Eskom’s 50%-plus empowerment policy never existed
Major coal suppliers were influenced to divest from the local sector because of an Eskom requirement that, it turns out, was never official policy at all
An Eskom policy to procure coal only from majority black-owned coal suppliers — which influenced major mining houses such as Anglo American and South32 to divest from the local sector — was never official policy at all.
Eskom nonexecutive director Nelisiwe Magubane said the new board, installed in February, had looked through the Eskom policies but found no evidence of a supposed requirement that coal suppliers must be 50%-plus black-owned. “It wasn’t in any of the policies,” she told delegates at the Joburg Indaba last week. Rather it appeared to be “an aspiration”.
Under former Eskom CEO Brian Molefe, Eskom categorically stated its coal procurement policy required all the mines that supply coal to its power stations to have a black ownership target of more than 50% throughout the life of the mine — significantly more than even the 30% empowerment shareholding required by the new Mining Charter.
“It created a fear in the market that nobody without 50% black ownership could supply to Eskom,” said Xavier Prévost, a senior coal analyst at XMP Consulting.
The purported policy was one of the reasons major mining houses have moved to divest from SA coal in recent years.
Anglo American sold its last Eskom-tied coal mine in January this year with no prospects of returning to the business of supplying SA’s power utility. Diversified miner South32 last year announced it would spin off its local coal asset, SA Energy Coal. At the time its CEO, Graham Kerr, reportedly said the company did not meet Eskom’s requirements for supply contracts.
South32’s COO, Mike Fraser, told the audience at the indaba last week he was optimistic about the prospects of coal, but such a business required access to both domestic and global markets. With the “current ownership structure”, the company can’t compete in the domestic market, he said. The spinoff expects to create a black-owned coal company able to exploit opportunities available to it.
Exxaro, the largest supplier of coal to Eskom, has in the past expressed doubt that Eskom’s 50%-plus requirement was policy when, in late 2016, it faced pressure from the utility because it announced its BEE deal had expired and its empowerment shareholding would fall to 30% until a new deal was concluded.
According to Eskom spokesperson Khulu Phasiwe, “Eskom’s 50% + 1 requirement is based on the shareholder BBBEE compact for procurement spend, which states that the 40% of Eskom’s spend should go to BBBEE Level 1 companies. Coal purchasing is the largest cost element in Eskom’s income statement, and the biggest lever for Eskom to achieve the shareholder aspiration which was endorsed in the Eskom coal sourcing strategy in 2012.”
Also under Molefe, the utility announced its intention to move away from cost-plus mines, where Eskom in the past developed mines in conjunction with mining houses so as to ensure a steady and affordable supply of coal. Instead, Molefe said the utility would procure from smaller miners.
The utility is increasingly facing coal supply shortages. Last week Bloomberg reported that Eskom had less than three weeks of coal supply at 10 of its 15 baseload power stations.
Prévost said Eskom needed to go back to cost-plus mines if it were to bring down its primary energy costs and secure long-term supply.
Correction: October 8 2018
An earlier version of this article incorrectly stated that Mike Fraser, the COO of South32, also suggested that Eskom needs to go back to cost-plus mines in order to drop energy costs. In fact it was only Xavier Prévost who said this.