Why you’re going to pay more for Eskom’s mistakes

South Africans will end up paying for Eskom’s decade of mismanagement, says chief economist at Citadel, Maarten Ackerman.

Speaking to Cape Talk, Ackerman said that the state utility is running at debt levels that are simply not sustainable.

The group’s debt has increased by as much as 800% to over R400 billion over the last 10 years, while its energy capacity and sales have been reduced by 5%.

Eskom wants energy regular Nersa and the South African public to come to its aid by allowing the group to hike tariffs by 15% every year for the next three years (a total 52% increase over the period), to stay afloat.

Ackerman said that if Eskom is not granted the 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.

Eskom expects to report a loss of more than R15 billion ($1.1 billion) in the year to March 31, a record for any state company.

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, for everyone.

If the increase is granted, consumers and businesses will come under additional pressure, which will also be reflected in the wider economy. Businesses will continue move to alternative power sources, and consumers – 90% of which are dependent on the Eskom for power – may simply be forced to use less electricity.

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

“(Eskom) is saying ‘we need more money to keep the lights on’ – (the increase) is more to cover the interest costs (of Eskom’s debt) more than anything else,” Ackerman said.

“It’s very unfair for consumers and taxpayers to pick up the additional cost for what is essentially 10 years of mismanagement. Unfortunately, whether it’s through higher taxes or higher electricity prices, the consumer on the ground will need to chip in,” he said.

What needs to be done

According to energy expert Chris Yelland, Eskom, businesses, suppliers, government agencies and all South Africans need to collaborate and make some sacrifices to turn things around.

“Eskom itself must share the burden through a lower rate of return on assets, increased efficiency and belt-tightening across the board,” Yelland said.

“The shareholder – namely government and thus the taxpayer – must share the burden through further equity injections (bailouts) linked to performance in terms of a credible recovery plan supported by government and the Treasury.

“Eskom executives, management, staff and workers must share the burden through reduced pay, forgoing bonuses, reduced staff numbers, retrenchments and improved productivity.”

Financial institutions need to come on board by refinancing of existing Eskom loans with better repayment terms and lower interest rates, and the group’s suppliers need to help by charging lower prices, he added.

However, while these interventions are absolutely necessary to start resolving Eskom’s issues, there are many barriers in the way.

On retrenchments in particular, reported plans by Eskom to cut 7,000 jobs in 2018 was met with fierce opposition by unions – to such an extent that the power utility walked back on the figure.

The group currently employs around 48,000 workers, while experts have said that it only needs 14,000 to operate efficiently. Retrenching over 30,000 workers in a country where unemployment levels are already among the highest in the world (at 27%) is untenable – particularly in an election year.

Eskom’s wage bill was almost R30 billion in the 2017/18 financial year. Its workers are paid four times the global overage, according to energy analyst Ted Blom.

Read: Eskom said to be pressured on plan before national budget