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Can Eskom Be Rescued From Financial Ruin?

Author: Jason Snyman
Date: 2018-02-09
Eskom’s interim Financial Records have been released and they’ve received a R5 billion bail-out with more to come. Can it be turned around?
Eskom – shudder – a name synonymous with corruption and incompetence. The power giant is consistently making news headlines for its peerless displays of mismanagement. It is a soul-sucking drain on the South African economy, far more so than PRASA, SAA, Transnet or any other state-owned enterprise. Even the too-criminal-for-comfort Malusi Gigaba, our Minister of Finance, has admitted that Eskom represents the single worst crisis facing the government. SA parastatals have lost billions in taxpayer Rands, all the while being disembowelled for personal gains by crooked politicians and spineless CEOs. While the rest of the world looks to their state-owned enterprises as promoters for development and growth, South Africa has used them as personal piggybanks funded by the public purse. The worst part about Eskom is that it is showing no signs of releasing its parasitical grip. Just two days ago, it received a R5 billion bail-out, with more on the way. Because, what choice do we have? Eskom enjoys complete control over the energy monopoly. They have no actual competitors and still can’t turn a profit. The state of disrepair is profoundly distressing and, though we’ve come to expect the worst by now, Eskom’s recently revealed financial results are… surprising. To say the least.
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Eskom – Under New Management

A week or so ago, Phakamani Hadebe was appointed as Eskom’s acting CEO. Taking over as chairman of the board is Jabu Mabuza. These appointments, along with the installation of new board members, are just some of the measures taken to strengthen the management of Eskom. Hadebe has commented that poor governance was the spark which ignited the power utility’s financial ruin. The new changes hope to aid in turning that around. Regarding liquidity, Hadebe has also stated that the situation had reached the point where funders felt they could no longer engage with the company. Eskom just hasn’t been trustworthy enough, and Moody’s has also downgraded the SOE’s credit status. Thus, the recent R5 billion bail-out. Hadebe, at least, understands that Eskom cannot continue borrowing money in order to keep head above water. On restoring credibility, chairman Mabuza said:
"It will not be easy. But as collective we have the skills. Our mandate is non-negotioable."
Eskom’s interim financial results follow this recent liquidity crisis and the downgrade of its credit rating. Let’s take a look at the key points.  

Key Points In The Financial Results

  1. While there is room for much improvement, Eskom’s operational performance is satisfactory and stable. South Africans have electricity, maintenance is being done and operating performance metrics are positive.
  2. Eskom is not financially sustainable. Net cash generated from operations is not enough to pay back loans or interest. The capital structure, operational costs and debt and equity require immediate attention.
  3. It isn’t environmentally sustainable, either. Several coal-fired power stations are operating outside of South Africa’s environmental compliance limits. There seem to be no provisions for compliance upgrades, life extensions, decommissioning of old coal-fired power stations, or new-build apart from Medupi and Kusile.
  4. This environmental sustainability will likely suffer even further as Eskom seeks to achieve financial sustainability.
  5. The ambition to build and operate the controversial nuclear power stations appears to be over. This project cannot possibly be funded by Eskom without burdening the Treasury, as previously suggested by Brian Molefe.
  6. R20 billion worth of bridging finance will likely become available to meet the utility’s February 2018 debt servicing needs, now that a credible board, chairman and CEO have arrived.
  7. Sales revenue is declining. Price increases have been offset by declining sales volumes. Net finance costs have increased by 53%, resulting in net profit after tax dropping by 34%.
  8. The year-end financials are expected to reflect a net loss. Eskom’s second half of the financial year traditionally worsens quite significantly. This is due to lower sales revenue and higher maintenance costs.
  9. There seems to be no conclusion to the power purchase agreement debacle involving independent power producers. With political change in progress, everything is still in limbo.
  10. Delayed revenue clawbacks, lower-than-expected price increases approved by NERSA, mounting municipal debt and government issues has resulted in the liquidity crisis.
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A Revolving Door Of Problems

Eskom is the biggest risk to South Africa right now. Should Eskom go belly up, our economy would simply collapse. This is why we need to bail them out without flinching, every single time. But, for how long can we keep this up? One cannot even begin to speak or write about the situation without dread. The Eskom story is a treacherous quagmire and it will swallow you whole should you venture too far. Parliament is perplexed by it. CEOs are either in on the corrosion or oblivious to any long-term solutions. How do we save this sinking ship and keep it from dragging us all down with it? These are the questions keeping us awake at night since last year. Thuli Madonsela changed everything the moment she laid all the Eskom misconduct out for us. She delivered a damning report on the depth of the crisis that sent the country reeling. Now we know that Brian Molefe was probably appointed as CEO through an arrangement with the Gupta family, with the sole purpose of lining up contracts to syphon off tsosti-money. For months since, the government has been probing Eskom over state capture and links to the Gupta family. We recently witnessed the removal of yet another inept CEO, as well as the release of the (see above) dismal financial results. It will soon be up to Cyril Ramaphosa – most likely – to overhaul Eskom from the ground up and repair the damage. At least there will be support. But is it already too rotten, too broken and too unprofitable to rescue? We went a little more into the details involving all of Eskom’s offences in parts One, Two and Three in an article asking – what are our alternatives? Because, surely, there must be something better. Start your car insurance quote.

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