Is Eskom Stepping closer to business rescue?

Jonathan Faurie
Founder Turnaround Talk

Last year was a major year for business rescue. Not only was the value of the process demonstrated through several high-profile rescues, the business rescue process was put to the test when South African Airways was placed into business rescue.

It was the first time a State-Owned Enterprise (SOE) faced such a process and several questions were asked about the true viability of the process and if there is in fact legal precedent to effectively save the beleaguered company.

The two main factors that were found to be the root cause of SAA’s distress was:

  • Gross mismanagement of the company over a number of years; and
  • An aging fleet which were the company’s main assets.

Sound familiar? Think of our current energy crisis. The main root causes of this has been:

  •  the number of Eskom executives that have been dismissed and brought before public hearings following allegations of mismanagement; and
  • the current state of Eskoms aging power stations and the number of times they go offline because they cannot handle the current capacity that the electrical grid is carrying.

Despite this; while acknowledging the company’s faults, Eskom leadership is adamant that the company is best equipped to deal with the country’s future energy needs. A strong argument can be made that this will only be the case if a thorough independent business review is done on the company and it is placed under business rescue where sweeping (perhaps some might say draconian styled) changes are made.

Heading for trouble
Planning for this article began when we were experiencing Stage 2 loadshedding. The fact that I got around to writing it on the day that we were upgraded to Stage 4 seems a bit prophetic given the contents of this article.

Loadshedding began in 2008 when the electrical grid experienced significant strain and it became necessary to reduce capacity in order to avoid a complete grid collapse.

The issue of a complete grid collapse was not mentioned until the recent round of loadshedding. A recent article published by Cremer Media suggests that we may be closer to the same issues we experienced in 2008. 

South Africa should be a continental leader in renewable energy
Photo By: Tom Fisk via Pexels

The article points out that African Clean Energy Developments (ACED) CEO Richard Gordon told participants to a RES4Africa webinar that South Africa was on track for a “repeat performance” by 2028, owing to inadequate transmission capacity in areas where the best solar and wind resources are located.

The article adds that speaking against the backdrop of another intense period of national load-shedding, which was escalated to Stage 4, Gordon said Eskom was not in the financial position to build the grid capacity needed and also faced serious constraints in securing the servitudes required for new lines.

The Engineering News article pointed out that Gordon dismissed suggestions that the problem should be eased by directing independent power producers (IPPs) away from the best resources to areas of existing grid capacity, arguing that such an intervention would raise costs for consumers and should, thus, be reserved exclusively for just energy transition-related interventions.

However, Eskom’s Transmission Development Plan for the period 2022 to 2031 is only partially funded and also faces capacity, skills and land-acquisition headwinds.

The article added that, the private sector, Gordon argued, could assist in accelerating the roll-out if government would consider grid concessions, which could be transferred back to Eskom after a period of time.

The article points out that funding for grid infrastructure could also be raised by adding a transmission capital charge for every megawatt bid by renewable IPPs. Such a charge, he said, could add about 10c/kWh to the tariff, but would raise, during each bidding round, about R4-billion, for grid investments.

Heaps of ash and years of neglect
A recent article published by News24 paints a picture of years of neglect that some of the country’s most important power stations have been subjected to.

The article points out that Eskom is playing catch-up to turn around the shocking state of the Tutuka coal-fired power station, which tells a story of neglected maintenance.

Duvha power station is important to the country’s electrical grid
Photo By: Eskom

The article adds thar the power utility’s executives recently briefed a media on the state of the system, which was trying to balance planned outages for its reliability maintenance programme along with unplanned breakdowns.

According to Eskom chief operating officer Jan Oberholzer, improving the Energy Availability Factor (EAF) of these stations – by at least 70% – could make a significant impact on the overall EAF of the power utility and contribute to lowering the risk of load shedding. The EAF is a measure of power fed to the grid from power stations over a period.

The article points out that Eskom’s EAF for the year-to-date (September 2021) is at 65.3%, below its target of 70%. This was reflected in the 32 days of load shedding the country had experienced in the current financial year.

The News24 article adds that, last year, there were only 47 days of load shedding. The EAF was slightly for the year to September 2020 was also slightly better at 67.9%. This, however, was also linked to the hard lockdown, explained group executive for generation Philip Dukashe.

Dukashe recalled how during a site visit in March he found the station in a “shocking state”.

“What I saw, it is not what you expect to see at a power station… you do not expect to see heaps and heaps of ash covering walkways, covering plants and covering instruments you need to operate,” said Dukashe.

“That tells you maintenance is not done,” he added.

The article points out that he said that on the system there may have been sign-offs that maintenance had been done – but what he saw raised doubt. “It would take you quite an effort to first expose those instruments,” said Dukashe.

Eskom was trying to improve the situation – but turning around years of neglect won’t take place over a short period of time, Dukashe explained.

The article adds that, for the first time in two years, Tutuka had all six of its units up and running – a signal of what could be achieved, he said. But this was short-lived – within a few weeks no units were running, and this was linked to the infrastructure supporting these operational units being in a bad state.

If Eskom were placed into business rescue
If Eskom was placed into business rescue tomorrow, we have learned a few lessons from the SAA rescue that can be applied.

The business rescue process can work, provided that a solution is found to manage the conflicts between the Companies Act and the Public Finance Management Act. This was one of the main sources of frustration during the SAA rescue.

All stakeholders need to be singing off the same hymn sheet. Delays were a major issue in the SAA rescue to the extent that the public openly questioned whether tax payers money was being used effectively. A national airline carrier is not important in South Africa’s growth narrative, a functioning electrical grid is. If Eskom is placed under business rescue, delays need to be minimalised.

There is still a funding issue with SAA. This cannot happen with Eskom. Privatisation is  one possible route. However, according to Eskom CEO André de Ruyter said this is not an option. Speaking at a online webinar that was held by the University of Pretoria, De Ruyter said if you define privatisation as the selling off of state assets, one has to look at the quality of that asset. If you know of any investor that wants to buy a 40-year-old power station that has not been well maintained, that requires extensive investment in terms of environmental mitigation to remain compliant with international standards, that requires huge maintenance expenditure going forward and has only got a lifespan of 10 more years, I would be interested to meet this investor. South African power stations are fundamentally not sellable assets.

He added, South Africa would in essence be turning a state held monopoly into a privately held monopoly. And one would need to have extraordinary regulation to prevent the privately owned monopoly from being abused by a profit seeking private sector. I am all for profit in the private sector, I am not a foam at the mouth socialist. However, the simplistic model of selling off assets and expecting that the private sector will not want to come in and demand significant increases in electricity tariffs to fund a 10-year return is wishful thinking. It is clear that there are many sides to this debate and that the Wisdom of Solomon may need to be applied when finding a solution to the funding conundrum. We cannot argue thought that Eskom is closer to business rescue than the Eskom leadership cares to admit.

The final issue that would need t be resolved is the municipal debt issue. Reports indicate that Eskom is owed an estimated R35.3 billion by municipalities. Soweto alone owes Eskom R7.5 billion. Soweto originally owed Eskom R12.8 billion; however, the utility wrote off R5,3 billion. How a cash strapped company can afford to do this is a matter for another discussion.

No matter what road Eskom takes now, it will be filled with many challenges.