Eskom disaster: Independent report reveals dire mismanagement, urgent overhaul needed – Katzenellenbogen

The eagerly anticipated independent report on Eskom’s dire state, conducted by vgbe, a consortium of German energy experts, unveils a damning indictment of mismanagement within the power utility. The report challenges the ANC government with politically sensitive decisions, notably recommending a radical overhaul of Eskom’s complex and dysfunctional structure. As the nation approaches elections, Finance Minister Enoch Godongwana’s commitment to implementing the report’s recommendations adds pressure, emphasising the need for decisive action to avert escalating power cuts and financial crises, putting the ANC’s reform intentions to a crucial test.

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Jonathan Katzenellenbogen*

The long-awaited independent report on the disastrous state of Eskom by vgbe, a consortium of German energy plant operators, has presented the government with politically tough decisions.

The report could place the ANC into a tight political bind just ahead of the elections in May. Before the report was undertaken, the Finance Minister, Enoch Godongwana, promised that the report’s full set of recommendations would be implemented. He also promised that Eskom’s fleet of coal-fired power stations would be concessioned off to private contractors to run.

It is not clear whether the delay in the release of the report is because certain bits were so contentious that they had to be deleted prior to its public release. Nevertheless, as it stands, the report is an indictment of Eskom’s mismanagement, and the ruling party’s strong preference for large committees and layers of bureaucrats.

‘Eskom must concession all these (coal fired) power stations with clear targets,’ as part of the conditions attached to its debt relief, Godongwana said last year in his Budget speech. We have not heard from the Minister if this remains part of the Treasury’s intention.

In a slide presentation on the Budget last year, the Treasury leaves no doubt as to what Eskom must do after the release of the report as part of the conditions for the ‘Eskom Debt Relief Arrangement,’ (the bailout).

‘Eskom is required to implement the operational recommendations from this independent assessment,’ it is stated in the slide on the R254 billion debt relief arrangement.

Arguably, as all money is fungible, had the state not had to bail out Eskom, it would not have had to take R250 billion from the Reserve Bank’s Gold and Foreign Exchange Contingency Reserve Account in the current budget.

One big takeaway

If there is one big takeaway from the vgbe report it is this: ‘The management system (at Eskom) with its governance, structure and processes is dysfunctional and too complex.’

The entire Eskom management system is condemned as one ‘that is no longer able to maintain or improve technical performance.’

 The report says, ‘the necessary turnaround cannot be achieved within the framework of the current management structure at Eskom.’

The problem is one of layer upon layer of committees. The Eskom board of 15, which is large by most standards, reports to the National Energy Crisis Committee and six Ministers. Then within Eskom there are committees which review the most basic and routine decisions, and still things go horribly wrong.

The report calls for a complete overhaul of Eskom’s centralised organisation structure to something similar to that in European utilities, in order to ensure fast and efficient decision making and clear lines of responsibility. It is likely that this can only be done at some political cost. It is almost certain to involve deep staff cuts, including those of cadres deployed to Eskom’s Megawatt Park head office.

And if it does not make the changes, power cuts could get far worse. According to the report, there is a risk that power cuts could go to Stage 13 if three stations, producing more than a quarter of the coal fleet’s total capacity, go off stream due to the poor condition of plants that are used to treat water prior to its use in boilers.

One of the big issues raised in the report is why despite Eskom’s budget for plant maintenance being well above the international benchmark, its Energy Availability Factor (EAF) is so low. EAF is a key metric which shows the percentage of rated capacity at which an energy generating unit operates. Last September at the time the report was completed, Eskom’s coal fleet’s EAF was just 51 percent, compared to the international benchmark of 78 percent.

Abundantly clear

The report makes it abundantly clear that the age of the fleet is not a cause of the low EAF. After all, older stations across the world operate at a higher EAF than those of Eskom.

There are a number of things that could account for this failure to achieve sufficient  bang for the bucks spent. While this goes beyond the remit of the vgbe report writers, corruption, high empowerment margins on much procurement, lack of technical expertise and poor management could all account for this.

Take the example of Medupi, which achieves an EAF of close to 71 percent. The report says it should be running at 85 percent, but a change in leadership and the decision-making process is required. The root cause of the low performance at Medupi is Eskom’s organisational structure, which gives plant management restricted authority to make decisions and allows a high degree of influence by the Eskom head office, says vgbe.

The report does not explicitly say as much, but it does make a case for bringing in expert private contractors who have run similar plants around the world. It also calls for the implementation of emergency procurement regulations to exempt the coal-fired fleet from Eskom’s procurement constraints. If these are fully implemented, there could be a chorus of cries that Eskom is undermining empowerment.

Take the Kusile power station as an example. The high EAF of 90 percent of Unit 4 at Kusile makes a strong case for bringing in private contractors. The unit is run by Mitsubishi, the firm that built the boilers at the station. The EAF for the Kusile plant as a whole, at the time the report was handed to the Treasury, was slightly below 37 percent.

Three of the commissioned units at Kusile are not operating due to damage to a flue gas stack, equivalent to a chimney in a house, and two other units have not been commissioned. Management at Kusile blames design issues for the low performance and not its own failure to manage a high-tech plant. The vgbe report says while some design issues are causing the low EAF, ‘the damage to Unit 1 flue gas stack is solely due to Eskom deviating from prudent operation and maintenance practices.’

Better performance

Private contractors freed of procurement and other constraints could bring about far better performance at Eskom. Is the ANC willing to trade change at Eskom and the political costs for a boost to economic growth and an end to bailouts for Eskom?

The best course of action for the ANC might be to substantially downsize, reorganise Eskom and concession off the stations. If the stations are concessioned off, there is no reason to retain such a large staff.

 Is the government really politically brave enough to undertake these cuts?

Now that the report is out, it is a big test of the ANC’s intentions on wider reform.

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Jonathan Katzenellenbogen* is a Johannesburg-based freelance financial journalist.

This article was first published by Daily Friend and is republished with permission