Why shaking up Eskom matters for the economy

SA’s power utility Eskom has seen a remarkable leadership shake-up in the past few days. Almost the entire board has been replaced with seasoned businessmen. And a well respected acting CEO has been put in place, too. The developments appear to reflect resolve by the country’s deputy president Cyril Ramaphosa, who was elected as president of the ANC in December. Sibonelo Radebe asked Jannie Rossouw to discuss what the changes at Eskom mean.

SIBONELO RADEBE: What do you make of the shake up at Eskom?

JANNIE ROSSOUW: The announcement of a new board at Eskom is welcome for a number of reasons.

First, the previous board and top executive layer proved to be incompetent if not downright destructive. Secondly, the power utility had sunk into dire financial difficulties on their watch. Recent reports suggested that the power utility had run out of funds and wouldn’t be able to meet its obligations unless government stepped in with another huge bailout. This after the government injected R23bn in equity and wrote off about R60bn over the past five years.

Over the past five years or so, Eskom has been hit by a series of corporate governance breaches of the worst kind. These included the former CEO Brian Molefe trying to secure a R30m pay-out for only 18 months at the helm.

And it’s become clear from the Gupta leaks that the power utility had come to play a central role in a raft of activities related to state capture. It appears to have served as a conduit to transfer government resources to well-connected and corrupt individuals and families in SA.

Given the damage that’s been done, the previous board at Eskom simply could not continue. It had no plan to turn the company around or stop corruption. Its only strategy was to lean on the South African government for more financial assistance.

The new Eskom board should urgently revise the company’s remuneration policy to restore some sanity ... The board should also review business practices to ensure Eskom remains financially viable without any financial assistance from the government

The Eskom shake up is also significant because it’s a signal that the new president of the ANC, Cyril Ramaphosa, is committed to fighting corruption in both the public and private sectors.

SR: Why does Eskom matter?

JR: Eskom is arguably SA’s most important state-owned enterprise (SOE). The South African economy depends on continuous and uninterrupted power supply. This puts Eskom in a different league to other embattled SOEs such as the national airline, South African Airways (SAA).

SAA is also dependent on government bailouts, but the South African economy will continue to function without it. Eskom, on the other hand, is a monopoly power supplier. All South Africans depend on it for power.

SR: There seems to have been an urgency to make changes. Why?

JR: It seems that Ramaphosa moved quickly to wrap up the Eskom shake up before he left for the World Economic Forum in Davos. It’s not difficult to understand why. SA has had some very bad headlines over the past few years, including downgrades by international rating agencies, and its economy is in the doldrums.

A significant portion of SA’s economic pressure originates from declining confidence of local and international investors in the country’s economy. This is evident from the South African business confidence index, which has plummeted. Since 2013 business confidence has been on a declining trend from above 50 to a current level below 35.

Replacing the Eskom board before the Davos meeting was a smart and necessary move. Davos is a rare occasion to showcase SA as an investment destination of choice for international investors. One condition for attracting international investment is a clear commitment to addressing corruption and instilling sound management in government enterprises.

SR: What, in your view, is the long-term solution around Eskom?

JR: The long term solution to the problems at Eskom and other troubled SOEs is a rethink of their role in the South African economy.

Some, such as SAA, are really unimportant and their disposal or even their closure would have little impact on the domestic economy. Disposal or closure are necessary options as these entities add an unnecessary burden on the national fiscus.

But others, such as Eskom, are more strategic and matter enormously and the government should retain them.

It has also become necessary for SA to rethink the remuneration policies for executives of SOEs. They earn salaries that aren’t commensurate with the risks they face. The consequences of failure are much more severe for executives in the private sector. Executives of SOEs simply apply for bailouts when they’re in trouble.

So there’s no justification for exorbitant remuneration at SOEs. And no executive at any SOE should get a bonus: how can a bonus be justified when the South African government provides the bailout in the event of financial difficulty?

The new Eskom board should urgently revise the company’s remuneration policy to restore some sanity in the level of remuneration. The board should also review business practices to ensure Eskom remains financially viable without any financial assistance from the government.

It is also important that the South African government and the board of Eskom make it clear to the general public and to investors that the proposed nuclear procurement project plan will not go ahead: neither the South African fiscus nor Eskom can afford such a project.