Eighteen months after Eskom appointed a new board, the company produced its annual financial statements for the year ended 31 March 2019. The electricity utility had left it to almost the eleventh hour to produce its accounts.

Looking at the details, it is clear that the auditors required public assurance over Finance Minister Tito Mboweni’s R59-billion budget allocation in order to get any sort of comfort to produce the accounts on a going-concern basis. However, even then, the audit opinion noted that there was material uncertainty regarding Eskom’s status as a going concern.

Examining the results, there are some key takeaways that encapsulate many of South Africa’s woes.

The first two observations relate to Eskom’s revenue.

First, and unavoidably, growth is weak. South Africa is not growing. This was clearly reflected in the 1.8% contraction in electricity volumes during the year, led by a 4.7% decline in electricity utilised by the mining industry and lower residential usage. Therefore, despite the 5.8% increase in price that Eskom was granted by the National Energy Regulator of SA (Nersa), lower consumption led to a smaller increase in revenue. Not surprisingly, revenues were lower in the second half of the year – in line with the 3.2% quarter on quarter annualised contraction in the SA economy in the first quarter of the calendar year 2019.

Second, most of South Africa’s municipalities are very poorly run. For years, municipalities have layered on expenses, inadequately invested in maintenance and used electricity revenues to pay their other bills. The result is Eskom’s municipal arrears rose by almost R10-billion to R40-billion. The payment level from municipalities to Eskom is at 81%. In Soweto, which Eskom services directly, the payment level is a paltry 12.5%.

Not only do many municipalities face financial difficulty, they are failing on service delivery. Service delivery protests in 2018 numbered 237 – up 25% from the previous high of 191 in 2014.

Third, employee costs are too high. Despite an awful financial situation, employee costs rose by 13% during the year, driven by the unaffordable wage settlement signed in May 2018. Eskom employs too many people – and there appears to be zero political will to solve this issue. The same can be said for the government of South Africa.

Fourth, and also relating to costs, the company remains perilous operationally. Although the coal supply has been stabilised, Eskom was forced to make extensive use of the diesel-powered open cycle gas turbines (OCGTs) to keep the lights on. OCGT costs increased to R6.5-billion from R0.6-billion in the 2018 financial year. Years of inadequate maintenance under former CEO Brian Molefe have caught up with the utility.

Observation number five is that Eskom shares the combination of weak revenues and high costs with the government. In Eskom’s case, the company reported a loss of R20.7-billion. Looking at the pesky details, we find that they included an R8.4-billion deferred tax gain; strip that out and the loss before tax was actually R29.1-billion.

Of course, Eskom has been spending a lot on capital expenditure in recent years. Aside from the sad reality that Eskom’s cost containment and project delivery are considerably worse than the much-maligned Sasol’s, we need to strip out depreciation and interest in order to get an idea of Eskom’s current cash deficit. Earnings before interest, tax, depreciation and amortisation (EBITDA) fell by 31% to R31.5-billion.

More worryingly, cash from operations was inadequate to service debt. Continued government support was required to manage liquidity.

This is the risk the government faces. Plentiful global liquidity coupled with low local growth has left the government with sufficient buyers for its debt. But, as Eskom has demonstrated, liquidity can quickly dry up when sentiment shifts. South Africa should be using the current environment to curtail costs (by cutting unproductive public servants) and boosting revenues (by providing policy certainty to boost growth).

The ANC’s internal politics seem to make both of these unlikely – much like the politics seem to make it impossible for Eskom to cut costs, commit to the energy transition and reduce its coal dependency. Without those decisions, Eskom will not become sustainable. Instead, the latest cash infusion from the National Treasury will be gleefully swallowed by the same black hole that has devoured hundreds of billions of rand in recent years – without any uptick in output.

My final observation is that there was some good news in the results. Eskom’s energy availability improved from just above 60% in February 2019 to 72% in July. Maintenance is paying a dividend. The utility has finally appointed a chief restructuring officer, Freeman Nomvalo. Now it just needs to build on these. I’m hoping that the politics surprises us – both at Eskom and government. BM