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Being Eskom

When directors have no skin in the game, the results really don’t matter.
Brian Molefe, Eskom CEO

To be fair, we should give the new board and executive team at Eskom more time to implement the turn around before condemning them, but how much time do we have? This is a company that has teetered, stumbled, and fallen over the last eight years. It has now done such a good job of curtailing the growth of the South African economy that it can brag it has more supply than it needs (and they’re exporting it).

Eskom and the South African economy are locked in a death-grip from which there can be only one winner because the principles of fiscal prudence are simply not being adhered to.

And its Eskom that’s winning. The utility’s revenue rose by 11% to R163 billion despite supplying less electricity for the year ending March 2016 than it did in the prior year (-0.8% in volumes).

While the public is undoubtedly grateful that Eskom has avoided load shedding for eleven months, this is partly the result of South Africa’s fleet of industrial smelters switching off. The cost of winter tariffs might also persuade ArcelorMittal to switch off its Saldanha plant. These are huge consumers of electricity.

On the positive side, demand for electricity rose from commercial clients (+5.2%), agriculture (+6.1%), mining (+2.1%) and residential (+2.9%). Notably, there was a 12.2% increase in international sales volumes. But the decline in municipalities (-1.6%), rail (-7.9%), and industrial (-6.2%) more than offset this. Chief executive Brian Molefe attributed the large negative decline in rail to lower volumes of coal and iron ore being exported through Richards Bay and Saldanha, lowering demand for electricity from Transnet as it serves those customers.

Good progress was made on cost savings – R17.5 billion against a target of R13.4 billion – which allowed Eskom to post a healthy increase in earnings before interest, tax, depreciation and amortisation (Ebitda), which rose by 37% to R31.9 billion. Net profit for the year rose from R200 million to R4.6 billion, which is still a drop in the ocean when compared to just the cost of Medupi alone (R135 billion).

Is it viable?

Eskom has been kept afloat with an equity injection of R23 billion from its shareholder, the South African government (read: taxpayer), as well as the conversion of a R60 billion subordinated loan to equity. But the utility has still done nothing to show it is an efficient and prudent guardian of the public purse.

Primary energy, the company’s single biggest line item, saw an increase of 1.56% during the year despite lower sales volumes. The real shock though was net employee benefit expense, which rose by 13% (or R3.3 billion) to R29.2 billion. The staff complement did increase by 1 488, but 1 370 of these were learner artisans. Is there a company in South Africa where the wage bill is rising by 13% based on a relatively static headcount? Never mind one that is in dire financial straits? I think not.

“Other expenses” rose by 18% to R18.6 billion. So too did financing costs, which is understandable given the new build programme.

So we must return to this idea of “skin in the game”. The fundamental difference between a state-owned company and a private company is the motivation of its shareholders. The latter has shareholders whose own financial prosperity relies on the performance of the company – so the shareholder has “skin in the game”. In a state-owned company, this is not the case. The South African government does not rely on Eskom for funding, it’s the other way round. None of its executives or board members have any of their wealth directly at risk in the fortunes of Eskom. And that is why we are getting a result like the one we are getting now.

The annual report revealed that Eskom paid R18 million to three executives it suspended for no reason in March 2015: Tshediso Matona, Dan Marokane, and Tsholofelo Molefe. Deemed “other payments” this was surely to prevent the aggrieved employees from seeking compensation for wrongful suspension in the labour court. So a settlement, basically. Eskom found no wrongdoing on the part of any of the four originally suspended. (Mr Koko was reinstated and remains on the executive committee).

So what do we conclude? There is an indirect transfer of wealth occurring from South African taxpayers (via government) and clients of Eskom, to its employees and suppliers, on the principle of more, for less.

 

 

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COMMENTS   11

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So if you don’t like paying Eskom for electricity, just buy your own… oh wait.

This is the same issue we had with Telkom for decades till there was decent competition.

So very true. And what the **** is going on at Medupi? EIGHT years late, and still only one unit spinning…

Spot on. Mr Molefe has glided from one government quasi-monopoly to another (PIC, Transnet, Eskom) showing no particular skill on the way other than avoiding meltdowns – not hard in a monopoly. The size of these bonuses and payoffs is seriously insulting to tax payers and consumers.

And can someone please follow up on Medupi, that monument to lousy management. How much over budget is it now and how late?

Harry S Truman said “the buck stops here”. At Eskom and other SOE’s it doesn’t. It stops with the taxpayers who pick up the tab every time. Performance appraisal – what’s that?

And the question remains: “How did a real Eskom man Dames make such a muck of it?” Molefe is a numbers man knows nothing about watts and volts, comes in and gets it going, ok he did tell us to use less etc. Harping back to Dames, was there a hidden agenda, he perfected the ” give me an increased tariff or else” trick. He and his mates just milking the system as usual.
Give these guys some competition that will sharpen their game.

Current Eskom ‘stability’ is the rapid reduction of demand from SA’s mining sector.
Guess who is seeking recognition for this so called ‘stability’? Molefe.

If an ANC cadre crashes his car into the bridge Luthuli House will give him a bonus because he “stabilized the fuel supply/demand ratio of the car”.

Eskom is out of kilter…, just like its major share holder, the “SA Government under the current Regime”! If one does the maths, you don’t have to be a rocket scientist to understand that the Generally accepted accounting principles (GAAP) probably don’t apply to Government owned entities as the Solvency test should apply before bailout at Tax payers expense; claim a profit and bonus….. Mr Brian Molefe is a good window dresser to change the perception, good marketing campaign whilst not all is in order under cover…

Despite the critism of Mr Molefe I remain a fan: prior to the autumn of 2015 we had regular power outages and since his appointment we have hardly had any. We should be grateful for that!
Yes, I know that Eskom produced less power than a year ago, and he earns a bucket load of moola, and Medupi et al are late (hardly of his making), but I have more faith in his ability to deliver that any of the long string of his predecessors.
Thank you Brian and now please get production up and get Soweto and the munis paying.

Accepting low standards leads to even lower standards. Worth bearing in mind…

agree fourstars, glad we have seen the end of previous eskom guys. brian molefe has made a difference.

End of comments.

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