EDITORIAL: Eskom: dynamo of cynical spin
The utility's 85% decline in pretax profit means shareholder value is being destroyed on a grand scale — for the South African taxpayer
In what world does a company which reports an 85% decline in pretax profit congratulate itself on its turnaround and describe itself as being on a "firm financial footing"?
Welcome to the world of Eskom, which reported net profit of just R1bn for the 2017 financial year, down from R5bn in the previous year. On a gigantic asset base of R710bn, that is not just pathetic — it is scandalous.
It means shareholder value is being destroyed on a grand scale, and the shareholder in this case is the South African taxpayer, who has had to cough up big time in the past eight years to provide the capital needed to prop up Eskom’s balance sheet.
At the same time, electricity consumers have had to face steep annual tariff increases to provide the revenue Eskom needs to cover its huge cost base — a cost base which is no doubt significantly inflated by the corruption that seems to have become endemic at the power utility.
The presentation of the financials was quite cynically used, too, to pursue Eskom’s vendetta against the independent power producers
Eskom has again asked the electricity regulator for a one-year emergency-type tariff dispensation, with confidential documents showing it wants to seek a tariff increase of almost 20% for 2018-19 and to hit municipalities with a 27% increase in bulk tariffs.
In that context one might have expected a little humility mixed in with the financials. Instead, the narrative was all sweetness and light in a way that could only have confused investors and other stakeholders.
Eskom’s request to the regulator earlier in 2017 talked about hardship, and Finance Minister Malusi Gigaba made reference to this again last week in his so-called inclusive growth action plan, which also identified a need for "soft support" for Eskom, whatever that means.
Yet all of that was flatly denied at Wednesday’s Megawatt Park results presentation. "Hardship? What hardship?" was the tone.
True, Eskom increased revenue to 8%, but tariffs were up 9% for the year and it was only by pushing up exports that the utility managed to counter a 1% slide in domestic sales.
Nor was the much-vaunted "cost saving" of R20bn actually a cost saving: it was mainly because lower sales meant primary energy costs were down, with less diesel and coal needed to keep on the lights.
The presentation of the financials was quite cynically used, too, to pursue Eskom’s vendetta against the independent power producers that have come onto the grid in the past few years. Eskom made a point of hailing the 8.5% decrease in its own generation costs while snidely contrasting this with the 35% increase in renewable independent power producer costs. That reflects SA’s success in bringing more private power and more renewable energy onto the grid, however much Eskom has tried to resist it.
Perhaps it is not too surprising, though, that the narrative of the financials was rather more upbeat than the figures themselves. Eskom needs to borrow about R330bn more in the next few years to finish its build programme and keep itself out of trouble. In the past year it had to go to the market for an unprecedented R60bn amid ratings downgrades that didn’t help to keep its borrowing costs affordable. Its interest costs ballooned 82% during the year, which was one of the key reasons why the bottom line was so bad.
Under the circumstances, perhaps Eskom can hardly be blamed for trying to keep investors happy as it tries to minimise the damage from the endless news flow about corruption scandals and horrendous governance.
However, trying to gloss over the issues can only undermine its credibility further. And when it goes to the regulator yet again to plead for steep tariff increases, why should anyone believe it?