Fix Eskom or it’s lights out

COSTLY SYMBOL OF THE DISASTER It isn’t just a utility, it’s SA’s biggest recipient of state loan guarantees – and its costs are out of control.

On a dry plain in Limpopo province in 2007, Eskom leaders broke ground for a huge new power plant: Medupi. Jubilant officials said the project would stimulate local growth and relieve the strained grid.

More than a decade later, the facility is still years from completion and estimated costs have doubled to more than $10 billion (R145 billion).

It’s a costly symbol of the disaster that is Eskom. The utility has R399 billion in total debt, costing it $2 billion in interest payments last year.

Moody’s considers Eskom a key risk in deciding whether to downgrade SA, and Goldman Sachs Group has called it the economy’s single biggest risk.

Fixing Eskom is arguably President Cyril Ramaphosa’s biggest challenge.

Eskom isn’t just a utility, it’s SA’s biggest recipient of state loan guarantees. And its costs are out of control: the National Union of Mineworkers has a contract requiring a 23% wage increase over three years and a bonus.

“Ultimately, political constraints are going to prevent him from moving as rapidly as perhaps one would like,” said Daniel Silke of Political Futures Consultancy. “The one thing he doesn’t want to be accused of is overseeing job losses in the runup to an election.”

There are no good statistics about Eskom.

It has had 10 CEOs and six boards in the same period, and the new management has found about $1.5 billion in irregular expenditure, mostly involving procurement.

“It’s not generating enough cash to cover both its operating costs and its cost of capital,” said University of Cape Town’s Graduate School of Business Professor Anton Eberhard. “Eskom’s losses will increase this year unless they conjure up an accounting trick, sell off some noncore assets.”

Ramaphosa has at least installed some experienced executives. Jabu Mabuza, chair at Telkom SA, now chairs Eskom, and Phakamani Hadebe, a former National Treasury official, became CEO.

The new leaders have already put the utility’s mortgage business up for sale and in July they reported highlights of their governance cleanup: almost a dozen criminal cases opened.

The company has concluded about half of 239 whistle-blowing complaints and started probing all irregular supplier contracts.

But the big new direction is proving elusive. Management delayed until November a recovery programme. In the backdrop, electricity demand has been sinking for years and SA’s economy has entered a recession.

A $2.5 billion Chinese Development Bank loan will bring Eskom closer to fulfilling its funding needs for the year, while it still faces interest payments alone of R215 billion over the next five years.

Eskom faces increasing competition from customers who generate their own power. As part of an investment drive, Ramaphosa has put back in motion renewable energy generation run by independent producers with which Eskom signs contracts.

The Medupi and Kusile power stations will ultimately cost over R300 billion. The World Bank, which lent $3.75 billion to Eskom for Medupi, rates the project’s implementation progress “unsatisfactory” and its overall risk “high”. – Bloomberg

Eskom’s losses will increase unless they have accounting trick.