Why Eskom’s power crisis is SA’s top risk

Eskom’s surging debt is just the tip of the iceberg.
Eskom is struggling to cover costs and service debt, its ageing power-plants can't keep up with demand and it does not have a CEO. Picture: Waldo Swiegers, Bloomberg

A crisis at South Africa’s main electricity supplier, Eskom, threatens the entire country. The state-owned utility can’t manage to cover its costs and make the huge interest payments on its mountain of debt. Its poorly maintained power plants are struggling to meet demand, and it’s about to lose its 10th chief executive officer in as many years. Goldman Sachs describes Eskom as the biggest risk to the country’s economy. The government plans to bail out the company and split it into three entities in the hope of reviving its fortunes.

Read: The toughest CEO job in SA is open. Who wants it? 

1. Why is Eskom in such bad shape?

South Africa could produce more electricity than it needed when white-minority rule ended in 1994, but the government didn’t foresee how sharply demand would spike as the economy expanded and previously neglected black areas were connected to the grid. Eskom announced a series of multibillion-dollar investments after the authorities awoke to the severity of the problem in the mid-2000s, but the projects came too late and took too long to build. The Medupi and Kusile coal-fired plants, two of the world’s biggest, were supposed to be fully operational in 2015 but are still years away from completion and running way over budget.

2. What’s the problem now?

A lack of money forced the utility to cut back on maintenance and repairs to other plants, and it lacks key technical skills needed to do the work, despite having a bloated workforce. Plants that produce more than half Eskom’s power are at, or nearing, their ideal retirement age. The country has experienced intermittent power outages since late 2005.

3. Where was management?

The utility went through repeated board and management changes during the almost nine years Jacob Zuma was South Africa’s president. Investigations by lawmakers and the nation’s graft ombudsman alleged that the upheaval was part of an orchestrated attempt by Zuma’s allies to raid Eskom’s coffers with his tacit consent. Accusations that the utility was looted are now being investigated by a judicial commission. Zuma and his allies deny wrongdoing.

4. How is South Africa trying to fix it?

Eskom’s board and management were replaced in January 2018, the month after Cyril Ramaphosa succeeded Zuma as head of the ruling party, the African National Congress. Phakamani Hadebe was named chief executive officer, but he intends to leave at the end of July, because his health is suffering due to the “unimaginable demands” of the job. The new management has made a concerted effort to stamp out graft, and a number of tainted senior executives and staff have left the company. Ramaphosa was named South African president in February 2018, after the ANC forced Zuma to step down, and lawmakers re-elected him May 22.

5. How precarious are Eskom’s finances?

Very. By its own admission, it’s in a “ death spiral.” It was saddled with R440 billion ($30 billion) worth of debt at the end of March and its solvency is at risk. Sales volumes are at a decade low and continue to fall as the economy stagnates. Increasing numbers of businesses and middle-class consumers have moved off the grid as the price of renewable energy drops. Meanwhile, near-bankrupt municipalities are falling behind in paying their bills as customers in impoverished townships default on their debts or steal power through illegal connections.

6. What else is being done to help?

Ramaphosa plans to split Eskom into separate generation, distribution and transmission businesses under a state holding company, a reorganisation he says will enable each unit to manage its costs more effectively and make it easier for them to raise funding. The budget announced on February 20 includes an almost $5 billion cash injection over the next three years to help Eskom service its debt and free up money for operations. Eskom had floated a proposal for the government to take over some of its debt — an option not favoured by the National Treasury, which is trying to stick to debt ceilings and preserve the country’s sole remaining investment-grade rating. The company is also considering selling assets and firing thousands of workers. That proposition would meet with fierce resistance from labor unions, which also oppose the breakup plan.

Read: SA to split Eskom in rescue plan – Ramaphosa

7. What happens if the rescue fails?

The total collapse of Eskom isn’t on the immediate horizon, and Ramaphosa has said the government won’t allow it to happen. The utility provides about 95% of the nation’s power. If it were to cease operating or the grid were to collapse, South Africa’s economy would grind to a halt and many businesses would be driven into bankruptcy, triggering investor flight and multiple downgrades to the nation’s fragile credit rating — as well as potential social unrest. Power cuts are already weighing on South Africa’s rand and bonds, and present a huge risk to smelters, mines and and other energy-intensive businesses.

© 2019 Bloomberg L.P

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A golden thread runs through this story from 1994 until today. Appointing unskilled, unqualified people to do a job which they cannot possibly do and deliberately getting rid of those who had the skills and qualifications to do that job. All this was done in the hope of securing more votes for the ANC and that will bring this country to its knees. You can’t jump out of an aeroplane without a parachute and argue that the normal rules of physics don’t apply to you because you are a victim of apartheid. Being a victim doesn’t mean that all the normal rules which apply all over the world won’t apply to you.

There’s one correction.

“1. Why is Eskom in such bad shape?
South Africa could produce more electricity than it needed when white-minority rule ended in 1994, but the government didn’t foresee how sharply demand would spike as the economy expanded and previously neglected black areas were connected to the grid. Eskom announced a series of multibillion-dollar investments after the authorities awoke to the severity of the problem in the mid-2000s,”

This statement is not correct. A plan to electrify all of South Africa was already drawn up in the early 1990s. The electrification plan included the areas ignored by the previous government and those areas where electricity infrastructure was destroyed during the liberation struggle. Then in the late 1990’s the government decided NOT to proceed with the plan any further due to the huge costs.

