New Eskom chief executive Brian Dames rolls up his sleeves as the utility finds itself at a crossroads
As someone covering the Eskom self-implosion in recent years, I have become used to an almost weekly ritual of sending questions to the utility by email to have them answered the next day, also by email.
But a few days back, something extraordinary happened. My cellphone rang. It was Brian Dames, Eskom’s new chief executive, inviting me to a meeting to answer my emailed questions. It took a few days to set up, what with strike threats and the like, but earlier this week I sat down with Dames and his top team.
Eskom is generating far greater news coverage than it would want at present, the latest news reports focusing on generous executive pay increases and R12-million spent in buying World Cup tickets for senior staff and guests.
But my interest is how Dames intends dealing with other pressing legacy issues that are stacked up in his in-tray, especially the proposed Kusile power station — where Eskom has signed contracts valued at R70-billion even though it is yet to secure the funding to complete the project.
The project is so controversial that some in government think it would be best to walk away and pay the staggering penalties, but with R70-billion contractually committed, Eskom’s view has been that the project has to be funded and completed. There are no second prizes.
As Dames is an Eskom ‘lifer” and senior executive for some time now, I also wanted to know to what extent he had helped shape the legacy he now has to manage.
Eskom’s management has had an imminent strike to deal with in the past few days. Incredibly, there has also been news of generous bonus payments to senior executives — even though there was so much mismanagement under Jacob Maroga’s stewardship that if the system was fair, you’d think they should be made to pay money in, not take it out.
But notwithstanding numerous pressing concerns for Dames, it is fair to say that management’s most challenging issue, the one that has been keeping it awake at night, is Kusile.
Financial director Paul O’Flaherty, who has been in the job for six months and attended my meeting with Dames, has emphasised that there is great urgency. Each year-delay in bringing Kusile on stream amounts to an additional R14-billion cost. This is enough to build two-and-a-half large, 100MW concentrated solar plants.
Dames and O’Flaherty have emphasised that there is also great urgency in getting this funding issue solved. A few weeks back they indicated that their timeline was just two to three weeks. For them, Plan A is to get Kusile funded and completed.
There is no Plan B because it will be a train wreck if the project is suspended or stopped, triggering penalties on the R70-billion in contracts signed to date.
O’Flaherty came up with 45 potential solutions to the funding crisis and tabled the preferred options in recent meetings with the government. On the table is the proposed recapitalisation of Eskom by borrowing against unused guarantees that the government has issued. These borrowings would be put into Eskom as a cash injection to improve the utility’s debt-to-equity ratio.
Eskom has been engaging with the ratings agencies, the intention being to have an investment grade rating at the end of the recapitalisation process that will allow it to make new borrowings to plug the funding gap.
It is understood that the government has, in principle, agreed to the new structure. O’Flaherty scores the likelihood of securing government’s buy-in at eight-plus out of 10. He expects a signature from Finance Minister Pravin Gordhan within a week.
This will not be game over. The peak funding shortfall in the construction period would be R60-billion. Eskom would be raising funds on the international bond markets at a time of some uncertainty in these markets.
‘We will still have to go out and implement,” said O’Flaherty. ‘If the world market collapses tomorrow, there is nothing we can do but stop Kusile because implementation will not be possible.”
There is not much good to say about the current situation except that Eskom management is dealing with it transparently and urgently. Former chief executive Jacob Maroga’s failure to deal with this funding crisis was one of the main points of friction between him and the board, led by Bobby Godsell. This led to the breakdown between the board and Maroga and the subsequent claim, now before the courts, by Maroga for R85-million in damages.
Dames is warm, personable and likeable. It is clear that he and O’Flaherty have been consumed with solving the Kusile funding crisis and my strong sense is that the Plan B disaster will be averted. But it has been a close-run thing.
What sticks in the stomach is that the ANC, through its investment arm Chancellor House, is embedded in the process as a shareholder in Hitachi Africa, which won the contracts to supply boilers for both Medupi and Kusile. This is the same party that managed to muddy the water over governance issues between the Eskom board and Maroga when the former lost patience with his continuing inaction on a set of pressing issues, including the funding crisis.
Dames arranged for some of the executives who had been involved in the awarding of the Medupi and Kusile contracts to attend our meeting. He said the original plan, based on growth in demand for power at 2% a year, was to build just three power units at Alpha (Medupi), then another three later, but as demand projections jumped to 4% the decision was made to expand Medupi to six units and to bring what was called Project Bravo (Kusile) forward.
Eskom sent out invitations to tender to 14 parties but received only two responses. The world economy at this time, 2006, was in a sustained growth phase and vendors were capacity-constrained. Dames said: ‘We were in a position where we were quite at risk. In 2006 the power market changed. Everybody was building; slots were full.”
Dames said that costs for Medupi and Kusile compare with what it costs to build a similar power station, for instance, in Germany. He said that Eskom has seen quotes by a Chinese company to build a large power station in Southern Africa and these costs are also comparable.
He said that Chinese companies would be able to build at lower costs but that they would insist on supplying all the capital goods themselves, whereas Eskom’s build has a local-content component aimed at stimulating the domestic industry.
Dames said benchmark studies by HSBC and the World Bank have found the costs of Medupi and Kusile to be comparable internationally. He sees the issue of the ruling party having a vested interest in contracts that are funded by public money as a matter for government to deal with. The government appears conflicted on the Chancellor House issue, with some ANC luminaries supporting its continued involvement, while others, notably Gordhan, say they expect the ANC to do the right thing.
This is understood to mean that it will divest itself of the share in Hitachi Africa. It remains to be seen whether the party will still profit from its involvement in this case study of how not to manage public finances.
Dames said the Chancellor House issue ‘has affected this company’s reputation. This is an issue for government to deal with: how you regulate [such] shareholdings. But I can give you the assurance that certainly myself or any of my team have not been influenced by the process or had an influence on it.”
My sense is that Dames and his team see Eskom as being at a crossroads. They know the utility is too exposed to a single energy source, coal. Their experience in talking to potential funders and investors for Kusile confirms that the world no longer favours coal. Kusile may be the last coal-fired power station Eskom builds.
From the outside it appears as though Eskom has not been overly interested in energy efficiency or embracing renewable energies. I was surprised, though, to find an acknowledgement of how little it has done. Dames reckons that Eskom has saved about 3 000MW through demand-side management programmes but said savings of another 4 000MW can be achieved: ‘We have only picked the low-hanging fruit such as energy-efficient lighting.”
Eskom has been so slow to develop renewable energies such as concentrated solar energy, a project that has been in the works for 13 years without a plant in sight, that critics say it should step back and let private players, some of whom are already breaking ground, to enter the running.
Dames said that progress has been held up at the investment committee because of a lack of funding. Funding has now been secured from the World Bank and its first solar plant will go ahead. A wind project is also planned.
Eskom’s way forward from the crossroads will, in part, be determined by the new integrated resource plan (IRP) process now being development by the government. This will set the overall parameters for energy policy.
My own impression, from covering this story and from this meeting at the coalface, so to speak, is that the state has been taking on unsustainable levels of risk, running this critical area of economic policy through state monopolies and public finance while the energy sector internationally now comes with dramatically increased risks.
Dames may do a wonderful job refocusing Eskom and turning it around, but the IRP now puts a new set of bureaucrats in charge who are trying to guess what our energy needs are likely to be while centrally managing who gets to supply what form of energy.
Deregulation is an ugly word in South Africa but unless we put substantially more flexibility into energy provision and consumption we are heading for more of the same.