Note the interview was conducted in Afrikaans, on RSG Geldsake and translated.
RYK VAN NIEKERK: Eskom CEO André de Ruyter joins me now. André, welcome to the programme. How are things at Eskom? Are you sleeping at night?
ANDRÉ DE RUYTER: Yes, from about 11pm to 3am.
RYK VAN NIEKERK: What do you do at three in the morning?
ANDRÉ DE RUYTER: You know – worry! But it’s not really that bad, Ryk. We are slowly but surely getting things under control. Of course a great deal of work is needed, there’s a big backlog to catch up on, but in general I see a succession of very positive signals that offer promise for the future.
RYK VAN NIEKERK: I think many people are impatient, wanting to see rapid change. One of the things that gets people hot under the collar is the corruption we’ve seen over the past decade, one might say, much of which also took place at Eskom. What I found interesting this week is that you jumped in yourself, rolled up your sleeves and retrieved money from corrupt contracts that had been entered into. Do tell us more.
ANDRÉ DE RUYTER: I was on a visit to the Kriel power station about a year ago when I saw that knee protectors had been purchased at R80 000 apiece. If you go to the local hardware store, a pair will cost you around R180. I immediately ordered an investigation, saying we have to arrest those involved, open a case and have people arrested. Little came of this for a whole year, so I called in the responsible managers and said I wanted weekly meetings until the matter was resolved.
Later that evening one of my forensic investigators contacted the guilty supplier, who immediately paid back the money. The money was transferred to our account at three that morning.
I think one sometimes has to put one’s own shoulder to the wheel. People ask whether it’s worthwhile taking action for such a small amount when billions are in question, but I think it’s important to indicate that there will be zero tolerance of any corruption whatsoever. That’s why I tried to send those signals out to the organisation.
RYK VAN NIEKERK: That one was really blatant. As you say, it was a small amount, only a couple of million, but I think many would agree that any amount recovered is very, very welcome, because it’s money Eskom can use to correct things.
I assume that Eskom concludes very, very large contracts on a daily basis, and with regard to the contacts entered into for Medupi and Kusile there have been many assertions of corruption. How complex is this corruption, and how do you investigate it? What procedure do you follow to prosecute and get the money back?
ANDRÉ DE RUYTER: It’s a very complex matter to prosecute and expose this corruption because it essentially involves dishonest people. The required paper trail is not in place and those involved won’t necessarily cooperate in the investigation, so it’s a complicated unearthing of past corruption.
At Kusile, for example, we appointed an excellent contractor who specialises in handling contractual claims, so we are busy going one by one through all the claims that contractors have submitted, so as to verify whether all were indeed justified. What we found there is that many of the claims were presented and approved by certain people working at the time in the project contract management division for Eskom, Eskom employees, who had received a portion of the claim in payment for approval of the amount authorised for the contractor.
So we are now working together with the Special Investigation Unit, the SIU, to verify these claims one by one, and legal steps will be instituted.
We do not of course have any authority for criminal prosecution; that falls squarely within the scope of the Police Service and, more particularly, the Hawks. It’s a separate process. But at the end of last year, on December 23, we received R1.577 billion back from ABB, which had one of the big instrumentation contracts. We are also currently taking steps against some of the other big contractors. In this way we are systematically going through the field. We are also claiming interest, and not merely claiming back the original amount.
RYK VAN NIEKERK: So you basically have a team looking into these contracts to see what you can recover?
ANDRÉ DE RUYTER: Correct. I must say our collaboration with the SIU is excellent. They help us a lot, and I think we can recover even more money working together. I don’t want to make promises, because these things are always dependent on legal procedures that are not necessarily predictable, but so far it looks promising that we will recover a considerable amount of money.
RYK VAN NIEKERK: How sophisticated is the fraud and corruption?
ANDRÉ DE RUYTER: Some of it is very amateurish. People have received money, for example, to upgrade their homes or to pay their children’s school fees, or simply to deposit in their personal bank accounts. One can pick up those things with relative ease.
