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The R600bn runaway train Phakamani hopes to stop

With most stakeholder groups exhibiting some level of antagonism, will Eskom’s new leader be able to slow the debt trajectory?

Eskom’s newly appointed group CEO Phakamani Hadebe put on a brave face when he announced that the group showed a R2.3 billion net loss and received a qualified audit opinion for the year ended March 31, 2018.

He only joined Eskom in January (initially in an acting position, with his permanent appointment announced on May 24), and has been tasked with cleaning up the considerable mess his predecessors left at the utility.

On a standalone basis, the regulated energy utility reported a net loss of R4.6 billion. Net cash from operations dropped from R45.8 billion in the previous financial year to R37.6 billion and irregular expenditure skyrocketed from R3 billion to almost R20 billion.

The scary thing is that the basis for the qualified opinion is the uncertainty that the R20 billion reflects the total extent of irregular expenditure!

Hadebe and his team further made it clear that things could get worse before they get better.

He said Eskom was en route to increase its debt from the current R398 billion to an unheard-of R600 billion in the next four years.

This is in line with the 2017 corporate plan, Eskom’s operational roadmap as approved by the shareholder (represented by the department of public enterprises), Hadebe said.

To understand how much R600 billion is, it helps to write it out:

R600 000 000 000 … yes, that’s eleven zeros.

It’s equal to roughly half the tax collected by the South African Revenue Service (Sars) in 2017/18, according to provisional numbers from Sars. It could build us 20 Gautrain systems, and is more than the R528 billion South Africa budgeted for social grants over the next three years.

Eskom has never before disclosed that its debt could escalate to R600 billion.

Two years ago, then Eskom CFO Anoj Singh told City Press that Eskom’s debt “was likely to peak at ‘R500 billion-odd’ after three years.”

It seems the new Eskom board and management costed the existing multi-year corporate plan and came to a total of about R600 billion.

This clearly baffled Hadebe. At the results presentation, he expressed surprise that Eskom’s runaway debt was not a priority under the previous management.

At the current debt level of R398 billion – still some way from R600 billion – the utility is borrowing to service its debt. Nevertheless, the attitude was that “things will sort itself out”, said Hadebe.

At least Hadebe and his new team realise that this debt trajectory is totally unsustainable and has to change.

But how is he going to stop the runaway Eskom debt train?

The first step is to limit planned capital expenditure to R45 billion per year for the next five years. This would represent a saving of R55 billion. It provides for the completion of the Medupi and Kusile power stations, which require R36 billion each, but some network projects will need to be postponed, said Hadebe.

Growth in operating expenditure will be kept below inflation, releasing efficiencies of R11 billion per annum, he added.

He emphasised that this is not enough and that “tough decisions are required.”

Eskom’s strategy is to improve its Ebitda (earnings before interest, tax, depreciation and amortisation) margin to at least 35% over the next three years.

Source: Eskom Interim Report 

Initiatives aimed at improving this margin include:

  • Grow sales

Eskom hopes to realise R2.9 billion additional revenue over two years. It is targeting large industrial users in this regard, and says nine deals have already been signed.

This follows the successful implementation of a special pricing agreement with Polokwane-based Silicon Smelters, which saw the group restarting its furnaces after national energy regulator Nersa gave Eskom the green light to charge it a discount tariff for a limited period.

Nersa is expected to approve a similar deal between Eskom and Mpumalanga-based Sublime Technologies this week.

However, these approvals took a long time and Eskom earlier indicated that it would only submit further applications once the final framework for short-term negotiated pricing agreements – which the Department of Energy, National Treasury, the Department of Trade and Industry, and Eskom are working on – have been approved.

  • Reduce arrear debt

Eskom has been telling the South African public year after year that it is addressing outstanding debt from municipalities and customers in Soweto. Nevertheless it has extended its credit terms to municipalities from 15 to 30 days. It now says it hopes to collect an additional R1 billion per annum from municipalities and to continue to install prepaid meters in Soweto.

