/ 1 March 2023

Eskom | There’s simply no fixing the 100-year old company as it is

Eskom Flag
Eskom has reported a 6% decline in sales in its interim results for the six months ending in September, revealing a sustained decrease in plant performance. (Waldo Swiegers/Bloomberg via Getty Images)

Eskom in its current form cannot be fixed.

There aren’t many companies as complex as Eskom to run in this country and in the world. It has some 12 ageing coal-fired power stations in Mpumalanga that are nearing their end of life and considered relics of a bygone era that aren’t investable anymore. But these relics are the backbone of the country’s entire electricity grid, without which South Africa’s already deindustrialising economy would grind to a halt overnight. 

At all costs, Eskom’s chief executive and board need to keep the lights on and what that ultimately means for a company with such ageing infrastructure is spend, spend and spend some more on keeping those boilers going. That would be fine if Eskom’s balance sheet was in good shape but without a capital injection from its shareholder and tariffs that don’t reflect the costs of maintaining the plants and the build of two additional plants to better meet demand, it has proved impossible without the help of a tightfisted treasury.

Its individual coal plants, companies in their own right, spread across Mpumalanga, Free State and the Limpopo have become feeding fodder from large engineering giants and the political opportunists they sponsor in South Africa’s bad brand of politics.

With an economy floundering for more than a decade, the treasury has, in pursuit of credibility in global markets, had to have a tighter handle on expenditure. It was Nhlanhla Nene, who served as finance minister from May 2014 to December 2015, who first started to reign in what was a more expansive budget in the aftermath of the 2008 global financial crisis. 

South Africa and other emerging markets such as Brazil found themselves in a rather lucky position of being able to spend in that downturn to boost their respective economies, unlike the developed world economies. The last time the treasury boasted of a fiscal surplus was at the tail-end of the last super-commodity cycle and just before the financial crisis.

Countries such as the United Kingdom, Italy, Ireland and Greece — not blessed with a commodity dividend — had to resort to cruel and punishing austerity measures that at one time threatened the future of the European Union. The crisis peaked in 2011.

We escaped much of that pain, and were feted as one of the new growth centres of the modern world. Yes, South Africa was in that bucket of nations, which explains the hubris of breathing life into the BRICs grouping of nations — something unplanned.

But this would all change, as fate would have it. By the time Nene hosted his first and, sadly, only budget speech in February 2015, the spending taps had to be tightened. It’s a message that would cause friction in what was the land of plenty for the few in the Jacob Zuma inner circle. It’s no wonder by the end of that year in a midnight raid, Nene lost his job and a weekend finance minister was appointed. What a time that was. 

Ever since that raid on our public purse by a desperate and bad presidency, the treasury has had a tight fist of public purse — especially over the spending of ailing state-owned enterprises such as Eskom. Being the diligent bean counters that they are and through the assistance of the Public Finance Management Amendment Act (PFMA), they’ve ensured that procurement within these giant companies is squeezed. 

Although we’ve welcomed this, given the many horrid tales of state capture, what it has done is ensure these much derided state-owned enterprises (SOE) aren’t able to react to changes in market conditions as nimbly as they once were. For a company like Eskom, it has meant relying on the cheapest contractors to maintain its plants, which has fed into more breakdowns in the ageing power stations. 

It doesn’t end there, once the cheapest contractor wins the tender, there’s always a change to that price from within. Cost escalations — ask anyone within that SOE — are an everyday occurrence. So Eskom is getting cheap maintenance parts delivered at the gate, but over a short space of time, they get priced at “premium” levels.

It’s a recipe for financial and operational ruin — or the 122 days of load-shedding that we are living through. 

But do we suspend the PFMA as a solution; do we trust governance processes in SOEs, especially as political interference is still the order of the day? A thought.

Externally, tariffs, limited capital injection by a nervous shareholder and an overzealous but well intentioned treasury have combined to make the Eskom turnaround a near impossible task. 

There is one last thing that makes the Eskom turnaround such a dastardly job. How does one break up the eco-systems that exist around its coal fired power stations in Mpumalanga, Limpopo and Free State? It’s critical.

By internal accounts and through the M&G’s investigations, its most troubled power station is Tutuka, which was commissioned in 1985. There lives a corrupt ecosystem that has proved impenetrable.

Tutuka is one of the relatively younger operations, but it has proved the worst performing. In launching any turnaround of Eskom, I would have thought that former chief executive Andre de Ruyter would have established headquarters in the town of Standerton, where the plant is based. (I would have endorsed daily helicopter flights there, given the magnitude of the problems there.) Maybe it’s a bit of wishful thinking, but Neal Froneman did take his entire executive to ailing Carletonville when he started Sibanye more than 10 years ago. It was a symbol of management being on the ground, close to its most troubled and problematic gold operations. 

Whatever the intervention, something has to be done — and it isn’t soldiers at the gate. It needs a brave chief executive and executive board, not people simply in search of higher salaries and stature. 

Over the century of its life, Eskom has just grown into an institution that is quite simply “too big to fail” — except that it is failing. It was clearly a company too complex for De Ruyter to run. When he bravely walked into the corner office at Eskom’s Megawatt Park compound in December 2019, he was taking on a monumental task even without any of the political interference that would come to dog his final months in office.

It’s just that big of a problem that no one person can fix. For a country always searching for a hero to save us from ourselves, he was set up for failure. Even if he was blessed with the strongest board that we could muster in this country, the job would have consumed him.