Government, the sole shareholder of Eskom, has moved lock, stock and two smoking barrels into the engine room of South Africa’s state owned power utility. This is not good news.
When Tshediso Matona was appointed to Eskom’s top position, he was one of the first people in the driver seat of the power utility who didn’t have a long history with that organisation. “Sometimes too much is made of cadre deployment within Eskom,” says Chris Yelland who has covered the state owned organisation up close for eight years.
An energy analyst and the publisher of trade titles that cover the sector, Yelland says equity targets at Eskom are aggressively implemented, but stresses that this is the first time in decades that government is getting seriously involved with the management of SA’s national provider of electricity.
Previously the ANC and government had a hands-off approach to Eskom, in part because of the utility’s successful ‘Electricity for All’ campaign conceived shortly before the dawn of SA’s democracy, and the subsequent shareholder compact to reduce the price of electricity in real terms year-on-year for a decade. “In the past, Eskom’s strategy was to keep government out of the engine room of Eskom because its leadership thought that the state didn’t have the skill, experience or wherewithal to run Eskom,” he says.
Here Yelland speaks specifically about former Eskom CEO, Ian McRae. As long as Eskom performed and met the objectives of government, there was no need for the state to intervene in the utility. “McRae’s strategic objective was to take the Eskom ship through the choppy waters of SA’s democratic change. Eskom survived the transition intact. In fact Eskom’s reputation with the ANC was high because of the ‘Electricity for All’ campaign,” Yelland says.
‘Electricity for All’ was McRae’s campaign to democratise the provision of power.
“Now that Eskom is failing to build new generation capacity on time and within budget – with the consequences of deferred maintenance, declining generation performance, and with regular load shedding – things are very different,” says Yelland. Eskom is in trouble operationally, financially and environmentally – an open invitation for government to get into the engine room.
Currently Eskom’s debt to equity ratio is too high, and this will get higher still as the utility seeks to acquire more debt at increased cost, whilst constraining electricity consumption as it struggles to bring new capacity on stream. As the price of electricity increases, customers will likely use less electricity. In a vicious circle, with declining revenues and increasing costs, Eskom is set to experience cash flow problems, forcing the utility to seek still further price increases from its customers. Meanwhile equity bale-outs from the state will be borne by the taxpayer – much like other badly performing state owned enterprises.
The appointment by government of Matona – the former director general of Public Enterprises – and the establishment of a so-called ‘war room’ heavily populated with government officials to help crisis manage Eskom, shows that the state has moved in. “While this is inevitable in view of Eskom’s poor performance, it is unlikely that government will do much better, as it simply doesn’t have the experience or knowledge of how to fix Eskom,” Yelland says.
Matona’s appointment had just been announced when Mail & Guardian’s investigative team, amaBhungane, questioned his capability. “He was weak as a director general,” declared an anonymous former colleague who knew Matona when he was the director general of public enterprises. “He could never do the things that needed to be done. He couldn’t manage his own office, let alone Eskom,” the source said to the investigative weekly.
“For me, this is not a personal issue, as I don’t know Mr. Matona – it’s a matter of cold hard facts. One needs to compare the size and scale of Eskom to that of Public Enterprises to get an understanding of the challenge,” Yelland says. Public Enterprises as a government department employs a couple of hundred people and has a budget of some R259.8 million. Eskom is a technical and engineering organisation that employs just over 40 000 and has a turnover of about R150 billion a year.
“No matter how intractable the Eskom problems are right now, government may not be able to do much better,” says Yelland, explaining that Matona is a former civil servant and bureaucrat to whom Eskom reported, and that government places ideological constraints on decision making at the utility. “The best thing for Eskom may be to take on external strategic equity partners or sell some assets, but these are options a Tripartite Alliance aligned government can’t consider”.
The other bad news is the bureaucratic effect of the state moving in. “The move by government into the engine room comes with enormous baggage,” says Yelland. Think of Eskom operating more like a government department, or pouring treacle over the cogs of machines. Things become more laboured, burdensome and slower.
In December 2014, Minister in the Presidency, Jeff Radebe, announced that government Cabinet had established an Eskom ‘war room’ that comprised officials from Eskom and the Departments of Energy, Public Enterprises, Trade and Industry, Co-operative Governance and Traditional Affairs, Economic Development Department and Water Affairs, overseen by Deputy President Cyril Ramaphosa.
This doesn’t necessarily realise the aphorism ‘more hands make light work’. Au contraire, it has introduced a new layer protocol that Yelland says may serve to slow down decision making and limit possible solutions that jar with the Tripartite Alliance’s ideology. This includes providing independent power producers with the right to non-discriminatory access to the grid on level playing fields with Eskom, the establishment of an electricity market in South Africa, Eskom taking on strategic equity partners, or listing on the Johannesburg Securities Exchange.
The bottom line? Winter is coming and if you haven’t already done so now’s the time to invest in viable alternatives including standby power supplies.
Eskom’s board game risks leaving everyone a loser by Bruce Whitfield in Business Times.
Chris Yelland’s recommendations to address the generation capacity “crisis” in SA