Eskom

No light at the end of Eskom’s tunnel until blockages are cleared

No light at the end of Eskom’s tunnel until blockages are cleared

The opacity at Eskom must end so that contracts can be re-examined to reveal corrupt or conflicted practices, the maintenance and rebuild must be quantified and the workforce repurposed with a credible plan actioned against the requirements of a stable baseload.

Ghaleb Cachalia

Ghaleb Cachalia is a former leader of the Ekurhuleni caucus for the DA and now serves as an MP in the National Assembly. He is the DA spokesman on Public Enterprises and serves on the Ethics Committee in Parliament.

Much discussion around Eskom focuses on how to address the utility’s self-inflicted financial woes. Whether this comes from proposed debt-for-equity swaps from the Public Investment Corporation (PIC), continued government bailouts, government guarantees to renewable energy producers or price hikes – all of which have significant implications – it doesn’t address the fundamental question: Is Eskom fixable?

The phrase, “Eskom is too big to fail”, is trotted out ad nauseam by government and Eskom while the company continues its death spiral. Meanwhile, electricity supply, which needs to be both affordable and available, is destined to be neither.

Eskom’s CEO André de Ruyter recently affirmed, in a presentation to the Parliamentary Portfolio Committee (PPC), his commitment to have the company stabilised in 18 months – the buck, he said, stopped with him. In the interim, supply is unstable and increasingly unaffordable.

Approximately 85% of Eskom’s business is the generation of electricity to meet demand. This is the heart of the business and to meet demand it needs a stable baseload (the minimum level of demand) to provide roughly 22,000MW, a mid-merit (that adjusts output as demand fluctuates) and peaking supply (plants that only run during peak periods or emergencies) to deliver another +/-11,000MW.

The baseload requires generation to run on a 24/7 basis, mid-merit needs to run for around 12 hours, and peaking supply for about eight hours – each have operational and cost requirements which affect stability and price.

Power stations require continuous adjustment. Transmission networks need continual maintenance and keeping the whole grid at a frequency of 50Hz takes careful monitoring and fine-tuning, involving the management of frequency, reactive power and voltage – a deviation as small as 5% above or below can lead to increased wear and tear of equipment – and additional maintenance costs, or even large-scale blackouts.

Eskom’s inability to manage efficient and reliable supply is evidenced by its spend (2009-2019) on diesel to guarantee peaking and emergency supply to the tune of R47.4-billion.

This is attributable in large measure to the new build programme (Medupi and Kusile) being ruinously behind schedule, resulting in a reserve margin at critical levels – not to speak of astronomical cost overruns and escalations. If these projects were on time, it is expected that they would have reduced the operation of the open cycle gas turbines (OCGT – powered by diesel) to the required emergency or peaking function.

The over-reliance on OCGTs can be credited to the deterioration in performance of Eskom’s existing fleet of coal-fired generation plants. To add insult to injury, the new builds have been shoddily built – initiated in 2006 and 2008, they have been hit by cost overruns, poor engineering designs and allegations of corruption. Once hailed as the answer to the country’s electricity supply challenges, the costs for the plants have already escalated uncontrollably, leaving Eskom with R450-billion in debt which it cannot service without government bailouts.

The fundamental problems around Medupi and Kusile arise from the form of contract which was entered into. Eskom instituted engineering procurement and construction management contracts (EPCM) –  in contradiction of an internal resolution – instead of turnkey projects. This meant that Eskom needed the in-house competencies of design, procurement, financing, construction, commissioning and testing – none of which were in place at the time the contracts were awarded. 

Both Medupi and Kusile are monumental disasters. Together with Ingula, the cost overruns and debt on these projects are what helped deliver the country, in large measure, to sovereign junk status.

Eskom, therefore, assumed the liabilities of system integration for the projects and had to hire consultants to assist, who would not accept any liabilities. As a result, both Medupi and Kusile now suffer from defects in all these areas. Efforts to remedy these are akin to shutting the stable door after the horse has bolted.

The CEO’s report to the PPC nitpicks at areas of deficiencies without understanding how they arose. Dealing with matters in silos does not solve system defects. What is clear is that incompetence compounded with corruption and political vested interests will not address the deeper issues. By continuing to build defective plants, the job of correcting or recovering has become monumental and these are costs which SA Inc can ill afford.

Both Medupi and Kusile are monumental disasters. Together with Ingula, the cost overruns and debt on these projects are what helped deliver the country, in large measure, to sovereign junk status. Debt will continue to rise as long as bailout money is forthcoming, and the plant performance will remain poor. This will only contribute to grid instability and ongoing load shedding.