There are other dealings that are much more sophisticated, set up by companies in which they have no personal interest, which then nominate people on the ground to receive and administer the money on their behalf. Investigating and unravelling those networks is a matter of considerable complexity.
And then, of course, people get clever. One person said at one stage, “You can look into my bank account, but no one knows how many cattle have been delivered to my farm, so you’ll have to go and look into that.”
RYK VAN NIEKERK: Let’s discuss electricity prices. That’s something that many people ask us about, especially as we have seen double-digit increases over the past couple of years. This is a fairly intricate scenario – almost a double-edged sword – because Eskom has on several occasions said the current price structure can’t make Eskom viable. On the other hand, consumer affordability comes into question. Perhaps you could give us a broader perspective – where is the electricity price at the moment, and at what level do you think it will stabilise so that we see only inflation-linked increases?
ANDRÉ DE RUYTER: That is indeed a complex question. For about 100 years South Africa’s industrial policy was based on providing cheap electricity which would theoretically give our industries a competitive advantage. With the introduction of the legislation that empowered the National Energy Regulator of South Africa, Nersa, to regulate the electricity price, a methodology was put in place requiring that Eskom could recover reasonable costs every year by increasing the electricity tariff. That is a somewhat rigid methodology; there is little room for discretion, but Nersa, for various reasons, did not approve the increases to cover our reasonable costs. I must stress that these are ‘reasonable costs’. We are not asking for a subsidy for corruption or capital improperly allocated. Our ‘reasonable costs’ can be well justified against a basket of international tariffs.
Nersa decided not to grant us those tariff adjustments, resulting in our cumulative income backlog to date being R370 billion. You still incur the expense, but tariff income is insufficient to cover your costs.
RYK VAN NIEKERK: Much the same as your debt.
ANDRÉ DE RUYTER: Exactly. One shouldn’t conflate too many things, but the fact that we had to borrow money to cover our costs, and the fact that that tariff backlog was almost identical to our outstanding debt, tells a very interesting story.
The dilemma we currently find ourselves in is that to now get our tariffs to a point that would make Eskom viable we have to go through a process of making a relatively painful adjustment, meaning that for this year we had a 15% increase, and we are again going to apply for another 15% increase, after which we think we could be in a position to apply inflation-linked increases because our tariff base will then be set at the appropriate level.
Our dilemma as a country is that we can choose either to pay high electricity tariffs or we’ll have to oblige taxpayers to make massive overpayments every year.
In the past financial year we received R56 billion from National Treasury. The money has to come from somewhere. The costs have to be met, and we have to choose between manageable tariffs that the consumer or user pays – or should this compete with other National Treasury priorities?
RYK VAN NIEKERK: If I understand you correctly, next year you will again request a plus/minus 15% increase, and we should see an inflation-linked scenario after that?
ANDRÉ DE RUYTER: Correct.
RYK VAN NIEKERK: The whole electrical industry in South Africa is now undergoing rapid change. We now have several renewable projects coming up, and we may see those electricity ships – about which court cases are under way. But many alternative suppliers are also going to contribute. What do you think it will look like in, say, 10 years’ time, and what role will Eskom then still play?
ANDRÉ DE RUYTER: The market is rapidly changing. I think one of the big catalytic events that will drastically change the market is the president’s announcement that the licensing requirements for private power generation from 1MW to 100MW will be lifted. The regulations were issued about two weeks ago and I have already been informed by a large financier who has projects involving 10 000MW ready for launch. The private sector has plenty of time to invest in private power generation and that is very gratifying because we can’t serve a country and grow its economy without adequate electricity.
Hopefully this can make a huge contribution towards eventually seeing load shedding as something of the past.
Hopefully in 10 years’ time one will see that many of Eskom’s old power stations that have reached the end of their lives will be taken out of operation. We would like to find a way to make use of those power stations in some way to provide a home for communities closely associated with those power stations, as well as for a very large component of private power producers that then, also via the Eskom transmission network, can sell electricity both to municipalities and to large industrial consumers. So the market is becoming very positively liberated.
