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Eskom’s problems primarily due to failure of ANC’s policies

ESKOM must have a non-regulated side where it could exploit its so-called non-core assets and cross-subsidise some of its operations, says the author. Picture: File photo.

ESKOM must have a non-regulated side where it could exploit its so-called non-core assets and cross-subsidise some of its operations, says the author. Picture: File photo.

Published May 8, 2022

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Lucky Montana

THE PROBLEMS of Eskom are unfortunately not technical in nature, but primarily failures of policy on the part of the ANC government.

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In the period 1996/98, Eskom had approached the government indicating the country would run out of generation capacity from as early as 2006.

Eskom wanted to invest in new capacity, including in mothballed power stations. However, the government response was to develop a new policy (the White Paper on Energy, developed by the Department of Minerals and Energy (DME) under the former minister, Phumzile Mlambo-Ngcuka), which was subsequently adopted by Cabinet.

The government did not support Eskom’s request to invest in new generation capacity because its new policy stipulated that 30% of generation capacity would in future be in the hands of Independent Power Producers. The investment requirements were in the order of R400 billion in 2006/7 figures.

However, Independent Power Producers did not at the time have the appetite to come into the electricity market without government first reforming the market structure. This included reducing Eskom’s monopoly of electricity generation; access to transmission; and, the proper allocation of political risks associated with electricity distribution, which, other than industrial users, resided largely with municipalities. However, municipalities could not guarantee household users paid for electricity.

The government had at the time conducted numerous studies to assess the appetite and capacity of the investment community, including possibilities for black economic empowerment. The results were clear – that there was no immediate interest or appetite to invest without government first reforming the electricity sector. There was also intense analysis of the California electricity crisis and what lessons could be learnt by South Africa .

Despite the overwhelming evidence pointing to the opposite, the ANC government, under then president Thabo Mbeki, insisted on its policy position, effectively preventing Eskom from investing in new generation capacity. This proved tragic for South Africa. The result was the country experienced its first series of load shedding in the period leading to the 2010 World Cup. The government’s decision to allow Eskom to build two new power stations – Medupi and Kusile – came too late, and the costs went ballistic.

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In 2018, the ANC government repeated the same policy mistakes, including President Cyril Ramaphosa’s announcement of the government’s decision to unbundle Eskom, disposal of “non-core” assets, funding options, and the tragic policy to not allow Eskom to compete or engage with IPPs on equal or favourable terms, which contributed to the haemorrhaging of Eskom’s financial position.

A proper, developmental approach to Eskom’s balance sheet tells us that a vertically-integrated Eskom (with its total assets, including “non-core” assets, investment properties, land, engineering business, investments through Eskom Enterprises, as well as cash generated from the sale of electricity, lease of assets, etc) is the route to go.

The assertion that Eskom does not have the capacity to service part or its entire debt is simple false. A different approach or financial modelling will show that Eskom could even afford higher levels of debt and still be able to service its debt based on its own cash flow position.

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Pravin Gordhan and the DPE had set the reduction of debt as one of their top priorities. There is just no justification for massive cash outflows from Eskom at this critical stage. This is a major blunder. While Eskom did not carry much, if any, debt prior to 2008, there is nothing wrong with Eskom being encouraged to take more debt to build infrastructure (a key part of capital formation) that could stimulate economic activity and will be in the long-term interest of the country. Reducing debt is being pursued in a fanatical way like it was some kind of religion. This is not the right way to drive economic development.

The push by the DPE for the disposal of "non-core” assets, which are vital to Eskom’s cash position, is simply madness. It has to be stopped until such a time when Eskom’s balance sheet is stable or strong enough to support its business. This is a key task of any chief executive.

Eskom is strategic to the country. It could offer the country some great developmental possibilities only if government pursues different policy options and strategy, contrary to the medicine imposed by proponents of “structural reforms” (the International Monetary Fund, World Bank, rating agencies, National Treasury and DPE ) and implemented by the so-called “turnaround specialists”.

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The deepening electricity crisis is not only about financial resources. This also demands decisive action to regulate the supply of coal to Eskom. Security of supply (high-quality) coal is a strategic imperative. The government must determine, through laws and regulations, whether or not coal could be exported if the country is facing a major energy crisis. South Africa is the only country in the world that fails consistently to protect its own economic interests.

Coal pricing today has a huge negative impact on Eskom’s overall financial position. Considering the pricing of coal on Eskom, there is no sound basis for government not to impose price caps on coal producers and other suppliers.

Part of the strategic intervention would have been to allow Eskom to acquire significant shares in certain coal mines in lieu of public funds deployed in the development of such mines, through the so-called “Cost Plus” contracts.