Current efforts will ameliorate some of the management issues (procurement, corruption, defects, coal procurement etc), but it will not fix the core problem. The need for economic growth in SA has never been greater. Without a stable power supply and continued load shedding, growth will remain a pipe dream. In order for load shedding to be solved, a stable baseload has to be re-established. Our economy is not in any position to migrate, over the next 10 years, out of energy-intensive industries and in so doing, dispense with load shedding. The workhorse of the SA economy remains a stable baseload.

Eskom has about 500 executive-band employees and many experts contend that this number can be slashed down to around 150 – for starters. It’s the quality of employee that matters, not the quantity and as such, the senior team (F band), including the CEO and COO, need to evince deep capabilities and track records in design, procurement, finance, projects management, construction, commissioning and testing, and operating and maintenance.

Without competent people who have the training and experience in power generation, it remains unlikely that load shedding will cease. It cannot be remedied with additional renewable energy projects which are dependent on a stable grid. If the stability of the baseload is not accomplished by Eskom, there is a very remote chance that independent power producers (IPPs) can re-establish the grid stability. It will require unimaginable investment over a time frame which this country cannot afford.

Hardly a surprise then that a recent report issued by the Pretoria-based Council for Scientific and Industrial Research (CSIR) measuring the energy availability factor (EAF) showed the reliability of the power system to be worse than it’s ever been, with a cost to the economy of hundreds of billions of rands.

But let’s get back to what is needed to fix Eskom.

Eskom has about 500 executive-band employees and many experts contend that this number can be slashed down to around 150 – for starters. It’s the quality of employee that matters, not the quantity and as such, the senior team (F band), including the CEO and COO, need to evince deep capabilities and track records in design, procurement, finance, projects management, construction, commissioning and testing, and operating and maintenance.

These proficiencies were last in evidence under Ian McRae (CEO 1985-1994) and Alex Ham (Engineering Director), and their teams who built the power stations that are keeping Eskom afloat today. At the head office, the two assembled Eskom’s best and brightest managers and strategic thinkers into a senior management council they called the “Top 30”. A few outsiders were also invited, including Reuel J Khoza, then a management consultant recognised for his entrepreneurial acumen and commitment to social change, who went on to become the utility’s first black chairperson.

The decline began under CEO Thulani Gcabashe, appointed in 2002 – under his watch, colossal pay packets became the order of the day. James Myburgh of Politicsweb identified the roots of the current crisis in two decisions taken by Gcabashe: “The first of these was to sell off most of Eskom’s coal stockpiles. The second decision was not to extend the existing coal procurement regime to meet the expected increase in demand over the following 15 years.”

Jacob Moroga succeeded Gcabashe in mid-2007 and made “transformation” his priority. By 2007, Eskom’s reserve margin had shrunk to between 8% and 10%, well below Eskom’s desired 15%. Construction had started on the Medupi and Ingula pumped-storage scheme in 2006, and on Kusile and Medupi coal-fired power stations the following year. Moroga’s contract was terminated in 2009, resulting in the erstwhile CEO unsuccessfully suing Eskom for an eye-watering R85-million.

A core competency study by external consultants in 2001 confirmed Eskom’s in-house capability to be only operations and maintenance, and coal procurement. The same situation that exists today is not entirely dissimilar in terms of the availability of deeply experienced personnel and the concomitant need for turnkey solutions. 

The decline continued, with vastly increased executive salaries being the order of the day. During Brian Dames’ succeeding tenure, the Eskom directors’ remuneration report reveals that R18.5-million was paid to executive committee members, compared to R8.8-million in the preceding year. The biggest winner was human resources head Bhabhalazi Bulunga, who pocketed 507% more. Of the two executive directors, chief executive Brian Dames was the highest paid at R5.7-million (a 0.9% increase). However, finance director Paul O’Flaherty took home 346% more at R4.9-million.

During his tenure as non-executive chairman (2005-2008), Valli Moosa set up the Chancellor House/Hitachi Power Africa deal – he presided over the parastatal, giving contracts worth billions to ANC funding company Chancellor House – while also serving on the ANC’s fundraising committee, reflecting a significant conflict of interest. Chancellor House Holdings made a 5,000% return on its investment in the local Hitachi unit. More than a decade after the construction of the plants was ordered, with years of delays, Africa’s most developed economy is left with regular power cuts. 

The only real inhouse expertise the Medupi and Kusile contracts were awarded resided in operations and maintenance, and the board was acutely aware of this. A core competency study by external consultants in 2001 confirmed Eskom’s in-house capability to be only operations and maintenance, and coal procurement. The same situation that exists today is not entirely dissimilar in terms of the availability of deeply experienced personnel and the concomitant need for turnkey solutions. 

