Explainer

Eskom, State Capture and a plan to keep the lights on

By Marianne Merten 25 January 2019

Eskom CEO Phakamani Hadebe addresses journalists during a press conference at the utility’s Sunninghill offices on November 16, 2018 in Johannesburg, South Africa. (Photo by Gallo Images / Business Day / Alaister Russell)

Daily Maverick takes a look what’s at stake amid all the Davos talk of renewal, credible turnaround strategies and growth.

President Cyril Ramaphosa told the annual World Economic Forum shindig at Davos, Switzerland, that a plan to keep Eskom switched on was in the making. ‘In the next few weeks, we will be announcing a set of measures to stabilise and improve the company’s financial position and to ensure uninterrupted energy supply.’ It’s not exactly new, given the end of January deadline he had set for the Eskom sustainability task team appointed in mid-December 2018. But his comments, crucially, were made on an international platform amid a drive to rustle up more investment for South Africa.

How bad is it at Eskom, financially-speaking?

The financial position of South Africa’s power utility was “a major risk to the economy and the public finances”, according to the 2018 Budget Review. And that was before the release in mid-2018 of Eskom’s annual report for the year ending 31 March 2018 showed losses of R2.3-billion and an increase in irregular expenditure to R19.6-billion.

The subsequent interim results for the year ending 30 September 2018, which were published in late November 2018, revised the forecast loss to R11.2-billion loss for 2018, and showed Eskom was R419-billion in the red, compared to R40-billion in 2007, while staff increased to 48,628 in 2018 from 47,658 a year earlier, at an annual cost of R29.5-billion. Other issues were highlighted, including insufficient coal stocks at at least one out of three of its power stations, and an ability to supply power at an average 77% is well below the 80% level it has set itself.

Eskom has government guarantees of R350-billion, of which at least two-thirds are drawn. To put this into perspective, the next biggest recipient of government guarantees is R38.9-billion to the Sanral (South African National Roads Agency Limited), followed by perpetual trouble-maker, SAA, at R19.1-billion in government guarantees.

There are complications – from financials to state governance

Municipal debt stood at R17-billion as of mid-November 2018, up from R13.57-billion just six months earlier. Councils in the Free State and Mpumalanga account for the majority of this debt, some R12-billion, according to Eskom documentation submitted to Parliament’s public spending watchdog, the Standing Committee on Public Accounts (Scopa).

There is litigation, between Eskom and councils and between business and civic organisations and councils. There is also a political dog-fight on: councils, represented by the statutory South African Local Government Association (Salga), have argued that Eskom must sign a service provider agreement as only municipalities can be in charge of electricity. Eskom, of course, is opposed, as this would affect its own revenue streams, as it was to a three-month moratorium on supply interruptions that the power utility is using to try to make councils pay up.

The Cabinet inter-ministerial task team (IMTT) looking at the electricity grid, and how it should effectively operate, is caught up in this. Twice in 2018, Cabinet rescheduled finalisation of this matter until its last meeting of 2018, on 5 December.

According to Co-operative Governance Minister Zweli Mkhize’s year-end statement of 13 December 2018, there had been “progress in getting unanimity amongst Eskom and municipalities to adopt a binding and co-operative approach in resolving the huge debt owed by municipalities and avoiding a court battle”.

But the statement makes it clear municipalities had won the fight with a Cabinet-approved recognition that council have the constitutional mandate to reticulate supplies, and that service agreements must now be signed with Eskom, taking into account the power utility’s infrastructure investment and to “ensure Eskom’s balance sheet is protected”.

What exactly the Co-operative Governance Department may do to ensure the electricity tariffs paid to councils are actually paid over to Eskom, rather than being used to keep the council afloat, remains to be seen in the IMTT implementation plan that Mkhize said would be unveiled from February 2019.

The vicious circle – Eskom’s financial troubles, tariff hikes and peoples’ pain

Municipal debt notwithstanding, electricity tariffs are key revenue generators for councils. While on Eskom’s own information the power utility charges an average of 85 cents per kW/h (kiloWatt/hour), councils put their own mark-up on the unit cost of R2 and even more per unit and also charge additional fees, like the City of Cape Town’s R150 monthly levy even for prepaid electricity users it says is due to declining electricity sales.

There’s a vicious cycle: after some 13 years of above-inflation electricity tariff hikes, the cost of electricity has gone up – and out of reach for many. Even middle-class households are cutting back usage, dampening a key revenue source for municipalities. And while Eskom may well be connecting more and more households to the grid – just over 82,000 in the 2017/8 financial year – anecdotal evidence indicates particularly poor and lower working-class households are returning to candles and paraffin due to the electricity costs.

That reduced electricity demand has been acknowledged within government already for some time.

Reduced electricity demand has also contributed to flat revenue growth (for Eskom),” noted the 2018 Budget Review.

It is apparent, however, that Eskom can no longer rely on tariff increases to compensate for flat electricity sales growth. To remain financially sustainable, the utility needs to reduce operating costs. Eskom’s business model will also have to change as part of broader transformation in the electricity sector.”

Somebody just needs to tell Eskom managers this, and make them stick to another way. The power utility has taken the National Energy Regulator of South Africa (Nersa) to court for having granted a 2018/19 increase of just 5.2% rather than the requested 19.9%. Currently under way are Nersa public hearings on Eskom’s request for additional hikes as part of its revenue-clearing account application, or annual increases of 15% that effectively amount over the next three years to a 52% hike in electricity tariffs.

