🔒 WORLDVIEW: Eskom is not a going concern and it’s a problem

By Felicity Duncan 

On Tuesday, finance minister Tito Mboweni presented parliament with a poisoned chalice – a special appropriations bill asking for an extra R59bn for the ailing Eskom.

As the Daily Maverick points out, together with existing emergency appropriations for the failed utility, this would mean Eskom will be getting R49bn this year and R56bn next year, for a nose-bleeding total of R105bn in two years.
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This is a lot of money. A horrifying amount, really. But it is also less than the R450bn in debt sitting on Eskom’s balance sheet – R350bn of which is state-guaranteed – just waiting to be called by anxious creditors.

This financial leverage forms Eskom’s leverage in the political sense of the word. As long as Eskom can sink the SA ship by defaulting on its payments and forcing creditors to demand immediate repayment, all we can do is pour money into it, in the hopes that things will turn around. Thus, parliament has no real choice but to accept the poisoned chalice of the appropriations bill, even though the country can ill afford it.

There’s nothing much new in this sad story. However, one noteworthy tidbit is Mboweni’s tacit confirmation of what we’ve all known for ages: Eskom is not a going concern.

His speech is clear on this point. As he puts it, “Eskom is not financially sustainable based on its current high levels of debt and its inability to generate sufficient revenue to meet its operational and capital obligations, which exposes the entity to high levels of liquidity and balance sheet risks. Therefore, without major changes to Eskom’s business model and financial assistance being provided by Government, the company will be unable to meet its financial obligations through the 2019/2020 financial year.”

This is the unvarnished truth: Eskom has failed. It cannot pay its bills. It is, not to put too fine a point on it, sc***ed. And fixing it is going to hurt. Mboweni is clear on this point too, saying, “The fiscal support we are announcing today will come at a significant cost to the fiscus and to South African taxpayers.”

To keep Eskom alive as a going concern – which is necessary to prevent a run on its debt – is going to require a lot of emergency blood transfusions, and that blood must come from somewhere. That somewhere, unfortunately, is taxpayers, who will either pay for it directly or who will shoulder additional government debt to pay for it.

As Mboweni puts it, “We really and truly cannot go on like this.” Something must be done.

Many have advised privatisation as the solution to Eskom’s woes. I don’t think that would work, because only a lunatic would purchase Eskom in its current state. Any rational buyer would insist that government first cleans up Eskom’s balance sheet before they pour private capital into it, which means we would still be in the same situation – held hostage to Eskom’s debt. A private buyer would also want to hike tariffs by triple digits, since Eskom clearly isn’t charging enough to cover its cost of producing and distributing power.

Instead, the government’s solution is to chop Eskom into three bits, which should allow the better parts of the business to raise capital more cheaply and, hopefully, would increase transparency and reduce fraud. The longer-term goal is to build a more competitive electricity sector by encouraging private investment – especially in clean technology – and removing conflicts of interest from the electricity supply chain.

That’s all well and good – those are noble and necessary aims. But the real question is, how do we get from here (Eskom as the corporate equivalent of a lawless, failed state) to there (a well-run electricity sector that provides power in a sustainable manner).

And this is where I have concerns. Because the way to get from here to there is to install good managers throughout the organisation, from the very top to the shift manager level. The problem is, fundamentally, a human capital problem.

And the indications are that the problem is going to be hard to solve. Eskom seems to be unable to hang onto a CEO. Phakamani Hadebe is heading out at the end of the month, and candidates for the top job are thin on the ground. The group treasurer Andre Pillay has resigned.

And the utility’s labour problems extend down to the lowest level – its biggest union, the National Union of Mineworkers (NUM), opposes the restructuring plan and refuses to countenance what many believe to be essential job cuts.

It’s not clear where government can look for the right managers. As scandals at SA companies from Steinhoff to EOH to Tongaat have shown, corruption has thrived at every level of South African corporate and public life over the last ten years. This has left us with a shallow pool of un-blighted management talent and, at the same time, an enormous need for it.

Fixing Eskom is a human resources problem. No financial magic or smart tech can solve the company’s governance issues. And so far, there is little evidence to suggest that Eskom has found the right people for the job.