Johannesburg - South Africa has a problem in its engine room. Eskom Holdings SOC Ltd supplies about 95 percent of the country’s power and hasn’t got a permanent chief executive officer, a chairman or enough money to keep the lights on.
Eskom said chairman Zola Tsotsi will leave the company on Tuesday. Less than three weeks earlier, he suspended four executives, including CEO Tshediso Matona, and started an audit of the utility. The squabbles come amid delays to new power plants that’s forced Africa’s most-industrialised economy to ration electricity.
Four months of intermittent rolling blackouts have curbed economic output, brought gridlock to city roads and could scare investors already roiled by a weak currency and labour disruptions, according to money managers including Abri du Plessis, who helps oversee the equivalent of about $330 million at Gryphon Asset Management.
“It’s one of our worst nightmares in South Africa from an economic perspective,” Du Plessis said by phone from Cape Town. “It can kill the economy. It’s one of the biggest challenges we’ve had (since the end of white minority rule in 1994),” he said.
South Africa, which through Eskom has the capacity to generate 10 times more power than the continent’s largest economy Nigeria, depends on electricity to run mines that provide its biggest source of foreign exchange. Power is needed to winch workers kilometres underground to dig and to fire smelters that produce chrome and aluminum.
Junk rating
Strikes at platinum mines and in manufacturing for six months last year cut economic growth to 1.5 percent, the slowest pace since a recession in 2009, and prompted Standard & Poor’s and Moody’s Investors Service to downgrade the country’s debt. A quarter of regular blackouts may reduce economic expansion by 1 percentage point this year, according to Bank of America Merrill Lynch.
The rand has weakened 14 percent against the dollar since the start of last year. It hit its lowest level since 2002 on March 13, the day after Eskom suspended its executives to allow for a probe into under-performing power generation, high costs and cash-flow problems.
The yield on the company’s dollar bonds due in January 2021 jumped to a record 6.76 percent on March 13 and S&P cut Eskom’s rating to junk 10 days later.
After not building any major power plants since the 1980s, Johannesburg-based Eskom is now battling strikes and technical set-backs to bringing new facilities online. The 4 764-megawatt Medupi plant is three years behind schedule.
Expert groups
The government plans to sell some state-owned assets to help Eskom meet a R225 billion ($18.4 billion) funding gap. The company has R418 billion in debt and interest due, according to data compiled by Bloomberg. Efforts to limit blackouts are adding to operating costs as turbines normally only used during peak hours are burning R1 billion more in diesel every month. The government announced on Tuesday it will withhold payments to 60 municipalities that owe Eskom about R9 billion.
The wrangling between the board and executives mimic those in other state-owned companies, including the national airline and state broadcaster.
A leadership tussle at South African Airways, which has been put under the supervision of the National Treasury, led to CEO Monwabisi Kalawe being suspended in October. The South African Post Office is also under Treasury administration, while infighting at the state broadcaster, SABC, has resulted in board members being fired.
Political factions
The divisions in Eskom also revealed disagreements at the top of the ruling African National Congress, which faces municipal elections next year.
While President Jacob Zuma backed the investigation into Eskom and Matona’s suspension, according to the Johannesburg-based Business Day newspaper, senior ANC members were against it, according to two people familiar with the situation. The Presidency said in a statement on Monday it didn’t give any directive to the chairman on Eskom.
“The ANC has become more politicised under the Zuma administration and it’s also become more factionalised and that factionalism is now playing out in Eskom,” Mark Rosenberg, Africa director at Eurasia Group in New York, said Monday.
Zuma’s spokesman Mac Maharaj referred questions to Public Enterprises Minister Lynne Brown, whose spokesman Lionel Adendorf wasn’t immediately available to comment.
War room
Brown on March 25 said she requested an investigation into Eskom’s business, but that the law prevents any political interference in matters dealt with by the Eskom board.
While Eskom doesn’t have any permanent leadership at the moment, groups of ministers and industry experts are trying to fix it.
A “war room” of ministers and officials, led by Deputy President Cyril Ramaphosa, is seeking to deal with the energy crisis. It’s being advised by industry specialists. An independent inquiry will do an audit of the business. Brown is part of a separate inter-ministerial committee dealing with the electricity shortage. And, Eskom’s board of directors remains in place.
Apartheid’s problem
“You meet with government officials and they kind of know what the problems are, but there’s never any action to fix it,” Max Wolman, who helps manage $13.5 billion in emerging-market debt at Aberdeen Asset Management PLC, said by phone from London Monday. “We’re not positive on the general outlook of South Africa.”
Apartheid, not the ANC, is to blame for the energy crisis, Zuma told a Cape Town stadium audience at the party’s 103rd anniversary in January. “We are, in fact, solving the apartheid problem, that must be very clear,” he said.
One of Zuma’s predecessors, Thabo Mbeki, in 2007 apologised to the nation because the ANC government had delayed decisions on the building of new power plants, saying that advice from Eskom had been disregarded.
It’s unclear just how bad the situation could be, BNP Paribas Cadiz Securities economist Jeffrey Schultz said by phone from Johannesburg on Tuesday.
“Eskom are scrambling to get this back on the right track,” he said. “Unfortunately, with leadership issues it’s all the more challenging.”
Bloomberg