SA power utility’s fall from grace
• The public enterprises minister failed to act on recommendation of disciplinary action against former acting CE Koko and promoted ‘inadequate’ Khoza
State-owned power utility Eskom has nose-dived from its position as one of the top five electricity producers in the world 10 years ago to a company overladen with debt and financial risk.
While Eskom’s debt was once rated above that of the sovereign by the major ratings agencies, today it is ranked junk and below the sovereign on the Moody’s scale, as well as on the scale of two other agencies.
A bail-out three years ago that included the conversion of a R60bn government loan into equity and a R23bn cash injection, appears to have had only a temporary effect.
Eskom is again burning cash and the government has begun to talk about “soft support” for its balance sheet.
The company will present its latest set of financial results on Wednesday.
All this takes place while a cloud of corruption hangs over key executives, with no sign yet of either firm action against them or the installation of a strong and determined board to sort out the mess.
The newly appointed Eskom board has a big week ahead. It has a parlous set of financial results to present on Wednesday showing rapid decline and must make major decisions on its future leadership, over whom a cloud of corruption hangs.
A question mark also hangs over whether the board will charge Matshela Koko, the former acting CE, with misconduct, corruption and breach of its conflict-of-interest policy. Will it decide to continue ignoring the serious allegations of corruption that continue to plague finance director Anoj Singh?
With the word “Eskom” having become synonymous with “corruption” any action it takes, or fails to take, will determine its future — for better or worse.
It will also show the country what kind of board it is dealing with: one with the guts to stand up for what is right or one that is timid because it is beholden to the politicians that put it there.
The need for a strong board and strong leadership by the government, particularly Public Enterprises Minister Lynne Brown, is obvious given the morass into which the utility has sunk. What is required is a board consisting of the best business brains SA has to offer.
However, Brown may have missed the opportunity to set things right. A report recommending disciplinary action against Koko has been gathering dust in her office.
Instead of strengthening the board as she promised, she appointed inexperienced academics and people without corporate or financial experience to the board in June.
She not only kept the woefully inadequate Zethembe Khoza on the board, but also promoted him to acting chairman. None on the current board has the depth of leadership experience required to navigate Eskom into calmer waters.
The power utility is gasping for air, hobbled by corruption and relying on taxpayers to keep it going.
The financial statements Eskom will table indicate it has only R20bn cash in the bank, having burnt through R8.6bn in the year to March.
This is enough to fund operations for three months — a position the utility disputes.
It paid R37.8bn in interest on debt, slightly less than the cash it generated from operations.
Eskom has in the past said that anything below the “liquidity buffer” of R20bn raised concern about its status as a going concern. It seems to have requested a cash bail-out from the government.
Finance Minister Malusi Gigaba hinted at more “soft” support for Eskom last week.
Eskom will have to solve these operational and reputational problems while it tries to restore itself to its former glory as one of the world’s best electricity producers.
Until 2006, Eskom occupied fourth place on the Financial Times list of the best stateowned electricity producers on the planet.
Since then Eskom has been in free fall. How did it reach this parlous state?
Those statistics, of course, were artificial as Eskom provided power to only a tiny fraction of the population until 1999, when the democratic government mandated it to expand connections to the previously disadvantaged majority.
As the world’s 15th-largest producer nowadays, Eskom has lost the position it constantly occupied until 2006 as one of the world’s top-five producers of electricity. At the time, Eskom’s debt was rated above that of the sovereign by the major ratings agencies, with Moody’s assigning it an A1 rating the following year. This is the upper medium-grade rating, surpassed only by entities in the developed world.
Eskom is now graded junk and below the sovereign rating on the scale of Moody’s and two other major ratings agencies.
Eskom’s loss of autonomy and with that, its planning capacity and operational prowess, started in 1998 when it warned the government that the country would run out of power capacity in the next decade.
The government, which believed the private sector would fill the gap and enter the market, overruled Eskom’s managers in the same year and denied them the opportunity to build more infrastructure.
Power rationing ensued in 2007, resulting from the disastrous political decision.
The political meddling did not end there. Not only did politicians appoint the management and board, they increasingly meddled with decisions to decide who received what contract and at what price, reducing Megawatt Park managers and engineers to rubber stamps.
Under the leadership of Brown and her predecessor, Gigaba, the political interference at Eskom has escalated. So have the scandals and corruption, which resulted in taxpayers being forced to bail out the utility with a R23bn cash injection in September 2015. That was followed by a R60bn write-off in debt owed to the government in December that year.
Judging by the numbers to be presented on Wednesday, the R83bn gift less than three years ago provided only temporary relief. Another bail-out request may not be far off, in addition to the six-year extension of the government guarantee on R350bn debt to March 2023.
Political meddling also began to destabilise the leadership of the utility, resulting in the forced departure of four executives in 2015. The current acting CE, Johnny Dladla, is the sixth person to fill the post since July 2014, including Brian Molefe’s two controversial stints, which ended with his axing by the public enterprises minister in May. His battle to be reinstated is continuing in court. This amounts to an average of six months per head in the crucial CE post.
Koko, who was Molefe’s replacement in November 2016, was forced in May to take leave of absence when allegations of conflict of interest and other irregular conduct surfaced. Law firm Cliffe Dekker Hofmeyr and auditors Nkonki, who conducted the probe on Eskom’s behalf, have recommended Koko faces six charges in a disciplinary hearing.
Khoza said on Sunday that charges against Koko had been finalised by the audit committee, which he said was now in the process of recruiting an independent chairman to present them to Koko. Khoza is the third incumbent in the chairman’s position since the dramatic December 2014 departure of Zola Tsotsi, who lost a motion of no confidence by the board after being accused of hijacking executive responsibilities.
Tsotsi’s replacement, Ben Ngubane, presided over corruption scandals including the controversial Gupta family’s acquisition of coal supplier Optimum Holdings and Eskom’s illegal financial assistance to the family accused of capturing the state. His tenure was cut short when he resigned in the face of the mounting scandal in May.
Eskom’s current chief financial officer, Singh, is the third person to occupy this strategic position since Paul O’Flaherty’s departure in July 2013.
Singh’s tenure at Transnet, where he held a similar position, and now at Eskom have been plagued by allegations of fraud and corruption involving hundreds of millions of rand.
The Treasury found in 2017 that Eskom’s prepayment of almost R700m to the Gupta family, which features prominently in allegations of wrongdoing against Singh and Koko, was illegal.
Former public protector Thuli Madonsela flagged billions of rand in questionable payments to the Gupta family, which she said were designed to illegally assist the family acquire Optimum in 2016.
Last week, Singh was accused of conspiring with global services firm McKinsey partner Vikas Sagar to illegally divert about R400m of Eskom’s money to the Trillian group of companies, whose major shareholder is Gupta lieutenant Salim Essa. While McKinsey immediately suspended Sagar and ordered an external probe into his conduct, Eskom’s Singh is sitting comfortably as the face of the utility’s finance department.
Eskom has R478bn in outstanding debt, half of which is guaranteed by the government until 2023. The debt would top R500bn over the next two years, with most of it coming from state-owned developmental finance institutions, Singh said last week.
The government was forced two weeks ago to pay R2.2bn to Standard Chartered Bank, which had recalled its government-guaranteed debt to South African Airways.
There will be a lot more for the taxpayer to pay if corruption is allowed to drain Eskom’s finances any further.
IT HAS PAID R37.8BN IN INTEREST ON DEBT, SLIGHTLY LESS THAN THE CASH IT GENERATED FROM OPERATIONS