In late June, the coldest part of the Southern Hemisphere winter, the power went out in South Africa. For as many as eight hours a day, right into early July, traffic lights went dark, factories and offices shut down, and meals had to be served cold.<\/p>\n
These weren\u2019t the first power outages, but they were the worst yet. Intermittent supply cuts over the past 14 years had already sapped business confidence and limited private investment in South Africa. In 2017, when he was leading Goldman Sachs Group Inc.\u2019s business in sub-Saharan Africa, Colin Coleman described the struggles of state power company Eskom Holdings SOC Ltd as the biggest threat to the South African economy.<\/p>\n
The power cuts this winter finally spurred the country\u2019s government to take action. The National Treasury has pledged to absorb part of the utility\u2019s R413 billion($23.5 billion) of debt. President Cyril Ramaphosa has changed regulations to allow private companies to generate more power\u2014a plan that, while welcomed by business, will take years to have an impact.<\/p>\n
Fixing South Africa\u2019s broken utility and its rickety power system is proving a crucial test for the ruling African National Congress party ahead of elections in 2024. ANC Chairman Gwede Mantashe has described Eskom as the party\u2019s \u201cbiggest opposition.\u201d<\/p>\n
Eskom is \u201ca litmus test of the ANC\u2019s ability to deliver basic services,\u201d says Shridaran Pillay, Africa director for Eurasia Group. \u201cYou can\u2019t grow an economy without power and without being able to spend on infrastructure.\u201d<\/p>\n
It wasn\u2019t always like this.<\/p>\n
Founded in 1923, Eskom rapidly built hydro and coal-fired power plants, spurred by the needs of a gold mining industry that was the world\u2019s largest. In the 1970s the company began building a fleet of coal-fired plants that operate to this day. The apartheid state invested in infrastructure and industrial capacity as a bulwark against international sanctions. Eskom even built Africa\u2019s only nuclear power plant.<\/p>\n
In the early \u201980s the company ran into financial trouble after committing to build plants that weren\u2019t needed. The government appointed a commission to reorganize Eskom\u2019s management. After the country\u2019s apartheid regime fell in 1994, the company rapidly rolled out electrical connections to millions of Black South Africans. In 2001 the Financial Times named Eskom the world\u2019s best power company.<\/p>\n
But in the next two decades, Eskom\u2019s fortunes suffered from erratic government decision-making and political interference. Around 2001, then-President Thabo Mbeki decided that power plants would be built by private investors and called a halt to Eskom\u2019s expansion plans. A few years later he reversed that decision, but by then the company had lost many of its skilled technicians.<\/p>\n
A lack of generating capacity led to regular power supply disruptions that started in 2008. A near collapse of the national grid closed gold and platinum mines for five days in January of that year, and in July the government appointed Bobby Godsell, the former chief executive officer of a gold mining company, as chairman to help stabilize Eskom.<\/p>\n
\u201cWhen I exited in November 2009, the debt was dramatically less,\u201d remembers Godsell. \u201cFor a long time, Eskom bonds had achieved a lower risk [premium] than sovereign bonds.\u201d<\/p>\n
But the company\u2019s financial situation has deteriorated dramatically. Today those bonds have a risk premium of about 4 percentage points above government bonds.<\/p>\n
After Godsell left, Eskom accelerated the building of Kusile and Medupi, two of the world\u2019s biggest coal-fired power plants. They were initially supposed to be completed in 2014. Instead, both projects have run years behind schedule, and their estimated total cost of 464 billion rand is almost triple their initial budget.<\/p>\n
To help fund the building program, South Africa lifted the amount of total outstanding Eskom debt it would guarantee to R350 billion in October 2010, from R176 billion a year earlier. In the decade to the end of Eskom\u2019s fiscal year in March 2022, the utility boosted the amount of money it had borrowed that was guaranteed by the government by 324%, to R328 billion.<\/p>\n
The projects were mired in allegations of corruption, which in some cases boosted costs. Hitachi Ltd paid $19 million to settle US Securities and Exchange Commission charges that it made \u201cimproper payments\u201d of $6 million to Chancellor House, the investment arm of the ANC, with whom Hitachi had formed a partnership to win contracts to install boilers at the plants.<\/p>\n
In a separate agreement with South African investigative authorities, ABB Ltd agreed to return R1.56 billion it was paid for control and instrumentation work on the plants. ABB\u2019s contracts were among a number Eskom reached with international and local companies, the terms of which were repeatedly modified. In some cases the new terms cost Eskom a multiple of the original amount. Neither Hitachi nor ABB admitted wrongdoing.<\/p>\n
Government policies that sought to boost the participation of Black South Africans in the economy, designed to address the inequities of apartheid, led Eskom to favor contractors and suppliers that were less experienced and often less efficient.<\/p>\n
Local companies were hired to maintain Eskom\u2019s plants instead of the equipment manufacturers that had helped build them. Coal supply contracts once held by mining giants such as Anglo American Plc and Glencore Plc, which often moved coal to the power plants on giant conveyor belts from adjacent pits, were granted to smaller companies that trucked it, at a higher cost, from small mines.<\/p>\n
