Pravin Gordhan and Jabu Mabuza
Eskom’s debt is reaching R450-billion, with no signs of letting up as borrowing increases, revenue remains flat and municipalities renege on their commitments even further, Parliament has heard.
Public Enterprises Minister Pravin Gordhan and Eskom chairperson and acting CEO Jabu Mabuza outlined the declining condition of the State utility in a joint briefing to Parliament’s appropriations committee, the Public Enterprises Committee and the Select Committee on Appropriations.
“We can’t deny the fact that Eskom carries a huge debt of R440-billion that increases every day. Equally important is the liquidity challenge it faces,” said Gordhan, who added that Eskom would have run out of money by the end of October if it had not come to Eskom’s rescue with a support package.
Eskom’s operating expenditure had ballooned by 30% in the past five years, reaching R151-billion in the 2019 financial year, while revenue had been flat and tariffs had not been cost-reflective, Mabuza pointed out.
“Our operating costs over the past five years have increased by 30%, reaching R150-billion in 2019. A big driver of our costs is people-related costs, coal costs and the independent power producer (IPP) costs that we have to pay,” said Mabuza.
A worrying escalation is the number of people who are refusing to pay for their electricity. Municipal debt, including a massive amount that is owed by Soweto, climbed to R38-billion this year.
He said Eskom had also had to burn a lot of diesel, while also using IPPs to avoid load-shedding. This had driven up costs. Salary increases set at 7% for three years, had also pushed up costs, while primary energy costs, particularly coal, had climbed.
Mabuza said tariffs were far too low, and that South Africa’s electricity tariffs were lower than both industrialised and developing countries like Germany, Brazil, Turkey and Indonesia.
“We have not been able to recover that tariff. Sadly, we have not been able to get a fair return on our assets for many years in the pricing policy. Cost savings alone will not solve Eskom’s financial health. The only long-term solution is for the electricity price to migrate to cost reflectivity,” Mabuza said.
While Eskom has called for higher tariffs, companies, particularly in mining and manufacturing, have battled to keep up with a sharp increase over the past few years.
“Our big users – mining houses, big smelters and big manufacturers that take 35% of our energy and contribute 35% to our revenue – reached a point that the cost to them is unbearable and is driving some to close their business, with unintended consequences that impact on the economy, on jobs and on the rate base of municipalities and on communities,” said the Eskom chair.
Smelters were particularly hard-hit.
“Energy contributes 60% of the cost in smelters. They are being offered some incentives in other parts of the world to set up smelters…..to import chrome from our country, and beneficiate at a cheaper electricity cost.”
Mabuza said Eskom's model was also outdated and would take time to change.
“Our operating model is outdated. We cannot operate a utility under this old outdated model. It is a death spiral.”
Mabuza said there were some positive moves.
“Work has started to repair pipe leaks at Letabo. We hope the unit is back by December. We have started to fill critical vacancies. We now have a Group Executive for Generation. We are reducing our reliance on open gas turbines. We are close to 170 days without the need for load-shedding,” said the Eskom chairperson.
But the utility has a long way to go to recover both its finances and the trust of the South African people.
“Eskom lost the trust of South Africans. They have to earn that trust again. As leadership we are saddened and regret the relationship with society that it does not trust us. We are working our way up to re-earn the trust,” said Mabuza.