The burning platform: Inside the efforts to save Eskom | Fin24
 
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The burning platform: Inside the efforts to save Eskom

Feb 15 2019 06:03
Pieter du Toit

It’s been the central theme during a series of crisis meetings held by the Cabinet, officials from the department of public enterprises and the Eskom board over the last ten days: the platform is burning and something needs to be done.

The phrase – an MBA favourite denoting urgent, forced and fundamantal change – gained traction during the finalisation of the plans to unbundle Eskom.

And it became the rallying call in the days that followed as the power utility was crippled by outages and disruptions. Last Thursday there was outrage in some circles as the decision to break up Eskom into three separate parts was announced.

On Sunday stage four loadshedding was announced. On Tuesday the lights wents out.

On Wednesday Eskom could only produce 27 000 MW of electricity against the national demand of more than 30 000 MW. And on Thursday President Cryil Ramaphosa told the National Assembly that government is moving with speed to manage the situation.

In crisis meetings and special Cabinet sessions, the message was the same: Eskom is on the verge of collapse, there is no more money available to prop it up and delay urgent intervention – the platform is burning.

Pravin Gordhan, minister of public enterprises, has used all his powers of persuasion to force the power utility’s board to act with urgency. He has brought all the resources of his department – limited and in many instances, inexperienced – to bear in an attempt to coordinate a coherent response to the escalating political and operational crisis.

Although his powers to intervene in the affairs of state-owned enterprises are limited (it did not deter his predecessors Lynne Brown and Malusi Gigaba), the minister has pushed the boundaries, repeatedly reminding the board of their obligations and what the situation demands: effective, strategic and timeous action.

Among bureaucrats Gordhan, who has had a torrid four years in the eye of the state capture storm, is widely admired for his managerial skills and political acumen. Nothing, however, compares to the scale and breadth of what he’s dealing with now.

The president, Cabinet, the board, and senior government officials all know: Eskom is bankrupt, its systems are misfiring and there’s no turning back. The platform is burning, something drastic must be done.

Cheap Electricity was Eskom's Mission

Things didn’t used to be like this. In 2007 the company was humming along, with manageable and low debt levels, ample revenue to cover its expenses, its bonds were more sought-after than the government’s and it was an internationally respected and admired company. Eskom was established in 1922 through an act of the then-Parliament of the Union of South Africa. The Electricity Act established the Electricity Supply Commission, or Escom, a statutory body established to merge the various disparate private generation companies that mainly coalesced around the mining houses on the rand.

These mining houses realised the need for cheap electricity in order to keep the mines going and formed private generation companies. These companies not only provided the mines with enough electricity, but also sold it onwards to local authorities.

By the time the Second World War started, Escom had managed to organise power producers under its umbrella, and the country produced just under 1 000 MW. Its mission, since the 1920’s and right up until the mid-2000s, was to produce cheap electricity in order to help grow the economy and industrialisation.

This it managed to do in the 1950s and the 1960s, when Escom’s electrification efforts blanketed all of South Africa’s main cities and enabled the industrial boom of the time. It helped propel apartheid South Africa’s economic growth to such levels that Time Magazine lauded premier Hendrik Verwoerd as “one of Africa’s ablest leaders” and caused the Rand Daily Mail to say that “South Africa suffers from a surfeit of prosperity”.

The 1970’s saw Escom expand its generation capacity with the construction of a number of new power stations, and the approval of the construction of Africa’s first nuclear power reactors, commissioned in 1984. In 1987 Escom’s name changed to Eskom and became an incorporated state-owned company. It operated 27 power stations with a capacity of more than 33 000 MW. It also employed more than 56 000 people “with advancement and remuneration linked to performance, without reference to race, creed or sex”, according to its annual report.

By 1994 it embarked on a major eletrification project, connecting households in black townships and rural areas neglected by apartheid. In its first year it connected more than 300 000 households, overshooting its targets. By 2018 more than 90% of households were electrified, compared to 36% in 1994. In 2001 Eskom was awarded the Power Company of the Year at the Financial Times Global Energy Awards Ceremony in New York, and in 2005 the outgoing chairperson of the board said Eskom was generating sufficient revenue and that it is independent of government loans.

But in the summer of 2008 the signs of a creaking system became apparent when the first wave of blackouts hit the country – and Eskom became the target of state capture and corruption.

Blackout: The Economic and Political Cost

Next week Finance Minister Tito Mboweni will announce that government will, for the very last time, bail out Eskom. The company is drowning in debt, and the provision of another guarantee might ease the pressure on Eskom for the time being but will surely threaten South Africa’s credit rating once it comes up for review by Moody’s soon. Over the last 11 years Eskom has been ravaged by poor management, willful neglect, corruption and state capture. It has lost hundreds of qualified engineers to foreign power companies or the private sector which has in turn affected crucial maintenance operations on power stations reaching the end of its lives. 

None of this however is new. When turbines at power stations explode, when coolling systems fail or when low-grade coal causes systems to fail, it happens publicly because the lights go out. And corruption, like the gerrymandered Tegeta coal deal where Eskom helped the Gupta family to acquire the Optimum coal mine (from where thye sold sub-standard coal to Eskom), revealed the extent to which the leadership had become corrupted. 

In fact, government itself realised the state of affairs when then-president Jacob Zuma appointed an Eskom task team to lead a turnaround strategy under the leadership of his-then deputy, Cyril Ramaphosa, in 2015. 

Despite the visible and gradual dismantling and unraveling of the company over the past decade, nothing has been done to ensure its surival. When Ramaphosa became ANC leader in December 2017, the first thing he engineered was the replacement of the board. But a year hence and the company is on the verge of collapse. Gordhan told MPs if it carries on with its present trajectory it will cease to exist in April – just six weeks away.

Gordhan, as project leader, is in a race against time. Eskom’s debt of R420 billion represents more than 15% of the state’s total debt. It isn’t earning enough revenue to cover its next debt repayment to international creditors, scheduled for March 31, 2019. That’s why government, itself cash-strapped, will step in when Mboweni tables the budget next week.

But that won’t be enough. If South Africa is to have any chance of avoiding junk status, an intervention to save Eskom will have to be fundamental and drastic. That intervention, as mooted in a white paper in Eskom in the 1990s, entails breaking up – or unbundling – the company into three separate entites; three standalone companies responsible for generation, transmission and distribution. It is a major undertaking.

Gordhan has one major problem: the skills and expertise to effectively manage such a major restructuring have left both Eskom and the department. He will have to navigate the refit of the country’s biggest company by contracting skills from outside the public sector – and he will have to rely on the president’s call of “Thuma Mina”. Because there is no money. For Ramaphosa, the political risks are great. His old union, NUM, along with Numsa, are violently opposed to any change in the status quo. They showed their strength in 2018 when they successfully stared down government and secured wage increases that Eskom just could not afford. And the unbundling plans are seen as the gateway to privatisation, total and utter heresy in the world of ANC and its alliance partners’ economic theory. 

There are No Options Left

On Thursday Ramaphosa said government will ensure that all stakeholders are consulted about their plans to rescue and reconfigure Eskom, but that “we are determined to correct this”. His statement was informed by a series of briefing notes, memoranda and working papers presented to him and Cabinet: there are no choices in the matter anymore. Eskom has been bled dry, power stations are grinding to a halt and the economy is under threat. Eskom, if it survives beyond March, will be subjected to the audits and stress tests all insolvent companies are subjected to in order to determine in what shape or form some of its constituent parts will remain in business. I

t will mean trauma for a company almost 100 years old. The platform is burning. There are no choices anymore. And there’s no turning back. 

gordhan  |  eskom  |  load shedding
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