Business Maverick

Business Maverick

Eskom set to post stratospheric loss as labour costs rocket

Public Enterprises Minister Pravin Gordhan delivers a keynote address at Daily Maverick's Business Against Corruption event on 27 June 2019 in Hyde Park, Johannesburg. (Photo: Ayanda Mthethwa)

The president and the finance minister’s ‘capitulation to the left in the ANC’ has been cited as one factor responsible for the shocking shortfall.

Next week electricity supplier Eskom will report a financial loss so high that no single public or private company has ever reported its equal in South Africa. The R25-billion net loss is almost double the previous record, held by another state-owned company, PetroSA, which reported a R15-billion loss in 2015, after spending billions drilling new wells for gas it did not find.

Eskom’s record loss is attributable to the power of trade unions, who won a wage increase almost double the inflation rate, together with a once-off bonus for their members last year, said two people close to the utility. But the loss is also attributable to higher maintenance expenditure as Eskom was forced to push up its expenditure on the diesel-guzzling open-cycle gas turbine stations in order to avoid load shedding, said one.

The accelerated maintenance expenditure came after the shock Stage Four load shedding in November 2018, during which Eskom was forced to ration electricity in the traditionally low-demand summer period due to massive breakdowns of power stations.

After a month of sustained load shedding, Public Enterprises Minister Pravin Gordhan was forced to cancel all December leave for essential staff and senior management, insisting they stay and fix the generating assets. The success was short-lived, as Eskom was forced back into load shedding in March 2019.

The price of coal also shot up as Eskom had to scramble to rebuild coal stockpiles to combat a shortage of coal at more than 10 power stations that had fallen below the required 20-day threshold.

Prices shot up because we had to get coal at all costs,” said the source.

The biggest, unnecessary expense, was the ex gratia payment to staff last year, in which the lowest-paid employees received bonuses averaging R10,000 each,” said another person who spoke on condition of anonymity because the results are not public yet. This was in addition to a 7.5% annual wage increase for bargaining unit employees.

The increase came after Gordhan intervened to broker a solution to end a series of protest strikes that resulted in Eskom generating assets being sabotaged as the utility declined to increase wages during labour talks, citing the unaffordability of any wage increase. This pushed the cost of labour to more than R50-billion.

This was madness. Eskom should not have increased the wages of its bloated staff, because it did not have the money at all. If people had the long-term interests of the company, and the whole economy, there would have been no need for all that nonsense,” said the person.

Shortly after taking over as CEO in February 2018, and backed by a new board, Phakamani Hadebe told the National Union of Mineworkers (Num) and the National Union of Metalworkers of South Africa (Numsa), that the company was in no position to increase wages as it had to beg its shareholder for money to stay afloat. A series of violent strikes followed, resulting in blockages of coal supplies to power stations in Mpumalanga and other generating assets breaking down. This triggered fresh bouts of load shedding.

Hadebe was pelted with missiles when trying to address protesting workers who had delivered a memorandum of demands to the Eskom head office in Johannesburg.

Threatened with a full-blown strike, Gordhan, the minister with the political responsibility for Eskom, intervened and instructed the company to reopen talks. Eskom finally settled at a 7.5% annual wage increase.

Not only was this unaffordable, but the utility had also tabled a plan to cut staff numbers. Eskom had told the government and public that it needed to cut a third of its 47,000 workforce – more than 16,000 employees – to return to sustainability. Eskom will report that sales of electricity have dropped to below those of more than 10 years ago when just under 32,000 people were employed at the power utility.

Eskom had also asked the government for a massive cash bailout to reduce its bulging debt pile. This it did get.

In his Budget speech in February, Finance Minister Tito Mboweni allocated a R69-billion bailout, to be paid in three instalments over the next three years. This week, in a special appropriation Bill in Parliament, Mboweni increased the amount by R59-billion. This will be paid out of tax coffers during this and the 2021 financial years, “to assist Eskom with its financial obligations,” said Mboweni.

These weren’t the first bailouts going to Eskom. After being gutted by corruption, the utility extended a begging hand to the taxpayer and received an R83-billion bailout in 2015. That was only the start.

That Eskom has been getting bailouts from the government, without it meeting any of the reforms necessary to transform it to a sustainable position, means the ANC’s leftist alliance is winning over the reformist finance minister Mboweni, said Wits Business School senior economist Lumkile Mondi.

The president has rallied to the left of the ANC. He has to push and fulfil promises the ANC made in its election manifesto.”

Among these were pledges made by the government not to retrench anybody at Eskom or at other state-owned companies.

This shows the dominance of the left in the ANC. But it is a blow to a reformer like Mboweni, who does not want to be pumping money into failing state-owned entities,” said Mondi.

Mboweni has repeatedly threatened the government would stop funding loss-making entities who keep coming back to National Treasury for more funds. But, this week he was forced to allocate more money to the SABC and to arms manufacturer Denel, both of which cannot pay salaries and suppliers without government assistance. Last month Denel had to delay paying the full wages of its employees as it had run out of cash.

This week Eskom will also announce its outstanding debt pile to have ballooned to just under R500-billion. On this, it pays annual interest of R50-billion. The utility generates just over R25-billion in cash flows from the sale of electricity, which is not enough to pay for maintenance expenditure on its infrastructure. Thus it must borrow money to service debt and pay for its running costs. Eskom is also at the tail end of a R300-billion capital investment programme that seeks to increase its output.

Eskom is owed more than R18-billion by municipalities and other electricity users who are not paying for their consumption. The majority of the non-payment is by customers in Soweto.

Without government cash injections, Eskom is not a going concern, which presents serious ramifications for South Africa’s economy. The utility supplies about 95% of South Africa’s electricity, and exports some of its power to Zimbabwe and Lesotho.

Its continued and growing losses are a recipe to trap the economy to stay in low growth gear for a long, long time,” said Mondi.

This low growth will worsen unemployment and inequality as skills will continue to leave South Africa for opportunities elsewhere, said Mondi.

Mboweni and Ramaphosa have really capitulated to the left of the ANC. Nobody wants to make the hard decisions. They think things are going to come right by themselves, and they are wrong.”

Mondi said if things continue as they are now, without the very necessary reforms such as cutting jobs and tackling corruption, the economy will sink further, forcing the Moody’s Rating Agency to downgrade South Africa to junk status.

Otherwise Moody’s will continue to have a questionable track record.” BM


Please peer review 3 community comments before your comment can be posted