Eskom is in a deep hole; it will take decades and serious financial wizardry to dig it out

After a week of noisy political protestations that Eskom’s restructuring into three entities was in fact privatisation, and renewed load shedding, President Cyril Ramaphosa is set to make further statements on the creaking power utility in his Thursday reply to the parliamentary State of the Nation Address (SONA) debate.

On Wednesday, four days into load shedding South Africa has not seen the likes of in years, Public Enterprises Minister Pravin Gordhan confirmed rolling outages are expected until April. And the bailout of the “technically insolvent” Eskom falls to Finance Minister Tito Mboweni when he delivers the Budget next week.

Eskom is the perfect storm.

Fine ash mixed with oil or water at one power station is linked to the collapse of at least some of the seven units that triggered Monday’s Stage Four load shedding, the first in four years, and the anticipated rolling outages for the next two months. And it appears cellphone usage in the highly sensitive power generating environment is affecting the enormous fans the generating plants use, leading to shutdowns that can take between four and six hours to reverse.

This was the initial information on what was behind the failure of the national power grid from Sunday, according to a briefing to MPs by Gordhan on Wednesday.

A probe into factors leading to load shedding is underway, as was an urgent investigation into the design flaws at the new-build power stations Medupi and Kusile that were meant to provide extra capacity to the grid, but are at best are running at 40% to 50% capacity. Both are at least three years overdue and a combined R200-billion over budget, according to Public Enterprises.

“We are still waiting for reports,” Gordhan told Parliament’s public enterprises committee.

“There will definitely be litigation once we understand what’s going on and who’s responsible.”

For Gordhan, who stepped out of a Cabinet meeting to brief MPs, it was a case of buck up, wipe the egg off the face — and face head-on the rolling outages that he had pledged in December 2018 – amid a round of load shedding then – would be not repeated. But then came those “mechanical things” like fine ash in water and/or oil that triggered this latest round of rolling outages since Sunday.

“This is an emergency. We need to understand sooner rather than later what’s the problem. If we don’t understand the problem, we are not going to get anywhere near the solutions,” said Gordhan, adding later that the rolling outages were “a bad signal” for the economy.

“We are trying our utmost that we limit load shedding… We have an obligation to apologise to South Africans for what they are going through…”

But there was no word on how the government would address the financial crisis at Eskom, described as among the biggest risks to the South African economy.

“Wait until Wednesday (Budget Day),” said Gordhan, when asked about a bailout or the widely touted R100-billion debt swap whereby government takes over some of Eskom’s debt.

The minister was as numbers-shy as Eskom CEO Phakamani Hadebe after last Thursday’s SONA, when he told Daily Maverick to wait until the Budget.

“Government is going to help optimise the balance sheet,” Hadebe said in reference to Eskom’s R419-billion debt, whose repayments it cannot meet without further loans. And he said it was most likely to be a debt swap as this could be done in a fiscally neutral way that would least affect government’s own balance sheet.

On Wednesday Public Enterprises acting Director-General Thuto Shomang put it bluntly:

“Eskom is currently technically insolvent… Eskom is not generating enough revenue to cover costs.”

Exactly how it got here is not unknown, and was broadly addressed again in Wednesday’s committee meeting. When Medupi and Kusile coal power stations were touted as the solution to power shortages, there had been no money for the ambitious construction. Instead, South Africa went to the markets to borrow, and then borrow some more, as money was also required for maintenance of ageing power plants.

While Eskom successfully applied for well above inflation-rate tariff increases for about a decade, the rising cost of electricity meant many customers no longer could afford it, and cut back on consumption.

Just a few figures in the Public Enterprises presentation to MPs reflect the disaster that is Eskom – and no one is disputing its risk to the South African economy, particularly as a default on its debt repayment would trigger a complex cross-default call-in of debt that would cut across state-owned entities, including the troubled SAA.

