Business Day has before expressed our admiration of and gratitude to the new leadership at Eskom, chairman Jabu Mabuza and CE Phakamani Hadebe, for taking on the unenviable task of saving the power utility.
After more than five years of rampant looting and a decade or more of short-sighted political interference and misguided strategy, the company is on its knees. Mabuza and Hadebe’s decisions to serve Eskom are, in social media parlance, #CountryDuty.
But this doesn’t mean that they will succeed, or that Eskom can be saved.
The two, along with acting chief financial officer Calib Cassim, presented Eskom’s results for 2018 on Monday, pointing out that for the year under review, the new leadership had been in charge for only 69 days. The audit was qualified, mainly due to procurement issues under the Public Finance Management Act, with R19.6bn of expenditure deemed "irregular". Some of this arose from noncompliance with procedure; some of it was fruitless and wasteful.
To deal with corruption and mismanagement 10 senior executives have exited the company. Eleven criminal cases have been opened, five of which involve nine senior executives. All contracts since 2015 have been reviewed to establish whether they were compliant and lawful. But while the new team is cleaning up, the numbers are still abysmal.
At the group level, Eskom (including all subsidiaries) made a R2.3bn loss for the year. On its own, the power-generating business made a loss of R4.6bn.
If Eskom cannot sell more electricity or hike tariffs, it needs to cut costs. But all three of its key costs – primary energy (mainly coal), salaries and debt service costs — are out of control and difficult to rein in.
The loss is a result of a fundamental problem that is hard to fix. Like any company in trouble, Eskom needs to increase revenue and cut costs. Sales, though, have been flat for close to a decade.
While the weak economy is partly responsible, falling electricity sales by large utilities is a big global trend that will not be reversed as technology has made it possible for customers to generate their own energy.
The National Energy Regulator of SA has over the past five years kept a lid on the extent to which Eskom is able to raise tariffs to compensate, refusing to allow it to pass on what it deems to be inefficiencies to the consumer.
If Eskom cannot sell more electricity or hike tariffs, it needs to cut costs. But all three of its key costs – primary energy (mainly coal), salaries and debt service costs — are out of control and difficult to rein in. The old model of building power stations on top of coalfields has collapsed. Coal must now be trucked in.
The salary bill for executives and workers alike has ballooned over the past decade. Workers have made clear they will use violence and sabotage to stop job cuts. Debt servicing costs are huge. Over the next five years, the company expects to pay R215bn in interest.
It is because of this revenue-costs bind that all the key financial ratios of the company deteriorated over the past year. Free cash funds from operations declined and the cash interest cover ratio — an indication of the amount of cash available to pay interest expenses — fell markedly. These are expected to deteriorate further before improving.
It is with this story that Eskom must now persuade lenders and bond markets to support its funding plan. As the company must raise substantial new debt every year to fund its capital build programme, funding requirements for 2019 are R72bn. So far 22% of this is committed, although executives say they will make major announcements soon that will bring funding commitments up to 62%. While this might sound reassuring, the funding plan is far from complete.
As auditors pointed out there was no certainty that Eskom is a going concern.
Mabuza has promised that in September the company will reveal a plan for "a total revision of the entire business model".
As this set of results shows, such a revision is essential.