Eskom CEO enters political danger zone

Andre de Ruyter, the chief executive officer of South Africa’s debt-stricken state power utility, is navigating a political minefield as he collects overdue debt, reduces electricity theft and bolsters revenue.

Eskom Holdings SOC Ltd. this month seized the bank accounts of its biggest defaulter — the Maluti-a-Phofung municipality that owes it 5.3 billion rand ($321 million) — and scaled back supplies to areas where many residents have illegal connections to the grid. It previously clashed with the country’s energy regulator over tariff increases, and suspended contracts with coal and renewable-energy vendors after electricity demand plummeted amid a coronavirus lockdown.

The utility supplies about 95% of the power used in Africa’s most-industrialized economy and isn’t generating enough cash to cover its operating expenses and interest payments on 454 billion rand of debt. Efforts to reorganize the loans and split the company into three units to make it more manageable have made slow progress, exacerbating the need to shore up its income.

“Inevitably tough decisions have now to be taken to implement debt recovery and to send a message to errant municipalities that they must now get their financial house in order,” said Raymond Parsons, a professor at North-West University’s Business School in Potchefstroom, west of Johannesburg. “This will not be popular and there may be political fallout. We must assume that De Ruyter has the necessary backing to be doing what he is.”

Municipal Debts

Local authorities, most of which are controlled by the ruling African National Congress and have been dogged by mismanagement and a lack of funds, owed Eskom 30.9 billion rand at the end of June. The party hasn’t commented on Eskom’s seizure of the municipality’s accounts, but President Cyril Ramaphosa has said payment boycotts are unacceptable.

Previous attempts by Eskom to cut off some township customers who didn’t pay their bills have sparked violent street protests. The utility demonstrated it’s aware of the sensitivities of taking a hard line at the weekend, when it conceded to releasing 90 million rand to Maluti-a-Phofung to enable it to pay salaries and other costs. Calls to its mayor’s office weren’t answered.

Eskom seizes defaulting customers’ assets as a last resort when other legal options have been exhausted, and reduces supply to areas where there are illegal connections to protect its infrastructure and avoid explosions, De Ruyter, who took up his post in January, said in an emailed response to questions.

Asked if the company consulted with the government or sought its permission before embarking on such action, he said: “Eskom is an autonomous agency of the government, whose mandate is to ensure the reliable supply of electricity.”

Legal Victory

The CEO’s strategy of resorting to legal action to shore up Eskom’s income paid off on Tuesday when the company won a court battle to overturn the electricity regulator’s directive that 69 billion rand in bailouts it received from the government should be treated as revenue. The ruling will enable the utility to raise an additional 23 billion rand annually over the next three years by increasing tariffs.

Public Enterprises Minister Pravin Gordhan, who oversees Eskom, and his spokesman, Sam Mkokeli, didn’t immediately respond to requests for comment.

Fixing Eskom will be a lengthy process and will have to go beyond collecting overdue debt and disconnecting customers, according to Jones Gondo, a credit analyst at Nedbank Group Ltd. He expects there will be more clarity on whether a turnaround is possible when Eskom is split into generation, distribution and transmission units that separately disclose their revenue and costs.

Investors appear increasingly confident that Eskom will secure sufficient state support to meet its commitments. The premium they demand to hold its 2026 rand bonds rather than government securities has narrowed 14 basis points since the beginning of January to 104 as of July 27.

Eskom Confidence Boost

Now read: Expect electricity price hikes – High Court rules in favour of Eskom

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Eskom CEO enters political danger zone