"The depressing debt-ridden death spiral"

Africa’s biggest power producer – once the pride of the continent – has had a dramatic fall from grace letting down millions of entrepreneurs along the way. What on earth is happening to South Africa’s national power generator Eskom? In the first of a two-part series Billionaire Tomorrow takes an in-depth look.

It has been a fall as dramatic as a flaming comet plunging from the sky into the dirt of a muddy field.

It is hard to remember that not too long-ago South Africa’s battered national power generator Eskom was an award winner. It was in 2002 – six years before the power cuts -whenEskom won the prestigious international award at the Financial Times Global Energy Awards.

The award was provided for exhibiting technical excellence in plant production, maintenance, and operation while at the same time demonstrating an ability to provide the world’s lowest-cost electricity to its customers, according to the Financial Times. That citation mocks Eskom’s current parlous state.

The award came on the cusp of proud days for the South African economy. Between

2002 and 2008 the economy was growing 5% on average year-on-year. However, this economic boom, combined with a lack of planning, sent demand for electricity outstripping supply. The currency and economy were so strong – touching five Rand to the dollar –that the newspapers called 2005- Two thousand and thrive!

When the lights began to flicker, those making decisions made errors when deciding on the future.

Power cuts were meant to be temporary, Eskom told us in 2008. It was going to be OK, there were two brand new coal-fired power stations coming on line – Kusile and Medupi.

At the time, South Africans were unaware these two new power stations were to be the last new generational plants a dying Eskom’s would bring on stream. Would they be the answer?

“The power stations are performing worse than the very old power stations, ”says Chris Yelland an experienced and respected energy expert in South Africa.

This irreconcilable result stems from naivety – or something else – on the part of Eskom management at the very birth of these vital power station projects.

In the past, projects like Kusile and Medupi project would be outsourced for a fee of 15%. However, Eskom Capital Projects decided to operate in house. It ran into two problems: budgets fell short of reality and standards short of requirements.

“The problem is a lack of accountability. The people who made these decisions aren’t around anymore,” says Yelland.

Thus, it is the South African citizen, employee and entrepreneur who carries the can

South Africa’s economy is already on its knees. Without reliable electricity, the owner of the coffee shop loses out with the CEO of a large company.

“Loadshedding is hampering the growth of the economy because the economy cannot grow if it is constrained by electricity. But if the economy was to grow at 5% a year, we would have more load shedding so we cannot grow at that amount, says Yelland.

As frustrations rise, a second crisis looms in the shape of ludicrous electricity price hikes, including a proposed price hike of 20% for 2022.

With a shrinking economy, many entrepreneurs will not be able to afford these price rises.

The lack of electricity is a contributing factor.

In 2021, the number of Eskom customers reduced. When combined with an ever-increasing maintenance bill and expensive oil electrical reserves. The result is lower revenue and higher costs, Eskom’s hand is forced to increase prices.

Unfortunately for South African taxpayers, this presents a third crisis for the power utility.

“Eskom is in a debt and death spiral,” says Yelland.“The situation is unsustainable”

With a current debt bill of R402 billion ($ US 254 million)and increasing interest rates it is getting ever harder for Eskom to repay. Reinforced by a debt cover ratio of 0.5, below 1. This suggests Eskom does not have sufficient cash to cover its debts.

These three internal crises are not the most distressing as external factors may be the final blow.

The external threat of sabotage seems to be ever growing as evidence emerges of previous criminal acts against Eskom.

However, one may argue the sabotage began 14 years ago, and not in the dark hallways but in the well-lit boardrooms.

The mindset of politicians must change if the lights are to stay on.

“Ideology can only survive if there is money to pay for this ideology.”

Yelland echoes the words of Margaret Thatcher: “The problem with socialism is that you eventually runout of other people’s money.”

Treasury’s purse – once bursting with taxpayers’ money – is getting thinner every year and less able for the bail outs of state-owned enterprises like Eskom. The lingering question is how will Eskom ever be fixed?