DUMA GQUBULE: Wage bill not the main cause of Eskom’s financial woes
Primary energy costs, net finance costs and depreciation and amortisation costs to blame
Let me try this again. There are two major reasons why Eskom has failed. First, as energy expert Mike Roussouw said recently in an interview with television station eNCA, the government refused to allow Eskom to build new power stations in 1998 because it had decided to bring in independent power producers. But it failed to do so.
So, there was a period of more than five years when there was no build. When demand started exceeding supply, as the economy grew faster from 2004, the government turned to Eskom in a rush.
“Eskom was under pressure to bring these projects into operation as soon as possible. But such projects need five to seven years of upfront work before putting contracts in place. As a result, there was insufficient design work done before construction started. This created an ongoing problem with contracts that were not sufficiently specified,” he said.
In December 2005, Eskom’s board decided to build the Medupi power station. Construction started in May 2007, only 17 months after the decision. Construction at Kusile power station started in April 2008. If there had been a six-year planning period after the board’s decision, construction of both power stations should have started during 2011/2012.
Second, Eskom had an inadequately capitalised balance sheet, which could not support its capacity expansion. In the 2009 annual report, former Eskom chair Bobby Godsell said: “It is not possible to fund the first major expansion of our electricity grid for several decades through revenue generated from tariffs alone.
“The growth of a business is normally funded by a sensible balance between the owner’s equity, accumulated reserves and debt. We need to mobilise greater equity resources to fund the build programme. We need to find other sources of expansion funding, perhaps in the form of a development bond that will enable South Africans to invest in the expansion of our country’s energy system.”
Between 2007 and 2019 Eskom spent R614bn on its capital expenditure programme. This was equivalent to 40.6% of its average revenues during this period. In 2009 capital spending was equivalent to a 82.4% of revenues. In 2010, the figure was 69.8%. Therefore, Eskom had no reserves.
The capital spend on Kusile and Medupi was R244.3bn or 39.8% of the total. The Treasury’s 2010 budget review said it would cost R266.4bn to build the two power stations. The cost overruns are not excessive, especially if one takes into account that the rand-dollar exchange rate was at about R7 in 2007.
It certainly does not account for the major portion of the huge increase in Eskom’s debt. Also, cost and time overruns are normal in such mega projects. Examples are Sasol’s Lake Charles project, Anglo American’s Minas Rio mine in Brazil and Goldfields’ South Deep mine. Even Tottenham Hotspurs supporters had to wait for ages for chair Daniel Levy to deliver their new stadium, a small project that was way over budget.
The government contributed equity of R83bn over the past decade. This was not enough. Between 2007 and 2019 Eskom’s revenues increased 4.5 times to R179.9bn, from R401.1bn, as the average price of electricity increased five times to 90.01c per kWh from 18.06c per kWh. Electricity sales declined 4.5%.
Primary energy costs increased 7.6 times to 55.3% of revenues from 32.5%. Net finance costs increased 17.8 times to 15.3% of revenues from 3.9% as debt increased to R441bn from R33.1bn. Depreciation and amortisation costs increased to 16.5% of revenues from 11.8%. But employee benefit costs declined to 18.5% of revenues from 23.6%. They are not the major reason for the increase in Eskom’s debt.
In 2019, these four cost items alone accounted for 105.6% of revenues, compared with 71.8% in 2007 when the company reported a R7bn profit.
In a recent report, equity research firm Primaresearch said the government should have funded the investment programme upfront. Targeting a debt to equity ratio of one would have required R220bn.
About 12 years later, Eskom’s management says the government must find a way to take a similar amount off its balance sheet. This is a political decision that no Eskom board or CEO can make.
• Gqubule is founding director at the Centre for Economic Development and Transformation.