These mining companies were often paid higher prices for their coal, says Lumkile Mondi, a senior economics lecturer at Johannesburg\u2019s University of the Witwatersrand who\u2019s written extensively about Eskom.<\/p>\n
Local companies \u201cgot access, and in the process they were treated differently by Eskom under political pressure,\u201d Mondi says. \u201cYou got the beginning of Eskom\u2019s balance sheet being eroded.\u201d<\/p>\n
Some of those arrangements led to alleged corruption.<\/p>\n
In 2015, Eskom and then-Mineral Resources Minister Mosebenzi Zwane allegedly pressured Glencore to sell mines supplying the utility to a company owned by the Gupta family, who were friends with former President Jacob Zuma. Zuma\u2019s son Duduzane had a stake in the company.<\/p>\n
Two of the three Gupta brothers were arrested in Dubai this year and are awaiting extradition proceedings on separate corruption charges. Ramaphosa\u2019s administration has said at least R500 billionwas looted during Zuma\u2019s nine-year rule. Zuma and the Guptas have denied wrongdoing.<\/p>\n
Meanwhile, municipalities have fallen behind on paying R49 billion in power bills as of the end of July. The national \u00adgovernment has done little to encourage them to pay even after Eskom threatened to disconnect the capital, Pretoria, in August.<\/p>\n
The utility, in a response to questions about the crisis it faces, blamed the national regulator. The company says it\u2019s not allowed to charge adequate power prices to meet its costs and finance new plant construction, forcing it to take on debt. The regulator counters that Eskom\u2019s revenue climbed 320% over a decade, even as its electricity sales declined.<\/p>\n
Pravin Gordhan, who oversees Eskom as minister of public enterprises, blames the crisis on corruption and management instability. Eskom, whose CEOs are appointed by the utility\u2019s board in consultation with the government, has had 14 leaders since 2007.<\/p>\n
As Goldman Sachs\u2019s Coleman warned, Eskom\u2019s woes are damaging the country\u2019s economy.<\/p>\n
\u201cSouth Africa\u2019s original industrial model was founded on cheap labor and cheap electricity,\u201d says Peter Worthington, a senior economist at Absa Bank Ltd. \u201cWe\u2019re no longer a very cheap electricity country.\u201d<\/p>\n
Eskom\u2019s desire to raise prices, known as tariffs, has little support. \u201cTo pass that inefficiency onto the broader economy through increasingly higher tariffs as the only lever is wrong,\u201d says Olga Constantatos, head of credit at Cape Town-based Futuregrowth Asset Management, a R193 billion money manager that holds Eskom bonds.<\/p>\n
ANC chairman Mantashe, who\u2019s also South Africa\u2019s energy minister, has been particularly critical of the company\u2019s explanations. \u201cLet Eskom blame everybody and anybody,\u201d Mantashe says. \u201cLet them hide behind everybody.\u201d He has suggested starting a second state-owned power company to rival Eskom.<\/p>\n
Ramaphosa has promised to fix Eskom in every State of the Nation Address he\u2019s given since taking power in 2018. A number of plans have been floated, but little has happened.<\/p>\n
The Public Investment Corp, which manages pensions for South African government workers, proposed converting its Eskom bonds, worth about R90 billion, into an equity stake in the company.<\/p>\n
The government considered listing Eskom on the stock exchange or moving a portion of its debt into a special-purpose vehicle. Deputy finance minister David Masondo suggested that some of the debt might be forgiven, and Finance Minister Enoch Godongwana advocated selling the company\u2019s coal-fired power plants.<\/p>\n
All of those proposals, which could have caused some of Eskom\u2019s creditors to be treated worse than others, raised concerns with credit rating companies. The companies told the government that if the plans were implemented, Eskom could be classified as in default, according to people familiar with the situation who aren\u2019t authorized to talk to the media.<\/p>\n
Moody\u2019s Investors Service rates the company\u2019s long-term debt Caa1, hovering just above default. By contrast, South African government debt is rated Ba2, two notches below investment grade, and the outlook was changed to stable from negative in April.<\/p>\n
The string of proposals \u201cwas madness that was allowed to fester. It would also have led to default,\u201d says Peter Attard Montalto, head of capital markets research at Johannesburg-based Intellidex. \u201cThe thing is a mess. There is no simple answer.\u201d<\/p>\n
But inaction has also had consequences.<\/p>\n
\u201cIt clearly has had a bearing on South Africa\u2019s credit rating,\u201d says Razia Khan, chief economist for Africa and the Middle East at Standard Chartered Bank. \u201cIt has come at enormous cost to the South African economy, the investment forgone, the employment that could have been created.\u201d<\/p>\n
In July, Duncan Pieterse, head of assets and liability management at the National Treasury, said \u201cthe broad brushstrokes\u201d of a debt transfer to government will be announced in the October budget update.<\/p>\n
In the end, only one option appears feasible: that the government absorb the debt that its decisions engendered.<\/p>\n
\u201cResolving the unsustainable debt problem has been spoken about for a few years now with very little forward momentum and action,\u201d Constantatos says. \u201cAs much as some decisions may be hard and have consequences, in not making a decision there are consequences to that as well.\u201d<\/p>\n