Executive shuffles can’t hide Eskom hole
The Eskom board decided on Friday to “rotate” the position of CEO, which acting chairman Zethembe Khoza says is a way “to give other people a chance”. So Johnny Dladla goes back to his old job, and information technology manager Sean Maritz comes in as acting CEO. So who’s next? The catering manager?
Nowhere on the planet is the notion of a “rotating” CEO of a major national utility even an experimental strategy. The reason the boards of 99.9% of public and private companies appoint a single CEO is that anything else reduces the CEO’s authority, responsibility and accountability. So it’s a certainty that Maritz did not get his job on the basis of a warm and fuzzy notion that everyone should have a turn.
This is why Friday’s sequence of events is so revealing. What happened, if I have this right, is that Eskom’s head of legal affairs, Suzanne Daniels, insisted — as any responsible head of legal would — that Eskom demand the return of the R1.6bn it wrongly paid to Gupta-aligned company Trillian and international management consultancy McKinsey. Dladla acceded to her call, although it came out as a simple request rather than a demand.
I think it is safe to say that asking consultancies nicely to pay back money they don’t think was wrongly billed in the first place is not going to cut it. You have to lawyer up pretty seriously if you want to go down that road.
Within 24 hours, Daniels had been suspended, the sixth member of Eskom’s executive team to suffer this fate. According to the Sunday press, this was Maritz’s first action as acting CEO.
Apparently the pretext was that Daniels spent R50,000 on a team-building exercise, because in Eskom’s weirdo world it’s quite acceptable to pay a management consultant almost R500m in fees without a contract, but having a R50,000 team-building exercise is just totally, absolutely wrong.
It turns out that when the suspension letter arrived, the reason given was totally different: Daniels was accused of making representations that were too strong. I am not making this up.
Over the past few months newspapers, Business Day included, have been writing huge tracts over the R1.6bn Eskom paid to McKinsey and Trillian. The reporting has been magnificent. The public protector’s state-capture report, the Budlender report, the Gupta e-mail leaks and the many honest people in Eskom itself have made this some of the most compelling journalism of our era. But I can’t help thinking that as fascinating and horrible as it might be, the McKinsey/Trillian angle is slightly missing the point, or at least it tends to obscure a larger problem. That larger problem is the financial state of Eskom itself.
None of this is secret, because Eskom reports very fully and very dutifully about its financial state. So here is the bad news: Eskom is about nine times leveraged, which compares with a global average of somewhere between 2.5 and 5.5.
For a small information technology company with a string of hopeful venture capital funders, that might be okay. But Eskom has annual revenue of R148bn. Massive cost over-runs have caused sky-rocketing debt that now needs to be serviced at an increasingly fast rate.
On top of that, Eskom has capex of R50bn a year, which will rise by R10bn every year for the next few years.
How big have those cost overruns been? One way to estimate that is to compare the projected cost per megawatt with the actual outcome. The total difference is about R100bn, so the R1.65bn Eskom paid out to its advisers is pretty much chickenfeed.
To cover the capex and the debt repayments, Eskom needs electricity prices to rise 23% every year for the foreseeable future, without any efficiency gains.
What happens if Eskom doesn’t get these price hikes? The only possibilities would be to sell assets, go to the bond market or go cap in hand to the government. As it stands, the government has run up about R470bn in contingent liabilities, of which R250bn lies with Eskom.
What about borrowing more? Eskom hasn’t been to the bond market for two years now, which is very revealing because if it could have, it would have. Notionally, it plans to raise R340bn in the next five years, which would be less than its R413bn of interest and debt repayments. That plan is really not going anywhere until the utility gets management stability.
As for selling assets, please, dream on.
This quick look at Eskom’s finances explains why the board thought at the start of 2017 it had to contemplate a massive contract to buy in external skills. By fluffing that contract, Eskom has closed down yet another option.
A few weeks ago, Goldman Sachs sub-Saharan Africa head Colin Coleman said Eskom was the single biggest risk to SA’s economy. I have absolutely no doubt he is right.
AS FASCINATING AS IT MIGHT BE, THE MCKINSEY/TRILLIAN ANGLE TENDS TO OBSCURE A LARGER PROBLEM: THE FINANCIAL STATE OF ESKOM ITSELF