1. Why is Eskom in such bad shape?
South Africa was able to produce more electricity than it needed when white-minority rule ended in 1994, but the government didn’t foresee how sharply demand would surge as the economy expanded and previously neglected black areas were connected to the grid. Eskom announced a series of multibillion-dollar investments after the authorities awoke to the severity of the problem in the mid-2000s, but the projects came too late and took too long to build. The Medupi and Kusile coal-fired plants, two of the world’s biggest, were supposed to be fully operational in 2015, but still haven’t been completed and are running way over budget.
2. What’s the problem now?
A lack of money forced the utility, which provides about 95% of the nation’s power, to cut back on maintenance and repairs to other plants, and it lacks key technical skills needed to do the work, despite having a bloated workforce. Plants that produce more than half Eskom’s power are at, or nearing, their ideal retirement age. The country has experienced intermittent power outages since late 2005. They reached a peak in December 2019, temporarily interrupting production at mines and disrupting mobile-phone services. Eskom is currently losing about $1.4 billion a year.
The utility went through repeated board and leadership changes during the almost nine years Jacob Zuma was South Africa’s president. Investigations by lawmakers and the nation’s anti-graft ombudsman suggest that the upheaval was an orchestrated attempt by Zuma’s allies to raid Eskom’s coffers with his tacit consent. Accusations that the utility had been looted are now being investigated by a judicial commission. Zuma and his allies deny wrongdoing.
4. How precarious are Eskom’s finances?
Very. By its own admission, it’s in a “death spiral.” It was saddled with $31 billion of debt at the end of September and its solvency is at risk. Sales are near a decade low as the economy stagnates. Increasing numbers of businesses and middle-class consumers have moved off the grid as the price of renewable energy drops. Meanwhile, near-bankrupt municipalities are falling behind in paying their bills as customers in impoverished townships default on their debts or steal power through illegal connections.
5. What’s been done to fix it?
Eskom’s board and management were replaced in January 2018, the month after Cyril Ramaphosa succeeded Zuma as head of the ruling party, the African National Congress. Phakamani Hadebe was named CEO, but quit as of July 2019 because his health was suffering due to the “unimaginable demands” of the job. Andre de Ruyter, currently the CEO of packaging firm Nampak Ltd., will take over the post -- which has been temporarily filled by Chairman Jabu Mabuza -- in early 2020. Eskom’s management has made a concerted effort to stamp out graft, and a number of tainted senior executives and staff have left the company.
6. What’s happening next?
The government intends to split Eskom into separate generation, distribution and transmission businesses under a state holding company by the end of 2021, a reorganization it says will permit each unit to manage costs more effectively and make it easier for them to raise funding. Freeman Nomvalo, head of South Africa’s chartered-accountants institute, was named Eskom’s chief restructuring officer on July 30 and is considering how to reorganize its debt. The government is also considering buying more power from independent producers.
7. What about a financial lifeline?
The budget announced in February included a $4.6 billion cash injection over the next three years to help Eskom service its debt and free up money for operations. The government has since announced a rescue plan for the utility and doubled the bailout. The support has added to state debt and caused South Africa’s budget deficit to soar, placing the country’s sole remaining investment-grade credit rating at risk. Eskom also plans to trim its workforce. That proposition is likely to meet with fierce opposition from labor unions, which also oppose the plan to break Eskom into three parts.
8. What happens if the rescue fails?
The total collapse of Eskom isn’t on the immediate horizon, and Ramaphosa has said the government won’t allow it to happen. If it were to cease operating or the grid were to collapse, South Africa’s economy would grind to a halt and many businesses would be driven into bankruptcy, triggering investor flight and multiple downgrades to the nation’s fragile credit rating -- as well as potential social unrest. Power cuts have already weighed on South Africa’s rand and bonds, and present a huge risk to smelters, mines and other energy-intensive businesses.
To contact the reporters on this story: Mike Cohen in Cape Town at firstname.lastname@example.org;Paul Burkhardt in Johannesburg at email@example.com
To contact the editors responsible for this story: Paul Richardson at firstname.lastname@example.org, Andy Reinhardt, Rene Vollgraaff