Howver, it acknowledges that only 28 of the 52 payment plans entered into with municipalities in arrears are being adhered to fully, and that communities in Soweto resist the installation of prepaid meters.

  • Manage the risk of increasing coal cost

Eskom has reverted to the policy of investing capital in cost-plus mines, but it will take time for this to pay off in reducing coal cost and ensuring security of supply. The utility further wants to optimise its logistics cost by migrating coal transport from road to rail.

  • Optimise productivity levels

Eskom’s biggest challenge is to manage its staff numbers and staff cost. In response to the utility’s dire financial situation, Hadebe’s intention was to give staff no salary increases this year. After pressure from the unions and apparent political interference, Eskom is now offering a 7.5% increase. This is way above inflation – and unions are even fighting for bonuses.

  • Tariffs

Eskom points out that electricity tariffs are not yet cost reflective and that the addition of more renewable energy from independent power producers will put further upward pressure on electricity tariffs.

It states that it needs regulatory certainty and has taken Nersa’s decision to grant it a mere 5.23% tariff increase in the current year on review in the High Court.

Eskom’s history with the regulator isn’t good and it has consistently been granted much less than it has applied for in the recent past.

While Hadebe and his team are making the right noises, it’s clear that they are fighting a difficult battle. Eskom’s stakeholders – from staff, unions and customers to politicians and the regulator – don’t necessarily support the elements of the plan aimed at stopping Eskom’s R600 billion runaway debt train.

Will Hadebe succeed in slowing it down, or is he already slipping?

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…..the country has heard political promises and good intentions before

I suppose hearing more can’t raise expections beyond what they are

Hadebe has an excellent record of leadership and financial acumen. He is hamstrung by ANCs Pravin Gordhan, who caved in to trade union demands.

No.

He is more likely to help himself at the trough.

That is the African way, that is the ANC’c modus operandi.

Really? What else is new?

Going to fill my 10 litre petrol container for my genny……………………..

The attitude of the trade unions is treasonous under the financial circumstances that apply. Previous management should also be charged with maliciously running the company into the ground. It seems that a combination of corruption, labour inefficiencies and mismanagement across all sectors of operations and project management and finance have sunk the ship and government, the shareholder, did nothing to stop it. If that is not incompetence I don’t know what else I call it, other than disaster.

The financial situation at Eskom is a numerical description of the ANC. The incompetence and criminality at Eskom is merely the logical result of ANC policies. We have got a bunch of criminals in Luthuli House that rule over the criminals at the SOE’s. Now, as the system implodes around them, they blame green energy for the mess.

Face the facts. The game is over, the money is gone. The SOE’s are bankrupt. The financial statements of SOE’s is a numerical description of the state of mind of the average ANC supporter. The “bottom line” figure is close to zero, and mostly negative.

It is impossible for the people who got us into this mess, to get us out of this mess.

If your swimming pool has a leak, you don’t fill it with more water just so that you can keep swimming, the crack will only get bigger.

Plug the hole if it’s small enough? If not then you buy an new swimming pool.

in all this there’s no talk of saving costs by cutting the bloated staff complement.

Correct they keep borrowing to fill the hole which has a hole in it.

What is wrong with just letting this fail?

Look at Iceland when they allowed their bad actors to fail, the economy sank by 50% and all the bad actors fell away. Subsequently the good actors were able to grow their legitimate business and have created natural positive growth of more than 5 to 10% a year.

There is no such thing as to big to fail. We need these zombies businesses to die a natural death.

So would actually happen in Eskoms case:
Employees would loose their jobs, then mine’s would loose some more jobs and the production of electricy would fall. Which will be followed by a huge growth in renewable energy sector, manufacturing and employment of local communities decentralisig Electrical Power Generation making and we would get lots of foreign investment, eradicating the single failure point our country had with Eskom.

We as citizens need to control this collapse so that the bad actors go to Jail. And that the workers are re skilled to absorbed back into a productive industry.

Not the same. They allowed a BANK or 2 to fail and not the national electricity provider. Will destroy SA for sure. Iceland is a first world country with homogeneous culture and people of about 300 000 who basically respect the law.

