Eskom’s Achilles heel: its average employee costs R735,000

Futuregrowth Asset Management says employee costs remain the Achilles heel for state power utility Eskom as it grapples with its cost base.

“A 42,000 headcount is still a far cry from the 35,000 optimal level as noted by management. The total employee cost accounts for 16.35% of Eskom’s revenue,” Sithembiso Garane, Futuregrowth’s head of listed credit, said in a note on Wednesday (9 September).

“Eskom’s average employee cost decreased from R775,000 to R735,000 as a result of the slight reduction of headcount from 44,000 to 42,000 and a management salary freeze. This is expected to be dampened by the 7% wage increase settlement over the next three years,” he said.

Eskom said late last month (31 August) that the Covid-19 pandemic negatively impacted its financial performance for the period ended March 2021, with sales volumes down 6.7%.

The group said it achieved operational cost savings of R14.4 billion during the year under review, against a target of R14.1 billion. Although sales volumes were down, primary energy costs increased 3.4% to R115.9 billion. Normalised operating costs increased 1.6%.

The group incurred a loss after tax of R18.9 billion, a slight improvement from the previous year’s loss of R20.7 billion.

Eskom pointed to a 4.5% reduction in employee numbers, with a total of 2,023 employees leaving the service of Eskom through natural attrition and voluntary separation. This had the effect of reducing the headcount to 42,749 during the year, from 44,772.

“This means that over the past two years, Eskom has reduced its workforce by just under 4,000 employees,” said Eskom chief executive André de Ruyter. “It must again be stated that not a single one of these was a forced retrenchment.”

Amongst these were 74 voluntary separation packages granted to managerial level employees in the 2021 financial year, further reducing employee benefit costs and reducing the manager: employee ratio.

De Ruyter said previously that the group needs approximately 38,000 employees.

Eskom said that employee benefits costs were successfully managed within budget, driven by a reduction in headcount. Production bonuses of R129 million were paid to qualifying staff, while the group reported a reduction amounting to R179 million in overtime costs. “Further reduction remains a challenge, given poor plant performance,” it said.

Union concerns

In May, the National Union of Mineworkers (NUM) called into question “the misleading statement” authored by Eskom spokesperson Sikonathi Mantshantsha which indicated that the average salary of an Eskom employee was R737,000.

“This amount is not a true reflection of the situation in Eskom. Eskom is divided into a bargaining unit (T4 to T13) and the non-bargaining unit (T14 to Executives).

“The NUM and other trade unions in Eskom are currently bargaining for the T4 to T13. The highest amount that can be earned by a bargaining unit employee is R650,460 while the lowest salary is R174,180. Eskom is intentionally misleading the public to gain public sympathy,” it said.

“We have noticed this thread of misleading information from Eskom. This is a clear sign of negotiating in bad faith. If the average salary is at R737 000 that will only mean that the non-bargaining is earning a lot of money which pushes the average up,” the union said.

Debt woes

Eskom reduced its gross debt by R81.9 billion – a 16.9% reduction – to an outstanding debt of R401.8 billion.

Futuregrowth Asset Management said that despite efforts to make the group profitable, including a process of unbundling its divisions into separate entities, “the core problem of debt” has yet to be addressed.

Bloomberg reported that Eskom expects to separate its transmission division from the utility by the end of the year, with generation and distribution units to follow in 2022.

“All these interventions do not address Eskom’s core problem: the debt trap,” Garane said. “Regardless of the divisionalisation and liberalisation of the energy sector, a debt solution is still required.”

“Primary energy cost pressure and the inability to contain employee costs continue to pose a significant challenge in the utility expenditure reduction program,” he said.

Municipal debt arrears increased by 26% year-on-year from R28 billion to R35.3 billion (including interest accrued over time), said Futuregrowth Asset Management.

“This figure was R6 billion in FY16 and is escalating very fast. Efforts to address collections from the top 20 defaulting municipalities continue to be questionable. Eskom has entered into a payment agreement with 12 of the 20 defaulting municipalities in an effort to increase recovery; however, 10 of the 12 are yet to comply with the agreement,” wrote Garane.

Investigations and disciplinary action

Eskom said in its financial report that a total of 105 (2020: 118) new cases involving employees and suppliers were reported through whistle-blowing channels during the year.

The group said it concluded 46 (2020: 202) investigations during the year of which 10 were fraud, 17 corruption and 19 related to irregularities. A further 77 cases were closed following a comprehensive review of all active cases. Disciplinary action was recommended for 80 cases and 238 cases were under investigation at year-end.

The forensic investigations revealed similar themes to previous years, with instances of undeclared conflicts of interest, failure to obtain permission to perform private work, leaking of confidential information as well as general procurement irregularities.

“Non-compliance with Eskom’s policies and procedures remains the most prevalent root cause,” the state company said.

There are 176 disciplinary cases with 155 cases that have been completed. As a result of fraud and corruption, 28 employees have been dismissed and 74 employees resigned during the disciplinary process, it said.

There were 72 cases registered with the South African Police Service and a further 14 are in the process of criminal prosecution, said Eskom.

Read: Eskom boss talks strategy to create 300,000 jobs

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Eskom’s Achilles heel: its average employee costs R735,000