The ANC government has missed the opportunity to intervene in the electricity market in the interest of the country, the economy and the living conditions of its citizens. It has failed to protect the financial position of its number one state-owned enterprise, Eskom.

The ANC government is today still unwilling to adopt bold and decisive measures to address the electricity crisis. This is illogical considering the fact that the government seeks to attract investment, develop infrastructure and create jobs.

The denial of the potential role of nuclear in the Integrated Energy Plan (simply because of suspicions of Gupta activities in the uranium space) was another big policy failure. The argument that the country could not afford nuclear was simply a red herring. It is established practice that investment in strategic or long-term infrastructure, is not always or in the short-term supported by numbers, whether good cash flows or volumes of commodities. If this was the case, the Richards Bay Coal Terminal, the deep-water Port of Coega/Ngqura, or King Shaka International Airport, would probably not have been built. Some of these projects may not have been “bankable” (to use the language of our capitalist masters).

The truth is the numbers tend to increase and align with long-term demand over a period of time. It is good though that the latest energy policy seeks to correct the earlier madness in respect of the role of nuclear in the energy plan of the country.

One of the major failures was to try and change the structure of Eskom in the midst of a major electricity crisis. The decision to unbundle Eskom is not only a major strategic blunder, but clearly not properly sequenced. Irrespective of the “End-State” the government envisages for Eskom, there is no doubt the short- and medium-term approach or the transition phase would require the protection of the current vertically-integrated structure, which allows for cross-subsidisation between the various Eskom businesses. Pursuing a cost-reflective approach for each Eskom business is counter-productive at this stage of the crisis and will result in huge increases in electricity prices.

The role of the National Energy Regulator of South Africa (Nersa) is itself important. However, the suggestion is that the government does not have power because only Nersa, which is an independent regulator, has the authority to approve tariffs. There is no problem with this. However, the country is not told that Nersa is itself driven by legislation and government policy. Nersa does not have a separate life of its own. For Eskom to survive and meet its legal mandate, there must be dual regulatory framework.

Eskom must have a non-regulated side where it could exploit its so-called non-core assets and cross-subsidise some of its operations. However, these must be fully disclosed to the regulator. This model is working quite well in the airports environment with the role of the regulator focusing on the core functions of the Airports Company of South Africa (Acsa).

Cabinet followed its wrong policy choices by removing the team lead by the late Dr Ben Ngubane (May His Soul Rest in Eternal Peace), Brian Molefe, Matshela Koko and others under the pretext of “fighting State Capture”. In their place, Cabinet appointed a board lead by the late Jabu Mabuza (May His Soul Rest in Eternal Peace) and an executive management team that seemed to lack operational experience, an understanding the “science and art” of maintenance, and how to sustain the ageing operating assets of Eskom.

There was excitement when Professor Malekgaburu Makgoba was appointed chairman of the Eskom board. This is someone who is well respected, a great leader with deep technical knowledge and a proven track record as a scientist.

The appointment of Andre de Ruyter as group chief executive proved a big disaster for the country. This is not because he is not an engineer, as suggested by some. The business of Eskom requires core skills in engineering/asset management, maintenance, planning, finance and sales, among others.

De Ruyter was appointed to play a leadership role at Eskom. He comes across though as someone who does not comprehend the real business of Eskom and fails to set the right goals for his executive team to address the big challenges facing Eskom. He is clearly not a taskmaster.

Today, the country is paying the price for policy failures under then president Thabo Mbeki, and the crisis taken to unprecedented heights under President Ramaphosa.

The problems of Eskom have nothing to do with “State Capture “or “mass looting” as argued by Gordhan and others. This is simple false. It is unfortunate that Justice Zondo has been sold a dummy and accepted as fact the narrative of those that, objectively, had historically benefited from Eskom.

The problem with the ANC is the false and misguided belief that “the ANC has the best policies but the problem is implementation”. Again, reality is telling us that we are on the wrong side of history. Until such time the ANC undertakes an objective and honest assessment of how the country came to be where it is today, appreciates South Africa’s position as a developing country and adopt policies suitable to these conditions, then we will continue to fool ourselves.

As the ANC prepares for its policy conference and 55th national conference, it should be honest with itself and radically change what needs to be changed, lest it serve as a major brake on the progress of the nation. Policy failures are so evident in key sectors of our national life and infrastructure has collapsed: economy, energy, education, transport (ports, aviation and railways), telecoms, water, etc.

Today, the leadership of the ANC, past and present, has joined the chorus of those attacking Eskom for its monumental failures, but fail to take responsibility for the situation it has created over the past two decades.

Lucky Montana is the former chief executive of Prasa.

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