Eskom, other ailing SOEs, need new business models

SA can no longer afford to bail out inefficient and unprofitable stateowned enterprises (SOEs). This much was clear from President Cyril Ramaphosa’s state of the nation address last week and was echoed by the figures in Wednesday’s budget.

Although potentially catastrophic for Eskom, it marks an opportunity for much-needed structural reform to lay foundations for robust economic growth for decades to come, starting with the embattled Eskom and extending across the SOEs.

In his maiden state of the nation address, Ramaphosa said the severe financial, operational and governance issues experienced in many SOEs had impacted on the performance of the economy and placed pressure on the fiscus. In an environment of weak economic growth, falling government revenue and rising public debt, it is simply not feasible to repeatedly bail out ailing SOEs that should be “organs of growth” for our economy.

Continuing problems have threatened Eskom’s sustainability, bringing it to the brink of financial collapse earlier this year. Staggeringly, outstanding debt is estimated at between R370bn and R470bn. Despite annual revenue of R95.5bn, it has been unable to cover operational costs. A rapidly worsening balance sheet forced Eskom to accept a 30day bridging loan of R5bn from the Public Investment Corporation in January. Had this loan facility not been availed Eskom would have been pushed into default.

At the heart of Eskom’s problems lies an outdated business model operating in a rapidly evolving energy market. The Department of Public Enterprises website states proudly that Eskom is the world’s 11th largest power utility in terms of generating capacity, ranks ninth for sales, and boasts the world’s largest dry-cooling power station.

This statement is perhaps the greatest indication of Eskom’s anachronistic approach to SA’s energy needs. This approach to power production and distribution today is not dissimilar to that of IBM’s in the technology sector in the past. As client-server technology began to replace centralised mainframes in the 1990s, IBM had to reinvent itself to support a distributed model.

The cost of renewable energy fell dramatically in recent years while conventional sources have remained largely unchanged. This is substantially because of renewable power procured through the Renewable Energy Independent Power Producer Programme, which saw reductions of 80% in the cost of solar and 60% in the cost of wind in five years. Solar and wind are already cheaper sources of energy than what Kusile power station will produce – before the plant is even completed.

Presently, Eskom’s fleet is operating under capacity and over budget. At current electricity tariffs there are already high levels of grid deflection, meaning that demand is unlikely to grow in the next five years.

There is insufficient space on the grid for cheaper renewables to replace more expensive coal power stations. To make matters worse, Eskom requested a tariff increase of 20% and received only 5.2% from the National Energy Regulator of SA, resulting in a R20bn gap in its finances over the next five years.

AUDITOR-GENERAL KIMI MAKWETU’S DETERMINATION TO DRIVE TOUGH CHANGES IS THE REASON FOR HOPE IN AILING SOEs

Eskom’s advertising for a new CEO and chief financial officer are hugely encouraging, but solving the power utility’s liquidity crisis demands more. To escape its debt trap, the new board must radically reform both its business model and the structure of the energy market, requiring a complete audit of all procurement practices and contracts and a staff restructuring process. Unless Eskom is able to show funders it has a sustainable business model, it will be unable to raise the funds it requires. These structural reforms will be greatly enhanced by the proposed Public Audit Amendment Bill.

Auditor-General Kimi Makwetu’s determination to drive tough changes is a reason for hope in ailing SOEs and the public sector.

We are all painfully aware of how much financial mismanagement and corruption cost our economy, but the real injustice lies in the lack of accountability and consequences for culprits.

The new bill would see sanctioning of state entities and government departments for breaches of the Public Finance Management Act, coupled with the referral of unresolved cases for investigation and prosecution.

It is also proposed that accounting officers and those implicated in wrongdoing be liable for losses stemming from their mismanagement. These changes will be easier said than done ahead of the national elections in 2019 but they are not impossible. With the co-operation of the ministers of energy, public enterprises and finance, it is possible to address the structural and funding issues at Eskom and create a blueprint for further reforms.