Changes buy Eskom a tiny bit of time

A World Bank assessment of African utilities pointed out that, against a benchmark number of employees of 14 200 at other utilities, Eskom had 41 800. (John McCann/M&G)

A World Bank assessment of African utilities pointed out that, against a benchmark number of employees of 14 200 at other utilities, Eskom had 41 800. (John McCann/M&G)

NEWS ANALYSIS

The overhaul of Eskom’s board and promises to deal with corruption may have reopened doors to local lenders just when the utility is running out of cash but far tougher long-term problems face the chairperson, Jabu Mabuza, and his new team.

It was announced this past weekend that a new board and acting chief executive Phakamani Hadebe were taking over at the utility.

Banks closed credit lines to Eskom late last year after its qualified audit and because of persistent governance concerns.

The utility must raise a total of R20-billion by March, it recently told the Mail & Guardian, but it is believed that it needs to raise R12.5-billion by today (January 26) to meet its immediate cash flow requirements. The M&G could not verify this figure and Eskom refused to comment on it.
It said it would provide an update on its funding and liquidity position when it published its interim results on or before January  31.

However, in November, media reports on an internal document prepared for its public enterprises ministry shareholder, Lynne Brown, indicated that, by the end of January, Eskom’s liquidity position would be negative, to the tune of R5-billion. This was based on the assumption at the time that Eskom would be able to get about R3.5-billion in loans from development finance institutions and facilities from export credit agencies. But the utility has been unable to raise funding in local and foreign capital markets for some time because of governance concerns.

As a result of auditors’ fears about Eskom not being a going concern, the utility has also be unable to release its most recent interim results. The JSE has said it must publish these by the end of January or face having its bonds suspended by the bourse. This illustrates just how close to the brink Eskom is.

But the new board and the recent resignations of executives implicated in corruption allegations, such as Anoj Singh and Prish Govender, could mean Eskom will be able to secure loans to tide it over until it can issue an international bond and refinance debt that is due to mature in the coming months.

A finance industry insider said the goodwill enjoyed by new ANC leader Cyril Ramaphosa and changes to the board mean the banks are likely to give Eskom the money it needs. A default by Eskom could topple the fiscus, given the R350-billion in government guarantees that it has borrowed against, which would have dire consequences for the whole economy.

Steering Eskom through this immediate crisis is just one of the tasks facing Mabuza and his team. The failure in controls that resulted in the qualified audit and continuous allegations of corruption and mismanagement by senior officials, which precipitated lenders freezing Eskom out, suggest the problems are deep-seated.

The board has an oversight role and Eskom needs “to be turned around from the inside out”, according to a team of investment analysts. Although a permanent chief executive and finance director must be appointed within three months, implementing real change can only happen once this is done, the analysts added.

Ultimately, Eskom is faced with much more fundamental problems that go to the heart of its business model. Internal inefficiencies, a huge expansion programme dogged by cost overruns and delays and a bloated workforce have contributed to rising electricity prices.

This has exacerbated a phenomenon faced by Eskom’s counterparts elsewhere — the utility death spiral. As costs rise, customers switch to alternative, off-grid electricity sources that are increasingly competitive, forcing utilities to ask regulators to increase tariffs. In turn, more customers look for cheaper alternatives and utilities must run on an ever-declining revenue pool.

Eskom’s recent tariff application pointed to this problem. About 9% of the 19% increase it asked for was aimed at making up for its decline in sales. Although Eskom was ultimately granted only a 5.2% increase, it is still aiming to reclaim almost R67-billion through three separate regulatory claw-back applications made to the National Energy Regulator of South Africa. But as tariffs continue to rise, customers will simply continue to find ways of bypassing Eskom, experts argue.

The power utility is also deemed overstaffed. A World Bank assessment of African utilities pointed out that, against a benchmark number of employees of 14 200 at other utilities, Eskom had 41 800. The Energy Intensive Users’ Group, whose members are some of Eskom’s biggest customers, noted that, since 2008, its staff complement has increased from 35 404 employees to 43 640. But sales have decreased from 224 366 gigawatt hours (GWh) to 214 121, meaning that the units sold per employee have decreased from 6.3373 to 4.9065, or a decrease of 22.58%.

Addressing these problems will require an ideological shift that goes beyond the changes to the board and all the way to the shareholder ministry, the analysts said.

But with the government being confronted by the material risks that a dysfunctional Eskom poses to the fiscus and the economy, there may now be the appetite to seriously address these issues. It has been suggested that Finance Minister Malusi Gigaba is seeking to tackle these broader questions.

Based on the recent changes to the board, there may be an opportunity to have this conversation. Although a drastic cut in staff, or the selling off of power stations, may be a step too far, proposals such as Eskom’s unbundling — separating its generation and distribution assets — could be a start, the analysts said. Easy wins could include tackling coal contracts where there are a lot of inefficiencies.

Other experts, such has Grové Steyn of Meridian Economics, have suggested more dramatic proposals, such as the curtailment of Eskom’s build programme and a halt to the construction of the Kusile power station, as well as mothballing its older power stations.

Addressing these issues will require sustained co-ordination between the treasury and the departments of energy and public enterprises, as well as political buy-in from the ANC leadership.

The problems facing the renewable energy procurement programme is an example of what happens when departments do not act in concert, the analysts said. The widely hailed programme, driven by the treasury and the energy department, has been hamstrung by Eskom’s unwillingness to buy power from the independent power producers.

It has not been helped by the many Cabinet reshuffles, which have seen the political principals, who should have driven the process, being changed.

Policy co-ordination and coherence so far has been notoriously difficult for the government, so how this could be achieved is anyone’s guess.

Meanwhile, Eskom needs to meet its January 31 deadline. Once it has cleared that hurdle perhaps this crisis can be turned into an opportunity.

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