The root of Eskom’s problems

THE problems of Eskom are unfortunately not technical in nature, but primarily a failure of policy on the part of the ANC government. In the period 1996-98, Eskom had approached the government indicating the country would run out of generation capacity in 2006. Eskom wanted to invest in new capacity, including in mothballed power stations.

But the government’s response was a new policy (White Paper on Energy), adopted by the Cabinet.

The government did not support Eskom’s request to invest in new generation capacity because its new policy stipulated that 30% of generation capacity would in future be in the hands of independent power producers (IPPs).

The investment requirements were R400 billion in 2006/7 figures. However, independent power producers did not at the time have the appetite to come into the electricity market, without the government first reforming the market structure; including reducing Eskom’s monopoly, access to transmission and the proper allocation of political risks because municipalities could not guarantee household users paid for electricity.

The government had at the time conducted numerous studies but the results were clear: there was no immediate interest or appetite to invest without the government first reforming the electricity sector.

Despite the overwhelming evidence pointing to the opposite, the ANC government under then president Thabo Mbeki insisted on its policy position, effectively preventing Eskom from investing in new generation capacity.

This proved tragic for South Africa. The result was that the country had its first series of load shedding before the 2010 Fifa World Cup. The government’s decision to allow Eskom to build two new power stations: Medupi and Kusile came too late, and the costs went ballistic.

In 2018, the ANC government repeated the same policy mistakes, including President Cyril Ramaphosa’s announcement of the government decision to unbundle Eskom, disposal of “non-core” assets, funding options and the tragic policy of not allowing Eskom to compete or engage with IPPs on equal or favourable terms, which contributed to the haemorrhaging of Eskom’s financial position.

A proper, developmental approach to Eskom’s balance sheet tells us that a vertically-integrated Eskom (with its total assets, including “non-core” assets, investment properties, land, engineering business, investments through Eskom enterprises as well as cash generated from the sale of electricity, lease of assets etc), is the route to go.

The assertion that Eskom does not have the capacity to service part or its entire debt is simply false. A different approach or financial modelling will show Eskom could afford higher levels of debt and still service its debt based on its cash-flow.

Pravin Gordhan and the Department of Public Enterprises (DPE) had set the reduction of debt as a top priority. There is just no justification for massive cash outflows from Eskom at this critical stage. This is a major blunder. While Eskom did not carry much if any, debt prior to 2008, there is nothing wrong with Eskom being encouraged to take more debt to build infrastructure which could stimulate economic activity. Reducing debt is being pursued in a fanatical way, but it is not the right way to drive economic development.

The push by the DPE for the disposal of “non-core” assets – vital to Eskom’s cash position – is simply madness. It has to be stopped, until such time when Eskom’s balance sheet is stable or strong enough to support its business.

Eskom could offer great developmental possibilities, but only if the government pursues different policy options, contrary to those imposed by proponents of “structural reforms” (the IMF, World Bank, Rating Agencies, National Treasury and the DPE).

The deepening electricity crisis is not only about financial resources. This also demands decisive action to regulate the supply of coal to Eskom. Security of supply (high-quality) coal is a strategic imperative. The government must determinewhether or not coal could be exported if the country is facing a major energy crisis. South Africa is the only country in the world that fails consistently to protect its own economic interests.

Coal pricing today has a huge negative impact on Eskom’s overall financial position. Considering the pricing of coal on Eskom, there is no sound basis for the government not to impose price caps on coal producers and other suppliers.

Part of the strategic intervention would have been to allow Eskom to acquire significant shares in certain coal mines in lieu of public funds deployed in the development of such mines.

The ANC government has missed the opportunity to intervene in the electricity market in the interests of the country, the economy and the living conditions of its citizens. It has failed to protect the financial position of its number one state-owned enterprise (SOE), Eskom.

The ANC government is today still unwilling to adopt bold and decisive measures to address the electricity crisis. This is illogical considering the fact that the government seeks to attract investment, develop infrastructure and create jobs.

The denial of the potential role of nuclear in the Integrated Energy Plan (simply because of suspicions of Gupta activities in the uranium space) was another big policy failure. The argument that the country could not afford nuclear was a red-herring.

It is established practice that investment in strategic or long-term infrastructure is not always or in the short-term, supported by numbers, whether good cash flows or volumes of commodities. The truth is the numbers tend to increase and align with longterm demand over a period of time. It is good though that the latest energy policy seeks to correct the earlier madness in respect of the role of nuclear in the energy plan of the country.

One of the major failures was to try to change the structure of Eskom in the midst of a major electricity crisis. The decision to unbundle Eskom is a major strategic blunder. Irrespective of the “end-state” envisaged for Eskom, the short and medium-term approach or the transition phase would require the protection of the current vertically integrated structure, which allows for cross-subsidisation between the Eskom businesses. Pursuing a cost-reflective approach for each Eskom business is counter-productive at this stage and will result in huge increases in electricity prices.

For Eskom to survive, it must have a non-regulated side where it could exploit its so-called non-core assets and cross-subsidise some of its operations. However, these must be fully disclosed to the regulator.

The Cabinet followed its wrong policy choices by removing the team led by the late Dr Ben Ngubane (may his soul rest in eternal peace), Brian Molefe, Matshela Koko and others under the pretext of “fighting state capture”.The Cabinet appointed a board led by the late Jabu Mabuza (may his soul rest in eternal peace) and an executive management team that seemed to lack operational experience, understanding maintenance and how to sustain the ageing operating assets of Eskom.

There was excitement when Professor Malekgapuru Makgoba was appointed chairperson of the Eskom board. He is well respected, a great leader with deep technical knowledge and a proven track record as a scientist. The appointment of André De Ruyter as group chief executive proved a big disaster.

He comes across as someone who fails to set the right goals for his executive team to address the big challenges facing Eskom.

Today, the country is paying the price for policy failures under former president Thabo Mbeki, and the crisis has taken to unprecedented heights under President Ramaphosa. The problems of Eskom have nothing to do with “state capture “or “mass looting”, as argued by Minister Pravin Gordhan and others. This is simply false. It is unfortunate that Justice Raymond Zondo accepted as fact the narrative of those who, objectively, had historically benefited from Eskom.

Until such time the ANC undertakes an objective and an honest assessment of how the country came to be where it is today, and adopts policies suitable to these conditions, then we will continue to fool ourselves.

The ANC should radically change what needs to be changed, lest it serves as a major brake on the progress of the nation. Policy failures are so evident in key sectors and infrastructure has collapsed: the economy, energy, education, transport (ports, aviation, and railways), telecoms, water, etc.

Today, the leadership of the ANC, past and present, has joined the chorus of those attacking Eskom for its monumental failures, but fails to take responsibility for the situation it has created over the past two decades.