In 2007 the power utility generated R39.4-billion in revenue on the back of the sales of 218,12 Gigawatt hours (GWh) at a cost of 18c per kilowatt hour (c/kWh). By 2018 electricity sales had flatlined, falling to 212,1 GWh, although at 85c/kWh Eskom actually generated R177.4-billion in revenue. The official numbers show that while coal purchases remained stable over the past 11 years, the cost for coal increased to R115.49-billion in 2018, up from R10-billion in 2007.

Over the same period — from 2007 to 2018 — total installed capacity increased by about 3,000 MegaWatts (MW), to 45,561MW from 42,618MW, the clearest indication of the failure of the multibillion-rand Medupi and Kusile new-build power station programme that was meant to add 9,600MW to the grid by 2015.

In addition, it emerged that Eskom employee numbers increased from just more than 32,000 to 48,628 over the same period — “60 middle managers increased to several hundred, with very nice packages”, as Gordhan put it, while regional head offices increased from four to nine. Then add malfeasances such as contracts that pay between 13% to 20% above market prices, as was recently discovered, corruption, and Eskom’s role in State Capture.

As this mix is being unpicked, Public Enterprises said it is expecting more irregular expenditure to emerge in the 2018/19 financial year. Already in the 2017/18 financial year, irregular expenditure increased to R19.6-billion, from R3-billion, in the wake of various checks and investigations by the new board chaired by Jabu Mabuza, one of the many private sector business persons now heading state-owned enterprises.

That financial management at Eskom is in disarray also emerged on Wednesday in Parliament’s Standing Committee on Appropriations. Between June and December 2018, the power utility had obtained deviations worth some R27-billion, according to National Treasury’s Office of the Chief Procurement Officer. A deviation is a procurement outside usual supply chain management procedures, either because of an emergency that is an immediate risk to health, life, property or environment, or because only a sole supplier can supply what is needed.

Eskom leads the table of deviations, for which National Treasury approval must be obtained: At R11.736-billion in deviations for the second quarter of the 2018/19 financial year, the power utility stood well above the next biggest applicant for deviations, the Road Accident Fund (RAF) at just over R1-billion. In the third quarter to the end of December 2018, Eskom received conditional approval for R15.414-billion in deviations. The second was Environmental Affairs with deviations of just more than R508-million, according to the Office of the Chief Procurement Officer’s presentation to MPs.

It’ll be up to Finance Minister Tito Mboweni to sell what is set to be a very bitter pill to remedy Eskom’s financial malaise. Not much can be said until he delivers his maiden Budget on 20 February.

Mboweni’s announcements could be much discussed, possibly as soon as a day later, when DA MP Natasha Mazzone indicated her requested a special debate on the state of Eskom had been pencilled in. And that is part of the political machinations around Eskom, whose restructuring is widely slammed as privatisation in disguise.

EFF leader Julius Malema, in his address to the SONA debate, said Eskom’s privatisation made Ramaphosa “the enemy of the workers” because he was pursuing privatisation as “a remedy that benefits his friends and family…”

Also critical are the National Mineworkers Union (NUM) and National Union of Metalworkers of South Africa (Numsa), which in an earlier statement said:

“The ANC and its cronies looted and destroyed Eskom and now they have identified privatisation as a convenient way to cover up for more than two decades of rampant mismanagement, looting and corruption.”

On Wednesday the South African Communist Party (SACP) chipped in.

“As usual, right-wing and reactionary bourgeois elements and forces are pushing their single idea of privatisation as the so-called solution. They behave like alcoholics who insist on solving the problem of alcoholism by drinking more alcohol,” the party said in a statement. “It is a fact that it is privatisation, through tenderisation.”

But Gordhan maintained before Parliament’s public enterprises committee:

“At no stage has the president said, or the government indicated, there would be privatisation of any of these (Eskom) entities or that this is the motivation for the separation into three entities.”

Gordhan will have to smooth out these political power struggles set to reach top volume ahead of the 8 May polling day. It’s understood letters have gone out to trade unions to discuss the power utility’s restructuring into transmission, distribution and generation entities. Coal company bosses can also expect a call, given the issues Eskom seems to have with both quality and quantity of coal supplies.

“The abuse of public resources to benefit these private interests stands indirect 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…” DM