Although one does not have the freedom to say what one wants, it is a wonderful privilege to be able to think what one wants.

ESKOM has been decolonized, a great leap forward for the National Democratic Revolution, a-loot-a continua!

…you mean “transformation”?

In business, one should choose one’s partners wisely. In a democracy, one should choose one’s fellow voters wisely.

Every reason for Eskom’s failure points to the voting public. Eskom has the wrong partners. Luthuli House represents the partner. The one half of Luthuli House was caught with their fingers in the till by the Zondo commission. The other half of Luthuli House is stealing from Eskom via their BEE coal companies. Here we have partners who are fighting one another for the opportunity to loot their own business.

It is becoming increasingly clear that Luthuli House is the worst of business partners and they represent the worst form of fellow-citizens.

Correct you are!

ESKOM itself isn’t the risk here.

The real risk is the voting majority who will continue to vouch for the ANC to run this country. Run it they will, straight into the ground with the approval of the masses.

10 CEOs in 10 years says everything about the mess that exists here!
This is a classic case of government interfering and ruining the place. The disgusting Zupta FD ,Gordhan deliberately undermined the last CEO by halting his proposed salary freeze for staff. What CEO can run a business when one of your largest costs is mis-managed by a politician seeking votes for the ANC prior to the election-No wonder he collapsed twice!!

Also we should expect the year end results shortly-the dear CEO will probably need assistance getting off the floor again when he sees the final quantum of red ink!!

The sad thing is that this headline may as well be dated 29 May 2009.

how 3 different entities will solve the financial debt problem only the anc will know or are able to dream it up – loans are still to be paid back. start by getting rid of 50%(+/-27000 of them) of the unskilled, unqualified cadre employees, change debtors into cash and makes repairs and maintenance part of your limited vocabulary

Construction cost of SEVEN to EIGHT US Navy Nimitz-class aircraft carriers = 1 Eskom debt.

R4-trillion of SA retirement fund assets will kindly assist Eskom (and other SOE’s). A great example of redistribution of wealth (good or bad…depending on the side of fence you sit)

Do your part to help Eskom this winter, by using MORE electricity. If everyone does this, it will raise Eskom’s collections. During the upcoming winter, where we’ll have load-shedding, I will be helping Eskom by running all my heaters!

Eskom is just a symptom of everything BEE.

The reality is that Eskom is failing because of this complete and utter policy failure and in a sense it is good that this is happening because it is revealing the failure of BEE.

If the policy is scrapped you will find skilled workers becoming available and perhaps even repatriating to SA. You will curb emigration and see a turnaround in the economy very rapidly.

The question is really whether the black government can do away with a policy the blatantly favours them in order to rescue a country that is collapsing due to them.

Maybe starting ahead in the race makes it possible for some people to compete who could never compete otherwise?

Stop worrying about Eskom and start worrying about yourself and your family. Worrying about something that none of us have any control or influence over is a waste of emotion, effort and energy (pun intended). We cannot change the outcome, but do have control how we react when it eventually happens.

Jacob was right, it wasn’t 9 wasted years. It is 11 wasted years and a few billion Rands….and counting.

This government’s life support for not only Eskom, but other insolvent SOEs, has already been decided: by implementing prescribed assets.

State and private pensioners will have to pay back the money stolen.

Gupta inspired theft was just a dry run, a rehearsal.

The state owned Reserve Bank will then print money to “wipe out poverty within a generation”.

I concur currently this is the most toughest JOB and I trust the replacement will indeed turn it around A S A P. This is a brilliant case study where governance, integrity, fiduciary duties, ethics, code of conduct and most of all Value has failed throughput the organisation. If your CEO collapses twice it is not due to bad health it is due to the demands of the ruling elite(luthuli house, ANC, all their structures including the Presidency)…all of these structure love cookies. Eskom no longer has the power to make them. If I could afford a one on one engagement with the President I will go public and fire the entire lot just Like Donald Trump does – make SA great again, we kill all policies open markets reduce red tape and allow everyone to participate. It works in China, japan, Singapore, Qatar, Tanzania, why not SA because every victim still thinks its 1994. Wake up or else get the IMF in or else let S&P downgrade us to hell then let SA fix it’s own house and start competing. The private sector are bleeding great (and also not so great) CEO’s. Eskom needs to CEO’s one that deals and handle political affairs and the other operational and growth affairs so that the 2 don’t mix and stay autonomous from each other. PROBLEM SOLVED

It’s not the toughest job. It’s actually the top dream job in the country.

Salary of 5m per annum, huge pension and termination penalties and no deliverables….or ample excuses for non performance on account of the shareholder not allowing staff cuts etc; and of course you make a botch and get fired in about a year, and you walk away a rich man.

That’s a job I dream of landing

And despite all of the above, no one has been arrested, no one has been charged, no one has appeared in court and no one has been jailed. most of the participants have resigned and now live very comfortably, planning their next endeavour, whether in S.A., Dubai or wherever. Not a cent has been recovered.
All we have to show is endless investigations, enquiries, probes, etc.

Believe anything the ANC says at your peril.

End of comments.

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