The big Eskom asset lie

The Organisation Undoing Tax Abuse (Outa) said it is horrified by Eskom’s highly inflated valuation of its assets.

According to Outa chairperson Wayne Duvenage, Eskom has pushed its asset base to over R1 trillion – significantly more than the R300 billion to R400 billion that they would say it is.

This unrealistic asset base, Duvenage told the City Press, paves the way for higher electricity prices and other inefficiencies.

He explained that Eskom, for example, factored in the cost of Medupi and Kusile at R300 billion, which are completely unrealistic valuations for those assets.

Energy expert Chris Yelland showed that the cost to completion (CTC) of the two power stations ballooned thanks to various problems in managing the projects.

The cost estimate for Medupi rose from R69.1 billion in 2007 to R135 billion in 2016, while the cost estimate for Kusile increased from R80.6 billion to R160 billion.

It should be noted that these costs excluded the flue gas desulphurization plants (FGD) and interest during construction (IDC).

If you include the FGD and IDC costs, it increased to R154.2-billion for Medupi and R172.2-billion for Kusile.

In 2016, Yelland warned that the massive cost and time overruns at the Medupi and Kusile power stations are expected further strain Eskom’s financial resources.

He also warned that it places upward pressure on Eskom’s electricity price trajectory in the years ahead.

This is exactly what is being seen now, with Eskom reporting record losses and trying to significantly increase electricity prices to remedy the situation.

Eskom price increases

Eskom recently applied for a tariff increase of 15% every year for the next three years, which it said is needed for it to stay afloat.

This follows news that Eskom expects to report a record loss of more than R15 billion in the year to 31 March.

The dire state of Eskom’s finances is a result of a decade of mismanagement and corruption at the power utility.

Maarten Ackerman, chief economist at Citadel, said that the state utility is running at debt levels that are simply not sustainable.

Ackerman said if Eskom is not granted the 15% increase, it is in very real danger of being unable to service its debts.

That kind of collapse would resonate across the entire economy, as Eskom is the biggest liability on the government’s books.

The government will be forced to continue to bail out the power utility – which is likely to push South Africa further into junk status, raising the cost of borrowing money further.

If the increase is granted, consumers and businesses will come under additional pressure, which will also be reflected in the wider economy.

In both scenarios, consumers end up paying more – either through the increase, or indirectly.

Now read: Eskom heads deeper into financial crisis with record loss

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The big Eskom asset lie