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With great power comes no electricity

On 14 August 2007 the Iraq War was in full-swing and a series of coordinated suicide bomb attacks devastated the Yazidi towns of Til Ezer and Siba Sheikh Khidir near Mosul. A total of 796 people were killed and additional 1562 wounded in what was the 2nd deadliest terrorist attack at the time. Tensions between the Yazidis and Sunni Muslims had reached a critical point culminating in the attacks. This tragic sequence of events had largely gone unnoticed in Western media, and as of 2019, it does not have much more than a short Wikipedia article documenting the events.

On the same day in South Africa, meanwhile, a chain reaction had set in motion a radically different type of tragedy. Construction had broken ground at the site of the Medupi power station. Eskom Chief Executive, Jacob Maroga, said in a press release,

“This project [the construction of Medupi/Kusile], together with the commissioning of Komati, Grootvlei and Camden Power Stations, as well as the Ingula pumped storage scheme, will enhance reliable electricity supply.”

Uhm, well that was a lie. Years of mismanagement and corruption – along with a plethora of other factors – have contributed to Eskom’s downfall, and an economic crisis. At the forefront is the ever-unfolding disaster of Medupi and Kusile.

Expectations vs reality – by the numbers

Every single metric used to measure the efficacy and efficiency of Medupi and Kusile’s construction has shot out the lights – so to speak. Though, this has not been in a good way. Costs have tripled and construction may be completed 10 years later than intended, and not without series design flaws. A picture speaks a thousand words, but the graphs below will have you uttering a thousand curses.

Failures by contractors and dodgy deals have resulted in severe cost overruns. Numerous design flaws have also contributed to larger than expected costs and delays. Bloomberg estimates the final cost of the twin power plants will be closer to the R451 billion mark. The significance of this number is highlighted later.

Medupi’s construction, which started in 2007, was estimated to be a 4-year endeavour. Likewise, the slightly larger Kusile was estimated to take closer to 5 years. Medupi has 6 boiler units, the last of which started feeding power into our grid in August 2019. Kusile has 3 of its 6 units operational. Despite the operational status of the units, the power plants are still plagued by breakdowns. They are scheduled to be completed in 2021 and 2023, respectively. To place things in perspective, when Medupi’s construction started in 2007, I was in grade 4. When it was scheduled to be completed in 2011, I would’ve only started high school. I have since completed high school; been to university; and started full-time employment. And construction is on-going.

Since construction of the plants started in 2007, Eskom’s debt ballooned from R40.5 billion to an estimated R441 billion in 2019. The R18 billion owed to Eskom by Soweto is dwarfed by the mammoth construction cost of R451 billion. It is to be noted, however, that the R451-figure is an estimated final cost (not the current cost). Despite this, it is not far-fetched to claim that Medupi/Kusile over expenditure is at the root of Eskom’s debt. Shockingly (or maybe not), the Special Investigations Unit (SIU) is investigating the alleged theft of R139 billion relating to the construction of Medupi and Kusile – that is more than 30% of the total cost.

Despite the construction and partial operation of Medupi and Kusile, Eskom is now producing less electricity than it did in 2007. Its “capacity” to generate is slightly larger, but there is less electricity available for distribution. The other figures relating to Eskom’s operations paint a dismal picture as to the state of the company.

 Source: Eskom

Despite a less reliable supply of electricity, the cost per employee has sky-rocketed by 145% since 2007 and the total number of employees increased by 43%. The capacity-to-employee ratio has decreased, essentially meaning that there are more employees, each of which is less productive. This is an alarming fact, considering that it would be expected that a factory producing less goods would in turn employ less staff. It’s also worth noting that the 2007 figures were recorded during a booming economy before the crash of 2008. You would expect a company to go through serious retrenchments and restructuring post 2007. It is consumers and taxpayers who are paying for the mountain of debt and expenses plaguing Eskom. The selling price of electricity has sky-rocketed some 400% from 18 cents to 90c – by comparison, the inflation-adjusted cost should be closer to 33c.

Solving the energy crisis is one thing and rescuing the company is another. A lot needs to change at Eskom, yet it’s not complicated. It is convenient to write-off the Medupi and Kusile saga as just another case of government over expenditure and looting but doing so neglects the fact that this very case of over expenditure is one the most significant contributors to the crippling of the South African economy.

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Aidan van Niekerk

Junior Investment Analyst

Aidan is responsible for quantitative research and stock-market analytics. He has a keen interest in all things numbers and - in addition to working for Sharenet -  is a full time BSc Mathematics and Statistics student at Unisa. Aidan has represented South Africa at a professional level in road cycling where the rigorous demands and self-discipline has prepared him for the markets. He aspires to one day complete a Master's degree in statistics and delve deeper into the world of algorithmic trading, market analytics, and financial modelling.