Reversing Eskom’s history of wrongdoing

There’s something tragic about the crisis at Eskom, the power utility that is facing going-concern issues. For a start, how was it possible to put together a full, decent board of nonexecutive directors — with a diverse mix of skills — in a matter of days when the shareholder minister spent almost a year setting, and missing, a string of deadlines for composing a new board?

That this was possible suggests that Eskom, like all key state-owned enterprises (SOEs) and public institutions, failed to be shielded from the political machinations of the governing party, which reverberate through the rest of government and SOE employees. Interestingly, the announcement of the new board came from the office of Deputy President Cyril Ramaphosa in his capacity as the man in charge of SOE reforms, in effect sidelining Public Enterprises Minister Lynne Brown.

Brown wasn’t the only one whose opinion seemed to be ignored. Also missing was the imprint of the embattled sitting head of state, who had placed himself in charge of SOEs after giving Ramaphosa the responsibility — other than a passing reference in the statement that he had been consulted. The other implication of the weekend’s intervention is the decisive shift of power to the ANC, or its new leader.

Now that a new board is in place, it’s worth reflecting how we got here in the first place. In part, Eskom’s troubles have their origin in the wrangling among the departments of energy, public enterprises and the Treasury. Before the current crisis, which is now the subject of a parliamentary inquiry that resumes today, Eskom found itself in the middle of a fight between these departments over the procurement of the nuclear energy programme.

When it became clear that the energy department, which is in charge of policy, wasn’t ready to undertake such a complex project, the responsibility to procure nuclear energy was moved to Eskom, where it found enthusiastic reception among executives. Matshela Koko, the head of generation at Eskom, became nuclear’s point man, with weekly instalments of opinion editorials extolling the virtues of nuclear energy vis-à-vis other forms of energy.

Meanwhile, the Treasury was lukewarm towards the idea. Instead, it supported renewable energy. The sequencing was thoughtless, resulting in months of delay in bringing this form of power onto the Eskom grid.

Just more than a year ago, the relationship between Eskom and the Treasury turned toxic and dysfunctional, partly as a result of these ideological differences but also due to disputes over coal procurement contracts. Eskom, the largest user of coal in SA, spends about R50bn on coal a year, mainly from “cost-plus” mines.

But the interdepartmental squabbling wasn’t only related to nuclear energy, it was also related to clumsy attempts to address legacy issues. Since the 2008 power crisis, Eskom has bypassed open, competitive coal procurement, as required by the Constitution. This has benefited large coal suppliers.

Related to this has been a culture of poor management of contracts. For example, Eskom’s books show that the utility pays billions each year in penalties to major suppliers for coal it hasn’t used.

Also, the current financial crisis, manifesting itself in the failure to publish interim financial statements because of going-concern issues, has been worsened by the fractious relationship it has with the National Energy Regulator of SA. Eskom has thus been awarded single-digit increases — well below its double-digit requests — resulting in a gaping hole in its finances.

Over time, a negative employee culture has developed at Eskom. A cursory study of the recent past shows an internecine battle between the lifers — those who have been at Eskom for decades — and the outsiders. The lifers used institutional knowledge to run rings around newcomers through misinformation. Brown has been a victim of this tactic, as has Tseliso Matona, the former CEO. There is reasonable doubt that former CEO Brian Molefe would have succeeded had he stayed longer in the job, unless he struck a “live and let live” pact with the lifers.

Finally, Eskom has been a testing ground for many operating models spewed out by management consultants. Most of these are bought at huge cost but never implemented. This causes uncertainty among employees, who fear the consequences of constant restructuring. With McKinsey having messed up at Eskom, rivals are no doubt lining up to propose solutions to the new board and Phakamani Hadebe, the new interim CE.

As the new board assumes office, it has its work cut out: it has to protect Hadebe from the lifers; help him build a new, inclusive culture, provide air cover from a meddling shareholder, renegotiate the archaic cost-plus coal contracts, reset relations with key stakeholders especially the regulator, and renegotiate with key lenders.

IN PART, ESKOM’S TROUBLES HAVE THEIR ORIGIN IN THE WRANGLING AMONG THE DEPARTMENTS OF ENERGY, PUBLIC ENTERPRISES AND THE TREASURY