Is the situation any better at the Eskom governance coalface?

The new board put in place a year ago – the announcement that Jabu Mabuza of Business Leadership South Africa (BLSA) would chair the Eskom board was made just before then deputy president Cyril Ramaphosa headed off to Davos in January 2018 – has cleaned up. On several fronts.

Eskom’s State Capture period has been reviewed, leading to additional irregular expenditure dating back all the way to at least 2015. According to the 2018 interim results, disciplinary proceedings against 1,049 employees have started, and with 858 disciplinary hearings finalised, 99 employees have left Eskom, as have 14 “implicated executives”.

Twelve criminal cases have been opened, five of which are against nine executives – and Eskom recouped R902-million from international consultancy McKinsey. Remember, there were advisory and consultancy contracts of over R1.6-billion with the Gupta-linked Trillian and Regiments, alongside the facilitation of the Optimum coal mine acquisition by the Gupta-linked Tegeta through the R600-million pre-payment of coal supplies.

Much has been made of the nine-point plan that includes nuggets like “preparing for rain” because, as South Africans have learnt the hard way, wet coal leads to load shedding.

That’s not to say that there have been no missteps by Eskom executives and board members, many of whom now come from the private sector corporate boardrooms where accountability isn’t exactly abuzz. One of the most spectacular gaffes had been Eskom CEO Phakamani Hadebe’s 0% wage increase offer in mid-2018 that got trade unions hot under the collar, and to unite across federation lines. The nil-increase was averted amid much public warnings that workers could not be made to pay for the corruption and State Capture irregularities perpetrated by executives and management.

But more labour trouble is on the way. After cuts to the number of executives, workers seem to be in the cross-hairs. On Wednesday the National Union of Metalworkers of South Africa (Numsa) picketed at Eskom Megawatt head office against what the union said were planned retrenchments of workers.

How did Eskom get here?

State Capture is a fundamental contributor, but not the only one, as organisational inefficiencies, lack of technical capacity and bloated management ranks and workforce play their part. There have been years of delays at cost escalation at Medupi power station, initially costed in 2007 at R56-billion for completion in 2013, but now with a price tag of R145-billion and still not quite done, according to the 2018 Budget Review, with similar escalations of Kusile’s costs to R161.4-billion.

But it is without a doubt that billions of rand were lost due to State Capture. The details, including the pre-payment for coal supplies to facilitate the Gupta-linked Tegeta’s acquisition of the Optimum coal mine and payments to consultants, were ventilated in detail in Parliament’s inquiry into State Capture at Eskom report that was adopted in the House in late November 2018 after hard-hitting findings and recommendations against the minister, Eskom top executives like one time CEO Brian Molefe and chief financial officer Anoj Singh and board chairpersons.

The abuse of public resources to benefit these private interest stands in direct contradiction to Eskom’s constitutional obligations to ensure its procurement processes are equitable, transparent, fair, competitive and cost-effective… (V)arious Eskom board members were conflicted in their dealings with some of the private businesses and may have acted unlawfully together with senior management to benefit a network that sought to achieve the capture of Eskom…” said the parliamentary inquiry, finding that the former public enterprises ministers Malusi Gigaba and Lynne Brown, who had been “grossly negligent”, must appear before the Zondo Commission.

What is known about the plan for Eskom to keep the lights on?

It seems all to revolve around restructuring Eskom into three divisions – generation, transmission and distribution – while getting additional financial support. None of that has fundamentally changed since mid-2018, although details have shifted.

In July 2018 the ANC confirmed it was discussing the restructuring of Eskom at its top-level meetings of the Top Six officials. That ANC proposal was to tap the Public Investment Corporation (PIC), which manages R2-trillion of assets of government workers’ pensions and social savings, to turn a R120-billion loan into equity. That did not go down well as touching workers on their pensions is never a good idea. Trade unions and federations like Cosatu and South African Trade Union Federation (Saftu) opposed the move, citing concerns over a series of questionable investments the PIC had made, including in the collapsed VBS Mutual Bank and Steinhoff.

Then a debt swap was raised, or effectively government taking over R100-billion from Eskom. And that option, alongside restructuring the power utility into different parts, but not privatisation, is still what’s on the table in January 2019.

The initial confirmation that this is being considered came at a briefing at Eskom’s Megawatt Park head office on 6 December 2018 called amid renewed load shedding. Trade unions like Numsa and labour federation Cosatu are on public record as saying load shedding is being used by Eskom as the stick to get its funding way. Then Public Enterprise Minister Pravin Gordhan said “debt restructuring is being discussed” without giving away details.

Sometime earlier in the new year government as a whole will give you (South Africans) some idea where we are going, with the road map as well.”

That road map is being charted, with various consultations, by the Eskom sustainability task team Ramaphosa appointed on 14 December 2018 to review the “operational, structural and financial viability of Eskom”, “assess the appropriateness of the current Eskom business model and structure”, propose how to resolve its debt burden and “propose alternative business and financial models appropriate for the South African context”, according to a statement by the Presidency.

Just before heading off to Davos, Ramaphosa met the task team. The deadline for its “initial recommendations” is the end of January. That would be just in time for an announcement in the State of the Nation Address (SONA) on 7 February, the pre-election platform Ramaphosa is unlikely to let pass. DM

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