerial oversight, and core lack of risk management oversight and expertise,” it says.

The inertia has resulted in the complete failure of corporate governance and management, according to the report.

Board chair Jabu Mabuza as acting CEO has come under sharp criticism, with some questioning his ability to dig the power utility out of its current hole.

Last week, Eskom plunged South Africa into darkness when it announced stage two load-shedding.

  •  “Without reliable and efficient power generation, there can be no sustainable mining and industrial base in South Africa,” the CRO report says.
  • “The rate of deterioration of the industrial and mining sectors in South Africa is escalating.”

Underlying problems

Eskom’s troubles are multi-pronged and run deep, the CRO report shows.

  • Its financial statements do not present fairly the financial position of the company as at 31 March 2019, as required by financial reporting standards, CRO says.
  • CRO Advisors finds that “current management accounts, internal costing and qualified financial statements are not reliable.”
  • “The […] material financial, operating liabilities and unavoidable costs are not properly accounted for, nor are they captured in the consolidated financial statements.”
  •  “There is no reliable cash management and control structure at Eskom.”

CRO Advisors recommends the appointment of new independent external auditors to examine Eskom’s books.

New build, new headache

Eskom is facing headwinds on many fronts, including at Medupi and Kusile. These projects formed part of the power utility’s new build programme, which was supposed to solve South Africa power supply woes.

Both coal-fired power plants are years behind schedule and have incurred cost overruns running into billions of dollars. The structural issues at Medupi were blamed for last week’s load-shedding.

“Medupi and Kusile are failing, constantly tripping off the grid and have had non-stop design and operational problems. They were not designed as what is commonly referred to as ‘standard plant’ in the power plant industry,” notes the report.

Finance minister Tito Mboweni is due to deliver the medium-term budget policy statement on Wednesday.

  • The statement is popularly referred to as the mini-budget in South Africa.
  • Many observers expect Mboweni to make a critical call on Eskom.

Bottom Line: A disappointing statement from Mboweni on Wednesday could accelerate a downgrade of the country’s sovereign credit ratings by Moody’s Investors Service.

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