Switch on: President Cyril Ramaphosa must act to end blackouts so the government can concentrate on growing the economy and creating jobs. Photo: Ihsaan Haffejee/Anadolu Agency/Getty Images
After four years of policy dithering, the time has come for President Cyril Ramaphosa to address Eskom’s financial and operational crises, which have got worse under his sorry leadership.
This requires immediate measures to restructure the Eskom balance sheet and reverse a dramatic decline in the performance of the utility’s power plants since he became president in 2018.
Eskom is now the country’s most important macroeconomic policy issue. Failure to address the crippling power blackouts in the short term could result in another recession this year.
After stabilising the power supply, South Africa must ditch the failed neoliberal macroeconomic policy framework of the past 28 years and re-ignite the economy with a stimulus that will chart a new path towards economic development until 2030.
But our inept leaders have the wrong priorities. They do not know the difference between macro and micro. While the country was reeling from power blackouts, the ANC had an emergency national executive committee meeting — which finished at 5am — to discuss the status of five branches in Ekurhuleni ahead of a Gauteng provincial conference.
At the recent national executive committee meeting, the ANC did not discuss the power crisis until the third — and last — day. They talked about micro and political issues which will not address the immediate crisis — a campaign against illegal connections and an idiotic debate about whether Eskom should now only report to the department of mineral resources and energy.
The power and economic crises will not be the major issues at the ANC policy conference which starts on 27 July. Instead, the cadres of “our glorious movement’’ will have an explosive debate, which could split the party, about whether to suspend the step-aside rule until the party’s national conference in December.
There could be a political crisis — if Ramaphosa resigns — to add to the power and economic crises. The good news is that there should be no blackouts at the policy conference as demand declines over the next few weeks and a unit at the Koeberg Nuclear Power Station, in Cape Town, returns to full production.
During the financial year to March 2007, Eskom’s costs were 87.4% of its R40.1-billion revenues. The company reported profits of R7-billion.
The lack of a plan to finance Eskom’s capital expenditure programme —not the hijacked contract given to the Guptas in 2015 — and soaring primary energy costs (coal and renewables) are what bust the company’s balance sheet. The Gupta contract was 2% of revenues in 2016. By February 2018, eight Gupta companies had filed for business rescue. Construction at Medupi and Kusile started in May 2007 and April 2008, respectively. From 2007 to 2017, Eskom spent a staggering 50% of revenues on its capital expenditure programme. From 2007 to 2021, primary energy costs increased by almost 800% to R115.9-billion.
Eskom’s debt soared to R392.1‑billion in September last year from R40.1-billion in March 2007. At the end of the 2021 financial year, Eskom’s costs were 114% of revenues. It made a loss of R18.9-billion.
The major costs included primary energy (57% of revenues), employee benefits (16.1%), interest (15.4%), depreciation and amortisation (13.2%) and other expenses (9.3%). Eskom cannot trade its way to financial sustainability. There must be a restructuring of its balance sheet. For the purposes of the restructuring, there should be no distinction between the SA Inc and Eskom balance sheets.
The government must cut up to 75% of Eskom’s debt to create a financial runway for it to invest in new capacity. Talks about restructuring about 50% of the Eskom debt have gone on for more than four years and Ramaphosa is sitting on many reports on how this can be achieved.
The Public Investment Corporation, the asset manager of the Government Employees Pension Fund and the Unemployment Insurance Fund, can write off debt of about R90-billion or convert the debt to shares. The Reserve Bank can get involved. And the government can lift Eskom debt to its own balance sheet.
Since 2018, there has been a dramatic decline in the performance of Eskom plants, especially after the appointment of chief executive André de Ruyter in January 2020.
Previously, Eskom had targets of 80% for energy availability, 10% for planned breakdowns and 10% for unplanned breakdowns. In 2018, the company had an energy availability factor of 78%. The planned breakdown ratio was 10.35%. The ratio for unplanned breakdowns as a percentage of total capacity was 10.18%. In April, Eskom’s energy availability factor had collapsed to 57%. The unplanned breakdown ratio had trebled to 30%.
An analysis of Council for Scientific and Industrial Research statistics shows 78.8% of all energy shed since 2007 has happened since Ramaphosa became president in 2018. From 2009 to 2017, under his predecessor Jacob Zuma, there were no power blackouts for seven years. Only 14.8% of the energy shed since 2007 happened when Zuma was president. Since De Ruyter was appointed, Eskom has shed 6 595 GWh (gigawatt hours), which is equivalent to 64% of energy shed since 2007.
A 2019 report by Primaresearch said maintenance spend per GWh increased from R21 623 in 2006 to R64 401 in 2019.
“Maintenance spend as a percentage of revenues has mostly been stable at 8%. We do not think Eskom has underspent or neglected maintenance by this measure.”
The research company said the average age of Eskom’s plants was 31.5 years compared to 14.5 years in 1996. The conclusion was that: “While the ageing of Eskom’s fleet of power stations may seem worrying, the situation is not uncommon. In the United States, 51% of the country’s electricity generating capacity was built before 1980 and about 74% of all its power stations are at least 30 years old (compared to Eskom’s 46%). Multinational energy company Enel discloses its useful life for depreciating thermal power plants is up to 62 years. Globally, the average age of retired coal power stations is 54 years.”
The government must help stabilise Eskom’s finances and operations in the short term. On the financial side, the focus must be the reduction of Eskom’s debt and controlling runaway primary energy costs.
In operations, there is clearly a problem with the quality of maintenance. The government must consider implementing a power engineering (or technical) version of business rescue and appoint engineers (local and international) to stabilise the fleet as soon as possible.
Achieving a much higher energy availability ratio would be the quickest way to end power blackouts and shift focus towards growing the economy and creating jobs over the next decade.
Duma Gqubule is a financial journalist, analyst, researcher and adviser on issues of economic development and transformation.
The views expressed are those of the author and do not necessarily reflect the official policy or position of the Mail & Guardian.
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