There will be pain, but people power can save Eskom
The future of Eskom is the future of SA. If it fails, the whole country does. The urgency and commitment that is needed to rescue Eskom is desperate. Without a sustainable solution the government’s finances will topple into the abyss and the economy will be plunged into darkness.
The solution is clear, but it is hard. Every part of society and every stakeholder must pull together and shoulder the pain to put Eskom right. That needs very clear political leadership and very clear leadership of Eskom. Right now, the two are at odds.
Eskom’s problem is a solvency one and an operating one. The solvency problem is a shareholder and lender problem. The operating one is an executive management problem. These are different competencies and different parties should be responsible for addressing them. But both must be solved if the solution for Eskom is to be sustainable.
As a country, we are capable of pulling together when we have to. The ending of the Zuma kleptocracy is just the most recent example (even if that project is not yet finished). Eskom is every bit as demanding and just as in need of a comprehensive solution in which everyone plays their part: Politicians, business, taxpayers, labour, electricity consumers, lenders and civil society. Each of those parties will have to take pain. When politics is said to be the art of the possible, it is often a call for pragmatism. But we need an idealism born of belief in SA’s ability to solve complex problems.
Eskom needs to be recapitalised. The pain for that is inevitably going to fall on taxpayers and electricity consumers. The state is going to have to absorb some of Eskom’s debt, not least because it has guaranteed most of it. That is going to cost and may well lead to the national government losing its last investment grade rating. Consumers are also going to have to pay more for their electricity, at least in the short term.
Increasing Eskom’s revenue so it can meet its costs, inflated though they are, is essential to enabling it to keep the lights on. Municipalities across the country that collectively owe Eskom R17bn need to cough up, even if it is at the expense of ratepayers. Lenders, which have R420bn of short- and long-term debt in Eskom, will have to accommodate rescheduling and potentially tougher terms, while somehow also keeping the parastatal liquid.
But like any company, a recapitalisation is pointless if there is no operational overhaul and implementation of a new and sustainable business plan.
This is where the executive, under the leadership of the board, has to pull its weight. Eskom is in a mess. Maintenance is a disaster, with plants going down unexpectedly and maintenance plans taking longer than planned. It cannot get coal to its power stations. It is expending huge amounts of capital on new capacity that is no longer needed. Despite producing less electricity than a decade ago, its staff numbers are up 46% at a cost that is 287% higher. It is in a debt spiral – extrapolating from recent interim results, it has R90bn of annual debt service costs, but just R52bn in operating cash flow. Plus, it is committed to spending of about R50bn on its new build programme.
When it comes to the business plan, there is no escaping that costs have to be dramatically reined in. That is going to mean reducing the bloated headcount – at 46,000 people, there are about 30% more than comparable utilities in the rest of the world.
The new build programme has to be delayed or restructured to reduce, or at least delay, cash-flow demands. Eskom’s problems in accessing coal are because of disastrous historical procurement policies. The coal industry needs to work with Eskom on a plan to efficiently mine coal, and closer to power stations, and to deliver on time and on credit terms that do not pour fuel on to Eskom’s cash burn.
Every one of these steps is hard. Lenders have the power to block any term changes. Workers have the power to go on strike and sabotage equipment, making the problem worse. Consumers can fight back against increases. Contractors on the new build programme can refuse to cooperate with shifting work plans. Fixing Eskom’s supply chains will hurt entrenched coal interests selling expensive coal transported by expensive trucks.
Business can play a part in absorbing some of this pain. It can support Eskom with capacity in key areas where it needs skills. It can work with Eskom on a plan for redundant workers, absorbing them into their own workforces or supporting retraining. Ultimately, business has the most to gain from getting Eskom right, both from stabilised government finances and from more reliable electricity supply. Organised bodies like Business Leadership South Africa and the CEO Initiative, which works with labour and government, can proactively engage to determine where business can contribute and take on some of the burden.
As of last week, the only part of this solution that seemed to be on the table is for government to absorb R100bn of Eskom’s debt. That suggestion has met resistance from many quarters, not least government itself. That resistance could be unlocked if there was a clear and credible plan on the table to fix the operations of Eskom. And for that to happen, labour and suppliers have to be willing to be part of the solution.
All this, of course, must be done in the run-up to a general election, which ensures the political temperature is at a peak. That can both inspire action and demand inaction. Politicians will aspire to be seen to be doing something, just not anything that could result in serious pushback from powerful political actors like unions. Can we hope that the scale of the crisis motivates the political leadership needed, despite the risks? For the sake of all South Africans, I hope so.