So would you rather loose the electricy provider and gain independent decentralised power or have the entire economy sink?

I know it’s a tough choice

“Hadebe and his team further made it clear that things could get worse before they get better. He said Eskom was en route to increase its debt from the current R398 billion to an unheard-of R600 billion in the next four years.
This is in line with the 2017 corporate plan, Eskom’s operational roadmap as approved by the shareholder (represented by the department of public enterprises), Hadebe said.”

It is the above quote from Moneyweb that leaves me with an ice cold financial shivering of the knowledge and capibilities eskom’s management. The terms “en route” and a 50.7% increase in debt is used quite casually – don’t they understand what debt means ??? it is all money to be paid back plus interest thereon ??? The other casually used term:”in line with the 2017 corporate plan, Eskom’s operational roadmap” is also in financial terms just a scarry nightmare – the operational roadmap is leading eskom straight into its own grave – sorry they are already buried in their own debt and just make underground noises. Even money from china means you will have to pay it back one day – there is a big difference between a foreign loan and a foreign investment – in the loan you pay back everything plus interest, in the latter the investor take the risk to generate income for himself from his investment. Is it not strange that a once vibrant organisation with reserves and cash in the bank is currently a pathetic bankrupt entity and all happened once the anc and its cadre army took control of it – with at least 22700 unnecessary and incompetent staff – the people who demands salary increase for doing nothing. And there is no urgency from the eskom side to cut down on these money sucking parasites, because it can cost the anc votes in the next election. Personally I feel less than nothing for eskom and other bankrupt soe’s – our problem is that we, as taxpaying citizens, are currently keeping these useless organisations afloat via direct & indirect tax whilst we do not see any positive results delivered by them other than fat salaries to incompetent staff.

Investigations and reports reveal that there’s not a single part, aspect or element of Eskom that’s not seriously afflicted with incompetence and corruption, and also there’s no effort whatsoever to rectify the rot. Nowhere in that organisation are things run properly, as soon as anyone tries to do anything right, they’re beaten up.

Replacing the leadership is not working, as soon as they catch one rat, the others run away and get away with more rot.

What everyone has forgotten is that the staff, management and board that were in place when
Eskom used to function efficiently took their packages under the new BEE initiatives.
What better example of why BEE practices should be stopped.
This policy is not only racist but damaging the economics of this country and bankrupting the taxpayer.

Dear Mr Phakamani Hadebe

Eskom was one of the best organisations/power utilities in the world and its people were proud to be associated with it.

It will only get back there if it run as a business and not as a political organisation.

Get rid of the Token Appointments.
Change the Maternity Leave that one may not take 6 months every year.
Get rid of people stealing from the company by organising overtime.
Start focusing on skills and not meaningless qualifications.
Start Listening to the old hands, experienced workers.
Stop trying to get rid of the 7% hard working white employees that are still loyal and dedicated to the firm.
Stop awarding tenders to incompetent companies at 10 the price just because they are politically right.
Get rid of the many sub organizations in the organisation where the one Audits, the other ones audits.
Change the ratio of “Way too many chiefs and too little indians”.

Do this and you will turn this massive ship on a dime.

These parts made me smile.. Seen this movie before?

The new Eskom board and management costed a total of about R600 billion. At the results presentation, he expressed surprise that Eskom’s runaway debt was not a priority under previous management.

Nevertheless, the attitude was that “things will sort itself out”, said Hadebe.

Growth in operating expenditure will be kept below inflation, releasing efficiencies of R11 billion per annum, he added.

Eskom said it is addressing outstanding debt from municipalities and customers in Soweto. It has extended its credit terms to municipalities from 15 to 30 days. It now hopes to collect an additional R1 billion per annum from municipalities and install prepaid meters in Soweto.

28 of the 52 payment plans entered into with municipalities in arrears are being adhered to, and communities in Soweto resist the installation of prepaid meters.

Hadebe’s intention was to give staff no salary increases this year. After pressure from the unions, Eskom is now offering a 7.5% increase.

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