Eskom is broken – that’s hardly news. Optimism has waned over whether it can be fixed. Fitch’s recent downgrade on its outlook on SA from stable to negative is largely due to the fiscal stress induced by Eskom. Eskom’s troubles dwarfs those posed by other SOE’s in terms of sheer numbers, yet South Africans appear to be in the dark regarding the plans to deal with its future.
The Fitch news is merely a symptom of the plague that has swooped over the country’s SOEs. Just last month, arms manufacturer Denel had confirmed its fall from grace by barely managing to pay employee salaries (the same problem persists in July). Across all SOEs it appears to be the same play but different actors: a very short CEO life-expectancy, ineptitude to pay salaries, trade union disputes, and a gross inability to fulfil their mandate.
No more loadshedding?
Loadshedding in 2019 seemed to disappear as quickly as it reappeared – touch wood. Worryingly, electricity demand and production has decreased since 2007 (see the graph below). Loadshedding first started in 2007, implying that the producer has had more than a decade to address the supply issues without added strain of increasing demand. The mere fact that in 2019 it was necessary to implement loadshedding is testament to the giant quagmire Eskom is in.
Eskom is currently a headless chicken. There has been no CEO in charge since Phakamani Hadebe resigned at the end of June. Neither is there a Chief Restructuring Officer at the helm. One would think it quite imperative that in a company that is overstaffed and facing collapse, there would at the very least be some form of leadership attempting to steady the ship.
The business is in serious need of restructuring, retrenchments, and privatisation of assets. Ramaphosa first announced in February that Eskom would be split into 3 entities. The much-needed reality of cutting jobs in an inflated workforce is strongly opposed by trade unions. Two of South Africa’s biggest unions, NUM and NUMSA, represent most of Eskom’s workers and will likely cripple any and all operations should serious job cuts go ahead (a classic cut-your-nose scenario).
The stalemate between what is needed and what is wanted by unions is perhaps the biggest hurdle preventing progress in the Eskom-saga. Besides for some behind the scenes negotiations that is hopefully happening between Ramaphosa, Eskom, and union bosses, there is yet to be a concrete plan presented in the public sphere.
Ballooning debt and government bailouts
The increasing government spending on SOEs is one of the concerns highlighted by Fitch. SA is already under pressure with an increasing debt-to-equity ratio and slow economic growth. This week, government has pledged an extra R59-billion on top of the initial R230-billion.
Until serious restructuring takes place at Eskom, a bailout strategy is merely a case of trying to catch one’s own tail. In the current business model, Eskom is unable to generate enough money to stabilise debt and cover costs. The unending bailouts has shattered the government’s debt-to-GDP goals for 2021/2022. The treasury has budgeted for a debt-to-GDP figure of 60%, but Fitch expects a number closer to 68% – pointing to gloomy prospects for foreign investment.
Who will pay for electricity?
The lack of growth in electricity demand and production is likely due to several factors: slow economic growth, independent production of electricity, and more efficient/sparing use thereof. The ever-increasing cost of electricity coupled with unreliability, has prompted many business and private individuals to simply leave the country, “go off the grid” or source other avenues of electricity to decrease or completely nullify dependency on Eskom. While one may think a more sparing use of electricity is a good thing, it spells serious concern for Eskom. The less electricity is used, the less revenue they generate.
The habit of increasing tariffs is creating a dangerous cycle: the more expensive electricity becomes, the more viable it is for people and business to shift to other options (such as installing solar panels). With each tariff increase, Eskom is likely losing a few customers. However, due to cash constraints and the high salary bill, Eskom needs to increase tariffs. A tariff increase is somewhat of a trade-off between increasing revenue and losing customers. Eventually, Eskom will be dependent on a much smaller customer base paying a lot more for electricity.
It is not difficult to see a doomsday scenario where Eskom simply does not have enough customers who want to buy electricity leaving a complete blackhole for future revenue. Those who will suffer most are individuals and small businesses who can’t afford to switch to other means of electricity.
So, what exactly is happening at Eskom? It appears no one really knows. Or, those in the know are doing a fine job of hiding any and all progress – at the peril of the SA economy. Eskom needs a clear and concise plan – such as the proposed restructuring – followed by actual implementation. Until reforms go ahead, debt will continue to grow and South Africans will be left in the dark – literally and figuratively.