Eskom is eating South Africa – Goldman Sachs
INTERNATIONAL – On a dry plain in Limpopo province in 2007, the leaders of South Africa’s monopoly utility broke ground for a huge new power plant. It was named Medupi for “rain that soaks parched lands” in Sepedi, a local language.
Jubilant officials proclaimed that the project would stimulate local growth and relieve the strained grid in a nation where almost 9 million people had no access to power. Then-Eskom chief executive Jacob Maroga said the station was the first of its kind since the 1980s.
More than a decade later, the facility is still years from completion and estimated costs have doubled to more than $10 billion (R145bn). On the site, massive metalwork and pipe segments await placement.
A cooling rack resembling an industrial Parthenon runs alongside six towering boilers that will take an estimated 120 000 tons of structural steel to complete.
It’s a costly symbol of the disaster that is South Africa’s state-run electric utility. Eskom has R399bn in total debt, costing it $2bn in interest payments last year.
Moody’s Investors Service considers Eskom a key risk in deciding whether to downgrade South Africa, and Goldman Sachs Group has called it the single biggest risk to the country’s economy. Even the turnaround plan is behind schedule.
Fixing Eskom is arguably President Cyril Ramaphosa’s biggest challenge as he attempts to modernise South Africa, boost growth, provide jobs and overcome years of entrenched corruption.
And shore up his support ahead of national elections next year. So important is Eskom that he mentioned it specifically in his first state-of-the-union address in February.
“Action we have taken at Eskom to strengthen governance, root out corruption and restore its financial position is just the beginning,” Ramaphosa said. “This is the year in which we will turn the tide of corruption in our public institutions.”
Eskom isn’t just a utility, it is South Africa’s biggest recipient of state loan guarantees. And its costs are out of control: The biggest union, the National Union of Mineworkers, has a contract requiring a wage increase of 23 percent over three years and a bonus, after protests and sabotage resulted in power cuts.
Ramaphosa’s odds of changing that are weighted by the fact that he himself co-founded the union in 1982.
“Ultimately political constraints are going to prevent him from moving as rapidly as perhaps one would like,” said Daniel Silke, the director of Political Futures Consultancy in Cape Town. “The one thing that he doesn’t want to be accused of is overseeing job losses in the runup to an election.”
The utility has had 10 chief executive and six boards in the same period, and the new management has found around $1.5 billion in irregular expenditures, mostly involving procurement. “It’s not generating enough cash to cover both its operating costs and its cost of capital,” said Anton Eberhard, professor at the University of Cape Town’s Graduate School of Business, in an emailed response to questions.
“Eskom’s losses will increase this year unless they conjure up an accounting trick, sell off some non-core assets.”
Ramaphosa has installed some experienced executives. Jabu Mabuza, chairman at Telkom SA, took the same role at Eskom, and Phakamani Hadebe, a former National Treasury official, became chief executive officer.
Boston Consulting Group has been hired to develop long-term strategic plans for the company and Lazard Ltd. for financial advisory services. The utility is careful about describing the role of Lazard, given the sensitivity of potential asset sales, saying only that it will provide a report on options.