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What can we tell of Eskom’s future from the Denton report?

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What can we tell of Eskom’s future from the Denton report?

3rd March 2017

By: Saliem Fakir

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The debate concerning the independent power producer (IPP) programme can serve as a useful distraction, and power utility Eskom is exploiting it to the full. The problem is not the IPPs, and they never will be. IPPs are a scapegoat that Eskom is using to obfuscate the many long-term multiple challenges it faces, which it is unable to resolve. The malaise at Eskom is symptomatic of a general chronic condition that is prevalent in other key State-owned enterprises.

If you read between the lines and not so between the lines, the recently released ‘secret’ Denton report that the Eskom board did not want the world to see paints a picture of an Eskom that should worry all of us. When you read the Denton report, you will see why it has been kept a secret for so long.

Having a behemoth of a utility made sense at one point, given the economies of scale and the single-minded mission it was created to fulfil. National aspirations have their usefulness and State entities can play an important strategic role in restructuring a one-sided political economy that favours private enterprise.

Eskom was established to produce cheap electricity for the mines and the steel industry and to open up coal deposits for fruitful exploitation. Eskom could control the price of coal because nobody wanted bad coal in the global markets. Its buying power enabled it to get the cheapest deals possible from cost-plus mines and fixed-contract coal agreements.

Eskom was key to South Africa’s industrialisation and securing greater capital accumulation in the national economy. It was not just about running plants, pulling wires across the vast landscape of South Africa and lighting streets and homes to take them out of pithy darkness. Strategic economics undergirded Eskom’s existence – it was driven by a nationalist instinct.

That is why to have a conversation about keeping the lights on only is to lose the plot and fail to realise how a State entity can recreate a new economic reality and broader inclusiveness. A rural house that is fired up by an electron means a world of a difference in terms of the entrepreneurial opportunity or livelihood diversity of that home more than just the fact that somebody wants the lights on.

The Denton report is a miasma of facts about the inner workings of Eskom and is a ‘must read’ for those who are serious about Eskom’s future and the South African economy. It demonstrates how political intrigue and rent seeking are slowly strangling the great behemoth and placing it in existential crisis.

The Denton report paints a picture of an organisation that must perform a Sisyphean task against an ever-rising mountain of goals and objectives thrown at it by its political masters.

Everything one reads in the Denton report is layered with double-truths: what is on the surface is true and what lies beneath it is also true. One only has to look at Eskom’s coal and diesel contracts – which constitute its biggest expense – to understand how double-truths manifest. The shift from cost-plus and fixed-price contracts to short-term contracts has seen a rise in costs seemingly to offload inappropriately surplus rents to new, empowered interests – some whose addresses can be traced to hairdressing salons.

Given their age, the power plants are using more coal to generate the same amount of electricity, owing to low plant availability factors and low-quality coal. Coal costs have gone up by 20% a year.

The Denton report highlights a persistent trend of overpricing for coal supplies based on short- and medium-term contractors. In the meantime, the only luck on Eskom’s side is our dismal growth rate. This is lucky for Eskom but a continuing peril for the economy, which is throttled by dysfunctional politics and a world that is increasingly looking inward and unable to creep out of economic inertia.

A long time ago, emeritus economist Alvin Hansen gave this chronic condition a lovely phrase – secular stagnation. Economic hope cannot be kindled by throwing money at a bad bet, but by fixing the malaise. In our case, it is the parasitic creep that has come to rule coal procurement – which the Denton report, more than once, refers to, as it cannot reconcile the high coal prices Eskom is paying and market conditions, which include a generous transport subsidy to medium- and short-term contractors. This is a runaway train that will not be stopped by stringent procurement rules but by political intervention to keep corruption in check.

The behemoth has other intractable problems besides the problem of greasy fingers at the till. There is the eternal recurrence of cost cliffs that require higher tariffs or the backhand recourse to the Regulatory Clearing Account. Eskom is unable to tame its rising costs and the possibility of bailouts poses a moral hazard. The Denton report describes Eskom’s financial woes as ‘‘inelasticity in financial levers’’, given that its costs cannot be fully recoverable, it has poor credit ratings and it is finding it difficult to get its customers to pay on time or to pay at all.

The behemoth is in trouble. This has nothing to do with IPPs. Do not believe a word that is said. Its woes are self- inflicted. Eskom must change, or perish.

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