Current CEO, André de Ruyter holds an LLB and MBA from the University of South Africa and the University of Pretoria respectively, in addition to a business qualification from Nyenrode, a business university in the Netherlands. He was formerly the CEO of packaging company Nampak, a position he held from March 2014. 

The COO, Jan Oberholzer, is responsible for all Eskom’s operations: generation, transmission and distribution of electricity, primary energy, coal and water, group capital (which includes new-build projects), Rotek Industries, Eskom Enterprises, Eskom Research, Testing and Development (RT&D), risk and sustainability, among others. His expertise, however, is primarily in the wires business of distribution. It was under his aegis, when he spent three years in generation – coming in at the top as a senior executive without on-the-ground generation experience – that he awarded the contracts to Black and Veatch (B&V). B&V consulting contracts mushroomed in value from R114-million to R4.2-billion, but the reliability is so poor that they require significant and costly design modifications.

Bheki Nxumalo, the CEO for generation, has a master’s degree in business administration (MBA) and is a registered engineer with the Engineering Council of South Africa (ECSA). He joined Eskom in 1996 as a senior technician. He has held roles of production manager, and maintenance manager at Lethabo and Hendrina power stations. He became power station manager at Grootvlei and Matimba power stations, and project manager at Kusile before being called to take up an acting position as Chief Executive Officer of Eskom Rotek Industries in 2017. 

The other CEOs are Segomoco Scheppers for transmission and Monde Bala for distribution – both were previously the group executives for their respective divisions. Transmission and distribution account for 15% of investments in Eskom’s business.

The acid test is whether the shareholder has the wisdom to privatise and allow private sector firms and venture capital to buy plants and build plants serviced by the requisite competencies to generate electricity and supply the grid.

Every successive team of senior executives has blamed the previous cohort for the operational and financial mess at Eskom. Each one has sought more money from government to fix the problems and government has coughed up liberally. Successive price hikes have moreover allowed the company to make up revenue to cover operating costs, expansion and to pay off its loans – but consumers and municipalities as a result struggle to make payments against poor delivery. There is no current evidence nor past track record based on the way the business was conducted, which indicates that the future will be any different.

Back in 1998, the White Paper on Energy made clear that Eskom would not be building any new power stations – IPPs were meant to fill the gaps. Six years later, Minister Alec Erwin sought permission from government for Eskom to build new power capacity. Despite warnings from Eskom in 1997 that new capacity would be required in 2007, the government did nothing. Initially, this was intended to add units to existing plants. How did this morph into the awarding of two new mega stations?

By this time John Maree’s headcount reduction had borne fruit and total employees were reduced from 65,000 in 1985 to 33,000 in 1997. The only remaining in-house capability resided in operations and maintenance. Despite this and the resolution to only award turnkey projects, Medupi and Kusiles’ contracts were awarded on an EPCM basis. The escalation in value of contracts (from R114-million to R4.2-billion) awarded to B&V bears testimony to the absence of skills. That these contracts were awarded on an EPCM basis accounts for the liabilities that Eskom now bears.

It seems as if the more things change, the more they stay the same and SA Inc is left to pay the bills that have crippled the fiscus. Unless the skills issue is addressed by cleaning the house of dead wood and hiring competent engineers on a fit-for-purpose basis and not a BEE basis, the problems will endure and multiply. The acid test is whether the shareholder has the wisdom to privatise and allow private sector firms and venture capital to buy plants and build plants serviced by the requisite competencies to generate electricity and supply the grid.

In this regard, a PIC debt-for-equity swap might be worth considering if it meant real equity which the PIC could then sell to other asset managers at a profit and have a real say in the running of the company. On this basis, effective privatisation or a meaningful segue to privatisation, with all the attendant covenants for piecemeal investment and sale, and the financial wherewithal to fix the problems, might be tenable.

First, however, the opacity at Eskom must end so that contracts can be re-examined to reveal corrupt or conflicted practices, the maintenance and rebuild must be quantified and the workforce repurposed with a credible plan actioned against the requirements of a stable baseload. The various component power plants and divisions might then be attractive options for investment – at a price, of course. Whatever the price though, if affordable and available electricity is the outcome and the fiscus is freed from an ongoing burden of Eskom’s magnitude, it may well be worth it.

The fly in the ointment is whether the unions, to whom the shareholder in its conflation with the ANC is beholden, will see the merit in such a proposal. That and the willingness to overcome ideological constraints, and vested interests for the sake of sustaining the lifeblood of the economy are the key questions to be answered. I’m afraid though that political blinkers and the short-termism of vested interests will thwart any such option. More’s the pity, as the alternative is to limp on towards a grim and increasingly dim outlook. DM


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