Eskom is insolvent. It does not generate enough income to pay the interest and principal on its debts. It is unable to provide enough electricity to meet demand. Various proposed rescue plans have failed – not in their implementation, but rather, they have failed to be implemented at all.
The utility has been thoroughly looted, and the looting continues. The dodgy deals made in Eskom’s procurement chain remain on the books. The disastrous power station projects Kusile and Medupi grind on. Eskom is overstaffed, and the unions are refusing to consider retrenchments, meaning that every month workers are being paid unnecessarily – it is clear this situation is allowed to continue because of the political influence of the trade unions. Those who have sucked the cash out of Eskom continue to do so.
It’s becoming increasingly clear that the government is not able to solve the problems at Eskom. Some elements of the government have admitted as much – Minerals and Energy Minister Gwede Mantashe announced at the Mining Indaba that miners would be allowed to generate their own power, a tacit admission that Eskom will never be able to meet their needs. Eskom has failed, utterly.
___STEADY_PAYWALL___
Yet, amidst all this, the government is proposing to force the Government Employees Pension Fund (GEPF) to “invest” R254bn to help Eskom pay off its debts. This amounts to little more than theft – Eskom will take this money and turn it into thin air, the way that it has done with all the money that has been loaned to it already.
At this point, Eskom has become a machine for destroying wealth. Wealth can be defined as capital invested productively – money that is being used to make more money.
A factory, for example, represents wealth when it is able to make goods and sell them at a profit. Similarly, money invested in a utility would represent wealth if the utility were able to generate electricity and sell it at a modest profit.
This is not something Eskom can do. Thus, a transfer from the GEPF would not be an investment in any meaningful sense of the word. Rather, the money would transform from wealth – capital productively employed – into nothing. It would vanish into debt payments, unnecessary salaries, and bad contracts. And once it’s gone, it’s gone. Worse still, there are only so many sources of wealth in the country. At this rate, Eskom is going to suck up all the available pools of capital and turn them into nothing. This could fundamentally destroy the SA economy.
In a normal environment, the way forward would be to arrange a business rescue, with a technocratic approach to patching up the power system and rebuilding Eskom on a firmer footing. But in this case, that’s a fantasy.
Entrenched interests at Eskom have no interest in pursuing a sustainable course out of this mess. They simply want to continue sucking up cash and burning it at the expense of the nation. And Eskom’s customers – citizens and businesses – have no appetite for the dramatically hiked tariffs that would be needed to make Eskom a going concern, not given the fact that so much money is wasted on superfluous staff and corrupt deals.
Thus, it’s time for the government to take drastic action. Failure to do so may well doom SA.
This may look something like a controlled burn. The government could pass emergency legislation, fencing off Eskom debt and calling for negotiations with Eskom’s debt holders. On pain of total loss, they may be persuaded to take a haircut on their loans, reducing the debt burden.
This would hurt SA’s credit rating and raise the costs of financing for the country. But realistically, SA is on the path to a downgrade anyway. Proactively managing debt would be far preferable to being forced into a bailout after exhausting all possible sources of domestic capital.
Or perhaps Eskom could formally declare bankruptcy and be shuttered. The government could then place the utility’s assets into receivership and force trade unions and lenders to the negotiating table. A new utility – or several new organisations, focused on different areas of the electricity system – could be created. Eskom’s debts could be housed on a rump organisation that draws revenues from the new companies and the state.
There are many possibilities. They will all involve very difficult choices and decisive action by the state. But the alternative – allowing Eskom to vacuum up capital until the whole edifice of SA collapses under the weight of its failures – is unthinkable. If the government allows this situation to limp on, SA will be a junk-rated mess within two years.
