De Ruyter upbeat on Eskom

CEO says power utility getting a grip on capex and procurement

● Eskom could shave a fifth or more from its bloated cost base as it gets a grip on its procurement and capital spending, putting disciplines back in place and tackling malfeasance and resistance.

But CEO André de Ruyter says cutting Eskom’s R140bn procurement budget is a slow process, and efforts to put disciplined procurement procedures in place often face resistance and prompt allegations of corruption and wrongdoing.

“It’s the favourite card to play when you expose people for being incompetent or not doing their job,” he said.

His comments, in an interview with Business Times this week, came after Eskom released the results of an independent investigation by advocate Wim Trengove that cleared De Ruyter of accusations that he had misled the board when he urged the cancellation of R14bn of fuel oil contracts suspected of having been improperly awarded.

The accusations were made by former Eskom board member Sifiso Dabengwa, who subsequently resigned from the board.

The Trengove investigation, which was commissioned by the Eskom board, detailed the concerns De Ruyter had raised about collusion, fraud and corruption, as well as an acute lack of skills and competence in the Eskom team that evaluated the fuel oil tender.

Fuel oil is used at the Eskom coal-fired power stations to fire up the generators.

De Ruyter told Business Times this week that his intervention to stop the award of a fuel oil contract to Econ Oil had saved Eskom R200m on a three-month contract.

Eskom insiders talk of Eskom paying more than R200,000 for a wooden-handled mop and De Ruyter, who took over as CEO in December 2019, has made it clear that cutting costs is a priority for the power utility.

And while efforts by his predecessors to freeze wages and retrench have attracted controversy and political pushback, De Ruyter has been reducing the headcount without retrenching.

He has focused mainly on fixing the flawed procurement systems which have seen Eskom overpaying for key inputs such as coal and fuel oil, as well as for more minor items.

De Ruyter estimates Eskom can reduce staff costs by 15% over the next couple of years, without forced retrenchments.

It has “managed down” employee numbers to 44,000 over the past year, from 46,000 a year ago, through selective natural attrition, a hiring freeze and voluntary severance packages that saw 180 senior managers depart.

It is on a “glide path” to reduce the headcount to 39,000 by mid-2023, De Ruyter said.

He is rebuilding Eskom’s procurement systems and reckons he can take 10%-15% out of procurement costs by rebuilding the neglected systems that had imposed discipline — up to 93% of procurement was being done on a “free text” basis that enabled funds to be misappropriated, and this has now been reduced to almost zero.

He has also instituted a process of “capital scrubbing” that will cut Eskom’s capex budget by about 15%.

“There is an opportunity to do things better. But it will take a lot of effort,” he said.

Even with cost cuts, however, Eskom will still need substantial tariff increases: the price needs to rise from the current average of R1.02/kWh to R1.30/kWh.

“That’s not reflective of our inefficient costs, it’s reflective of our efficient costs,” De Ruyter said.

But he insists SA’s electricity is still among the cheapest in the world — though the markups charged by municipalities create the perception that tariffs are expensive.

Eskom is in a series of legal disputes with the National Energy Regulator of SA (Nersa) over its tariff decisions, which Eskom has successfully challenged — though Nersa has appealed certain of these — and the court decisions will have an impact on tariff increases over the next three years.

SA’s electricity prices have increased by 177% over the past decade, Reserve Bank figures show.

On load-shedding, De Ruyter said Eskom should see progress on its reliability maintenance programme by April and a “significantly reduced risk” of load-shedding by September next year.

However, there is a big need for additional capacity, he said, which is why Eskom needs the 11.8GW of private sector power which Nersa and mineral resources & energy minister Gwede Mantashe have now approved.

Though Eskom has been less than enthusiastic about private sector renewable energy producers in the past, De Ruyter has welcomed the latest 11.8GW decision.

In line with the government’s roadmap, which envisages the unbundling of Eskom, De Ruyter has as a first step implemented a divisional structure for Eskom and said he is making good progress on the legal separation of Eskom’s transmission division.

“This is a key step in allowing private investors to come with confidence into generation,” he said.

And, he said, he has faced no political interference, only support.

However, Intellidex analyst Peter Attard Montalto said De Ruyter “hasn’t pressed any major buttons yet — he hasn’t faced a wage round, or tried to decommission coal-fired power stations faster”.

Along with other state-owned entities (SOEs), including Transnet, the South African National Roads Agency Ltd and Airports Company SA, Eskom has yet to report its March year-end financial results.

Andre Visser, director of issuer regulation at the JSE, said its debt listings requirements afford SOEs seven months to report.

In addition, a market notice from the Financial Sector Conduct Authority earlier this year afforded issuers an additional twomonth period, taking into account Covid-19 and the lockdown.

“SOEs with March year-ends therefore have until December 31 to produce results,” Visser said.

There is an opportunity to do things better. But it will take a lot of effort

André de Ruyter

Eskom CEO