RYK VAN NIEKERK: One would hope this results in competition, which potentially would lead to lower pricing than that in a regulated environment.
ANDRÉ DE RUYTER: Ryk, if you look at the rate at which the cost of renewable energy is falling, the cost of solar power over the past five years has declined by about 60%, which is an enormous drop as a consequence of technological progress, economies of scale and so on. In a competitive market one would hope that the end-user will be able to choose between different providers and negotiate better prices. I would therefore expect that the benefit of cheaper electricity will ultimately reach the pockets of consumers.
RYK VAN NIEKERK: Let’s chat about the coal-fired power stations and climate change, because some of these stations release most of South Africa’s greenhouse gases. You recently made a presentation which said that you could possibly convert one of these power stations to one using a different power source. That’s the Komati power station. What do these plans involve, and how would they work?
ANDRÉ DE RUYTER: That is part of our project to bring about a justifiable transition from coal to alternative energy sources. We can’t simply walk away from those communities. At Komati power station, which has been operating since 1961, there is a small village that was effectively built by Eskom. If you literally just pull the plug and walk away from that community, you will cause huge social misery. So we want to see if we can introduce solar power there, and also fit a modular micro power station built with solar panels and batteries into a old shipping container – if we can manufacture that. The World Bank has already indicated that it wants to buy 60 such units for application in Lesotho, and we have already received inquiries from other areas. If we can put up a small factory there and get it operational, we would be able to create jobs and thus give the community a bit of a new home rather than just walk away, leaving behind a ghost town.
RYK VAN NIEKERK: You won’t then convert the existing power station to using, for example, gas as a power source. Will you look to an entirely new largely renewable energy project?
ANDRÉ DE RUYTER: Ryk, the Komati power station is only a short distance, 18km, from the main transmission pipeline bringing gas from Mozambique to South Africa. As a second phase of this conversion we will issue an invitation to the market for the purchase of gas so that we can also instal gas turbines at Komati. So gas is part of the picture in the medium term.
RYK VAN NIEKERK: Then finally, Medupi and Kusile are the biggest coal-fired power stations in the world. How ‘clean’ are they?
ANDRÉ DE RUYTER: Kusile – let me begin there – has all the latest emission controls and components possibly available. There are filter installations to remove airborne particulate emissions to prevent fine dust passing into the air. We have put in special burners to eliminate nitrates or minimise them as much as possible, and we have introduced a scrubber process to dramatically reduce SO2 emissions.
Medupi has all the same equipment, other than this scrubber installation, and we now need to build that at an estimated cost of around R40 billion. The unfortunate disadvantage is that it requires additional electricity, as well as a huge amount of water. The Lephalale environment is of course not blessed with plentiful water. So on the one hand you gain cleaner air, but on the other hand you pay by using more water.
RYK VAN NIEKERK: I’m looking at a graph of the coal price, and I see that at the beginning of the year the coal price was around $69/tonne, and it’s now at $150/tonne. How does this affect your operating costs?
ANDRÉ DE RUYTER: We have long-term contracts in place with most of our suppliers. We have kept our coal costs under reasonable control, more or less in terms of inflation, and this follows a series of adjustments that we had to accept of 15-18% a year, which of course represented a big blow to us in terms of our cost structure. But we are strictly controlling those costs and attempting to keep any further increases to a minimum.
The interesting development is that Eskom is increasingly competing with the export market. We previously exported our high-grade coal, and the scrap coal was used by Eskom at a lower cost. But what’s happing these days is that the international coal market is depending more and more on the steam coal type, exactly like that which Eskom uses, so long-term demand increasingly exposes us to international market prices. Increasing coal prices are not good news for us.
RYK VAN NIEKERK: André , I think we could chat all night, but we need to end here. Many, many thanks for your time tonight and good luck with your massive task.
ANDRÉ DE RUYTER: Thanks, Ryk, and best wishes.