Eskom’s path to destruction

As South Africans are once again dumped into darkness, many are wondering how Eskom went from the most efficient power producer in the world to a company which cannot keep the lights on.

To answer this question, it is necessary to look at Eskom’s past and what happened to destroy the company which won the Global Power Company of the Year award less than 20 years ago.

Eskom was founded in 1923 as the Electricity Supply Commission (Escom) and started to produce electricity in 1925.

The company showed incredible growth as the demand for electricity increased and built a transmission system lines linking all major cities in the country.

Eskom was so successful that it supplied more than half the electricity in Africa by the end of 1990.

It was also highly efficient. Eskom highlighted in its 1994 annual report that it was the world’s lowest-cost producer of electricity.

The company was a globally respected power producer which won numerous awards and boasted many international accolades. These included:

  • The Matla power station set an accident-free world record of 11,847,026 man-hours which stands to this day.
  • On commissioning in 1993, Kendal power station became the world’s largest indirect dry-cooled power station.
  • Majuba, which became fully operational in 2001, was the only power station in the world that combined wet and dry cooled technologies.
  • In December of 2001 at the Global Energy Awards ceremony held in New York, Eskom was presented with the Power Company of the Year Award.
  • In 2004 Eskom was named as South Africa’s most admired brand in the Markinor/Sunday Times Top Brands Survey.

Today the power producer is a shadow of its former self and is dogged by mismanagement, corruption, power outages, and crippling debt.

This raises the question of how such a brilliant company has been brought to its knees.

Eskom’s path to destruction

In a recent presentation for the Free Market Foundation’s “Free Marketeers Podcast”, energy expert Ted Blom shared his views on what went wrong at Eskom.

He said there were five main reasons for Eskom’s decline over the last 20 years.

  1. A change in Eskom’s ownership model and governance.
  2. Accelerated BBBEE, which resulted in fronting and losing skills.
  3. Cadre deployment.
  4. Political interference.
  5. Grand looting and state capture.

To understand the beginning of the decline, Blom said, one has to go back to the late nineties when Eskom was still a public enterprise.

In 1998 the government decided to restructure the energy industry, which resulted in the Eskom Amendment Act which made Eskom a limited liability company with share capital and falling under the Companies Act.

Eskom was no longer run as a public enterprise, but rather as a public company with share capital with a board of directors which was appointed by the relevant minister.

Blom said this was the beginning of the end for Eskom, and it has been “downhill ever since” from there.

He added that the current investigation into Eskom at the Zondo Commission only starts at 2010, which is a mistake. “By 2010 the seeds were already sowed,” Blom said.

Blom said accelerated broad-based black economic empowerment (BBBEE) also caused tremendous damage to the power utility.

At the time when it was first implemented, there were very few competent and well-financed black suppliers, which meant fronting was commonplace.

“At the same time, they were also expelling top skills inside the organisation,” Blom said.

He said cadre deployment at Eskom replaced employment based on merit, which has become commonplace over the last few years.

Another problem for Eskom is political interference, which included ministers and the president running the show instead of knowledgeable people at Eskom.

“Political ideologies were forced onto Eskom, which included changing the profile of their workforce,” Blom said.

The combination of these factors culminated in grand looting and state capture at Eskom, which Blom said started in 2006.

The corruption and tender irregularities included tenders related to the Medupi, Kusile, and Ingula power stations, new coal procurement plans, and nuclear builds.

The result of the corruption and mismanagement at Eskom is regular load-shedding and a company which is now saddled with crippling debt and a bloated workforce.

New management team fighting to save Eskom

With load-shedding hampering an already struggling economy and hurting small businesses, it is hard to defend Eskom.

Its plan to increase electricity prices to fill the massive hole created by mismanagement, corruption, and theft by Eskom employees makes it even harder.

There are, however, some signs that new Eskom CEO Andre de Ruyter and his management team are starting to make progress to turn the company around.

Eskom’s latest interim results showed improved profitability before finance charges and interest to R15.4 billion, up from R12.5 billion a year earlier. Eskom reported a net profit of R83 million in the period, compared to a net loss of R1.9 billion.

The good news is that Eskom’s debt has also been reduced. On 30 September 2020 Eskom’s outstanding debt stood at R463.7 billion, down from R483.7 in March 2020. The gearing ratio has improved to 72% in September 2020, down from 75% in September 2019.

De Ruyter has also been able to reduce the staff headcount by around 2,000 people without any forced retrenchments.

This has helped contain employee benefit costs to R16.7 billion from R16.4 billion in September 2019.

Current processes to further reduce headcount are also underway, again without resorting to forced retrenchments.

Eskom has also highlighted that the current bout of load-shedding, which is expected to last until September, was planned to improve the reliability of its fleet of power stations.

Eskom spokesperson Sikonathi Mantshantsha added that four generation units at Medupi had their design defects repaired, and the last two are being worked on.

“The work will carry on at the Kusile power station and we hope to have a stable supply of 9,000MW from the two new power stations to reduce the risk of load-shedding,” he said.

The company has also shown that it is serious about fighting corruption and has joined forces with the Special Investigating Unit (SIU) to recover R3.8 billion from Eskom executives, former board members, the Gupta family, and their associates.

Eskom said the funds were lost in a concerted effort to corruptly divert financial resources from the company.

Now read: Eskom Stage 8 load-shedding possible, warns Ted Blom

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Eskom’s path to destruction