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.
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.
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.