Shots in the dark How do you solve a problem like Eskom?
Acommon theme for South African companies for the best part of the past decade has been diversification. Egged on by foreign investors who had taken a keen interest in their prospects because of the flood of cheap dollars and their supposed good governance (until the Steinhoff shock), local executives moved to de-risk their businesses from their troublesome home base. I’ll be the first to admit that since the first warnings of the withdrawal of stimulus by the US Federal Reserve in the middle of 2013, the fundamentals of emerging-market countries such as ours were no longer as attractive. Panicked by signs of these deteriorating fundamentals, boards and their CEOs sought different geographies for future growth.
For some, the answer to the insatiable demand for growth from investors such as US hedge-fund billionaire John Paulson was expansion into other emerging markets.
Given the report cards of Woolworths and Sasol, which chose Australia and the US for expansion projects, we can safely assume an expansion into the rest of Africa has proved the better bet.
Ian Moir took Woolworths into a retail market in Australia where department stores such as the one it bought, David Jones, were like rabbits stuck in the headlights.
It has proved an expensive adventure into a market of no more than 24-million people, which is likely to be further disrupted by the recent entry of Amazon. A 2017 Morgan Stanley report warned that Jeff Bezos’s “Death Star” would take a $12bn (about R170bn) bite out of the market within a decade.
While Nigeria proved a logistical nightmare for the Cape Town retailer, seeking growth in Australia — more than 11,000km from its Cape Town base — has proven equally hard. Woolworths has had to write off some R7bn of its 2014 investment.
Last week, Sasol flagged delays and cost overruns at its multibilliondollar US investment in Louisiana. It’s a plan that is now expected to cost as much as $11.8bn, compared with the original estimate of $8.1bn.
Many other corporations have blown shareholders’ money following what in hindsight clearly were weak strategies in developed climes.
There wasn’t enough scrutiny of their ability to meet expansion projects; in much the same way, we didn’t ask tough enough questions of Eskom’s ability to simultaneously build two coal-fired power stations.
There was mass panic around energy in early 2008, and let us remember that the construction of Kusile and Medupi commenced when the parastatal’s board included such highly regarded people as Bobby Godsell, the former AngloGold Ashanti CEO; Wendy Lucas-Bull, current Absa chair; and Jacob Maroga, the former Eskom CEO. Brian Dames was at the time head of generation.
While we lay much of the blame for the load-shedding that began on Sunday on state capture, the causes of the delays and problems at Medupi and Kusile are much more complicated.
Right from the start we should perhaps have been more sceptical that Eskom, which had never undertaken such an ambitious project, could do it on its own.
But we were spooked at the time; the threat of blackouts in a faltering economy was just too much to bear. Much like investors in Woolworths, Sasol and so on, we were so panicked by the threats of doom that the utility was given a green light.
Lessons should be learnt from Medupi and Kusile; unfortunately they now come with the economic hardships of load-shedding.
So too should shareholders, including pension funds, be more circumspect when it comes to the adventurous forays of executives at major corporate giants, and not let themselves be influenced by the sometimes irrational fear of cyclical downturns.
We were so panicked that the utility was given a green light