A decade after black-outs first abruptly put the brakes on the economy, prompting an unaffordable generation capacity expansion spree by Eskom that has seen tariffs rise 350% in the past 10 years, we remain knee-deep in the dwang.
Firstly, despite the hundreds of billions of rand spent on building new power stations, we still don’t have enough power, even though demand has barely budged since 2008. Eskom, which still supplies more than 95% of SA’s electricity and controls and operates the country’s transmission and a significant portion of its distribution infrastructure, started its latest round of load-shedding on Sunday. These days the utility’s schedules allow for as much as 8,000 MW to be taken out of the system — double the maximum prepared for previously and equal to nearly 20% of installed nominal capacity.
The tariff hikes over the last 10 years have been way above inflation, which was 74% over the same period. Yet Eskom wants to milk its customers even more, asking regulator Nersa to hike rates by another 15% a year over the next three years. This has been welcomed by ratings agency Moody’s, which emphasised that it will be a “credit-positive” for Eskom, whose bonds are deep in junk territory despite government guarantees to the tune of R350bn.
The madness of even considering further tariff hikes cannot be over-emphasised. What may create a bit of financial breathing room for the utility, which has largely wasted its increases so far on expensive coal supply and transport contracts as well as runaway capital-spending on new power generators Medupi, Kusile and Ingula, will simply push the rest of the economy — particularly energy-intensive industries like mining and manufacturing — ever closer to the abyss.
Without reliable, affordable power supply, companies will not send workers underground, operate smelters, or switch on production lines. It's as simple as that.
It is time to acknowledge that all of SA’s problems — state capture, the destruction of institutions like the South African Revenue Service (Sars) and the National Prosecuting Authority (NPA), the failure of municipalities, corrupt politicians, land reform — pale in comparison to the huge and systemic risk Eskom in its current position poses to the country.
The focus has been largely on Eskom’s debt position and its risks to the fiscus, but that is really minor in comparison to the damage the utility has been doing to the mining and manufacturing sectors, which should be the job-creating engines of our economy.
Eskom’s numbers have been well-ventilated. In the 2008 financial year, the utility had an installed nominal capacity of 43,037 MW, employed 35,404 people, and sold 224,366 GWh of electricity. The utility reported a net profit of R974m, and total debt was R106.4bn. Fast-forward to 2018, after tariff hikes of 350%, nominal installed capacity was 45,561MW (+6%), employee numbers ballooned to 48,628 (+37%), and demand totalled 235,486 GWh (+5%). Total liabilities? A whopping R568.78bn (+435%). Its interest bill alone over the next five years will be R215bn — roughly what the government will be spending on basic education services this year.
Given that SA’s economy expanded by roughly 20% over the past decade, the 5% increase in electricity sales demonstrates the extent to which customers are either finding alternative sources, or, in the case of sectors like mining and manufacturing, cutting production.
Looking at these numbers in isolation may be too simplistic, but it really boils down to simple business principles: there is no way that you can increase your workforce by 37% and debt by 435% while demand for your product is up only 5%, and think you’ll live to tell the tale.
Hiking tariffs won’t save Eskom. The only way forward is cutting costs, topped with a big fat government bailout — in cold hard cash — to get its debt down to manageable levels.
We can try to kick the can down the road some more, but ultimately, jobs will have to be cut, and government will have to pay up. The sooner we take that bitter medicine, the sooner we can get Eskom — and the real economy — back on the road to recovery.
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