/ 13 November 2009

Fixing a broken Eskom

Everyone knows that Eskom needs cash. Lots of it.

Its position now is so parlous that without funding from the treasury it would not be able to pay its bills. This is not to say that it can’t meet its operating costs.

At least until last year, revenues more or less matched costs. Eskom’s big expense right now is finding the billions to fund Medupi, the giant 4 800MW power station it is building in Limpopo province.

The final estimates for Medupi are not yet in, but the latest figures put the cost at R120-billion.

How much should a coal-fired power station cost?

A 2008 World Bank report on the cost of building one in the United States, India and Romania puts these costs at $1 960 (about R14 500), $1 290 (about R9 500) and $2 250 (about R16 500) per kilowatt respectively.

The report emphasises that these are not the cheapest power stations. The Chinese build two 500MW power stations each week at a cost of one-third to one-half of international prices. Medupi costs $3 400 (R25 300) per kilowatt, but the World Bank report excludes financing costs, so this is not an apples-for-apples comparison.

It would help if Eskom took us, the people paying for Medupi, into its confidence and gave us a breakdown of how all the costs are made up. This may lead us to fire the developer, Eskom Enterprises, though, and bring in the Chinese to build up small plants quickly and cheaply.

Eskom is in the news because it wants tariff hikes of 45% a year for the next three years to fund its capitalexpansion programme. It is also in the news because of a row between former chairperson Bobby Godsell and chief executive Jacob Maroga.

Godsell wanted action from Maroga on several fronts, including dealing with bad debts, non-payment by some customers, the provision of cheap power to BHP Billiton, the buying of power from independent power producers, resolving the issue of derivatives that have put a black hole in the company’s accounts and improving its position regarding its long-term coal contracts.

Godsell also wanted management to advise the board on the type of government guarantee ‘that would satisfy the auditors in terms of the undertaking that was made by the board of the going concern statement”.

The board wanted Maroga out, but he did not want to go. The issue was quickly politicised as the ANC Youth League and Black Management Forum cried racism. The two were not reined in by the country’s leadership.

It took the National Union of Mineworkers and Cosatu, and later ANC secretary general Gwede Mantashe, to point out that far from being a racist, Godsell has a proud track record in helping to shape a democratic South Africa.

The political intervention extended to President Jacob Zuma, who called in Godsell and Maroga.
Sources close to Zuma have indicated that he was unhappy with Minister of Public Enterprises Barbara Hogan’s handling of the issue as she sided with Godsell and the board against Maroga.

Characteristically, Zuma hoped Godsell and Maroga would find a way of working together.

Eskom is so cash-strapped now that it is reliant on cheques from the treasury to fund Medupi. Treasury spokesperson Thoraya Panday said ‘the direct transfer from national treasury to Eskom is in the form of the R60-billion loan that was announced last year, disbursed in tranches of R10-billion in 2008-09, R30-billion in 2009-10 and R20-billion in 2010-11”.

Some of the treasury money finds its way to the ANC, or, more specifically, its investment arm, Chancellor House. The Mail & Guardian has detailed in several reports that Chancellor House was a major beneficiary of the awarding of Medupi contracts by Eskom.

Chancellor House is a 25% shareholder in Hitachi Power Africa, which won tenders to supply boilers for both Medupi and Kusile, a proposed 4 800MW power station to be built near Witbank.

The M&G reported in November 2007 that R20-billion for the boilers for six steam generators ordered by Eskom from the Hitachi consortium accounted for the biggest chunk of what the parastatal planned to spend building Medupi.

The estimated cost then was R79-billion. Of major concern to industry insiders is the fact that Medupi is under development while supply contracts with coal companies have been delayed. The usual practice for giant power stations is for development to begin only once long-term coal contracts have been secured.

The Medupi contract had only two bidders to supply the boilers. The Kusile boiler contract was awarded to the Hitachi consortium without a further tender.

Eskom justified the second award on the basis that it would speed up the development of Kusile and that economies of scale would be achieved.

The World Bank report lists boiler costs for an 800MW generator set for coal power at $212 000 (almost R1.6-million) in the United States, $180 000 (about R1.33-milliom) in India and $337 000 (about R2.5-million) in Romania.

The R20-billion for six boilers for Medupi translates into $456 000 (about R3.4 million) per boiler. It is not clear what the Hitachi contract is worth to Chancellor House.

The two tenders were worth R38-billion combined. Hitachi Power Africa has a 60% interest, the other 40% being held by a European subsidiary of Japan’s Hitachi. This would give Chancellor House’s 25% stake a face value of R5.7-billion when the tenders were issued, before escalations.

Kusile is a hot issue for Eskom management. Delaying Kusile is one of the utility’s options to substantially reduce its capital needs, improve its cash flow and lower its tariff requests to the regulator.

Godsell raised the issue of delaying the building of Kusile among the 41 items on which he said Maroga and his executive team had failed to act decisively. He described these as unfinished
business, meaning they were incomplete or late.

We have to assume that it is in Chancellor House’s interest for the Kusile project to go ahead sooner rather than later.

Was this a factor in the political intervention played out in the past few days?

If the ANC has an interest in the Medupi and Kusile tenders, would it have played the normal watchdog role required of government to ensure that the country was not saddled with uncompetitive prices?

Would it have the required neutrality on the timing of Kusile’s construction when its own finances may be dependent on this flow of funds?

Whatever the answer to these questions, the ANC is conflicted because of its interest in Medupi
and Kusile and this certainly does not alleviate the deep-seated challenges Eskom faces.

There is a similarity in the way the unrelated issues of Caster Semenya and Jacob Maroga have been handled. In both cases, just weeks apart, there was an unseemly rush to politicise the issue.

When the dust settled around the unfortunate athlete, we saw that the political bluster was an attempt to hide a litany of lies and misrepresentations.

There was an attempt to make Godsell’s handling of Maroga’s position a racial issue, even though the ruling party had given him the job as chairperson, and the board, both black and white, were unanimous that Maroga was not succeeding in fixing a broken Eskom.

Eskom’s problems now are so deep and multifaceted it will take more than any individual to fix them. It will need a whole country.– Additional reporting by Lynley Donnelly