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Why Eskom is unfixable

Apr 01 2019 14:53
James-Brent Styan

Eskom is unfixable. 

Every big decision taken around Eskom over the past three months has probably made matters worse. 

Let’s start with the biggest of the (multitude of) problems. 

Money. 

Eskom has none, and the hole is getting deeper. 

Later this year – for the financial year to 31 March 2019 – Eskom will report its biggest loss ever, in all likelihood between R20bn and R30bn (2018: R4.6bn loss). 

The company already sits with escalating debt of R420bn. 

In February this year Eskom got a bailout from the state amounting to R150bn over the next ten years. 

The shorter-term portion, a rescue plan for the first three years from 1 April 2019, amounts to R23bn per year over the three years. 

It is not nearly enough. 

By March 2019 Eskom had burnt through R6bn just to buy diesel to try and avoid load shedding. 

It hardly helped. 

The money was spent, the diesel still ran out and the country experienced the worst period of sustained stage 4 load shedding it has ever seen. 

Exacerbating things for Eskom, the energy regulator, Nersa, did not give Eskom the tariff increases it had applied for. 

Last year Eskom had asked for an increase of 15% per year for the next three years. 

In February this year, Eskom amended its application and asked for 17.1%, 15.4% and 17.5% over the next three years. 

Nersa approved increases of 9.41%, 8.1% and 5.22%. Again, not nearly enough.

Politics

Election year is making Eskom’s problems worse. 

The national government – led by an under-pressure ANC – won’t cut off areas like Soweto for non-payment, despite owing R17bn (as much as the rest of the country combined). 

Government will also not support Eskom in making the necessary decisions required for urgent restructuring needed to reduce cost. 

The ANC cannot afford the state to sign off on retrenchments of over 10 000 people that could result in billions in cashflow savings per month. 

This is true for all state-owned entities that require deep cuts to return to solvency. 

It won’t happen. 

The only new plan the Ramaphosa-led government has come up with amounts to politics of distraction. 

In February, Ramaphosa (who also led the Eskom war room from December 2014) proposed a plan to break Eskom up into three parts. 

This won’t make a hoot of a difference in the short to medium term. 

Talk of breaking up at this critical juncture only adds to the uncertainty and confusion enveloping Eskom, something the utility and the country can ill-afford right now. 

The debt and money problems won’t go away – even if you break Eskom into 100 pieces. 

While it could be considered in future, the priority should be to ensure electricity supply.

Blackouts and collapsing grids

A growing concern relates to the possibility of a national blackout which would see the country’s entire power grid go down, as has been the case recently in Venezuela. 

That would be catastrophic and could leave the country without electricity for weeks, if not months. 

I don’t see this happening in SA. We may instead see increased load shedding – up to stage 8 – to prevent a grid collapse and blackout. 

Another major issue is the impact of continued load shedding on aged municipal electricity infrastructure, which is under immense pressure from sustained load shedding. 

It wasn’t designed to be shut off and on so often. Many municipal areas have simply not adequately maintained its infrastructure. 

This includes most metros, and the City of Johannesburg, which saw a change in government following the 2016 local government elections. 

Recently the city has admitted the continued rebooting of power grids is to the “detriment of already aged infrastructure and will lead to a failure risk of said infrastructure”. 

Current mayor Herman Mashaba states in the city’s 2016/17 annual report that “the city’s infrastructure requires an investment of R170bn to address the backlog created by decades of underinvestment and neglect”. 

There have been many reports of transformers and substations bursting into flames during the past few weeks and this can be expected to continue. 

Pension money given to Eskom

Before Eskom can be turned around, a lot more money will be needed over the short term, before the end of this calendar year. 

This may not necessarily mean billions in new money going to Eskom from the state, instead it may in all likelihood come down to a massive reduction in its debt. 

How will this be achieved? 

It could be done by using the pensions of state employees. 

This option – and this has been mooted already by the minister of finance Tito Mboweni – means that the Public Investment Corporation (PIC), who manages state employees’ pensions, will be encouraged to buy up Eskom debt in exchange for equity. 

This means that the pensions of government employees like teachers, police officers and nurses will be used to buy up Eskom stock. 

In this manner Eskom technically does not get privatised, yet the PIC will end up owning large parts of it. 

Does this sound like a good investment idea? 

James-Brent Styan is the author of Blackout, The Eskom Crisis.

This article originally appeared in the 4 April edition of finweek. Buy and download the magazine here or subscribe to our newsletter here.

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