What now for junk-rated "dinosaur" Eskom? South Africa asks - CNBC Africa

What now for junk-rated "dinosaur" Eskom? South Africa asks

Southern Africa

by Reuters 0

What now for junk-rated "dinosaur" Eskom? South Africa asks. PHOTOS: Eskom

In the dying days of apartheid, the head of South Africa's power utility, the central pillar of the white-run economy, sat down with Nelson Mandela and asked him a simple question: when you take office, what are you going to do with Eskom?

The answer from South Africa's future president was equally simple: nothing, as long as you continue to produce cheap electricity and connect more black South Africans to the grid.

(READ MORE: S&P lowers Eskom’s ratings, cites negative outlook)

"'We do not wish to interfere with what you are doing and how you are doing it because you know the electricity business. We don't,'" then-chief executive Ian McRae, now 85, recalled Mandela telling him over lunch in the early 1990s.

However, over the next two decades that basic agreement would fall apart as Eskom failed to keep the lights on and the government - the utility's sole shareholder and increasingly its main source of funding - waded further into the engine room.

The result has been deepening operational and financial turmoil in a utility that generates 95 percent of the electricity in Africa's most advanced and important economy.

In another blow that will pile more costs onto its already creaking books in the form of higher interest rates, S&P downgraded Eskom's credit this week to "junk", saying it now regarded its management as 'weak'.

In particular, the agency pointed to last week's suspension of chief executive Tshediso Matona - an electricity sector novice who had been in the job only six months - and three other executives to make way for an inquiry.


Eskom's decline, first manifest in rolling blackouts that hit in 2008, has been a rude awakening for South Africans, shattering their sense of first-world superiority on a continent where the quiet thrum of generators is part of everyday life.

Until then, the utility, founded in 1923 at the zenith of the Johannesburg gold rush, had served as a source of pride.

It ranked as one of the world's biggest public electricity firms, producing up to 40,000 MW of some of the cheapest power on earth, and was leading the charge in redressing the ills of apartheid by promoting black managers and connecting millions of black households to the grid.

In 2001, Eskom won the Power Company of the Year award at the Financial Times Global Energy Awards in New York, generating glowing domestic headlines that are unthinkable today.

It is now regarded more as a national joke than national treasure.

One runs: What did South Africans use for lighting before candles? The answer - electricity.

But Eskom's problems are no laughing matter.

This year, economic growth is forecast at a paltry 2 percent because of the power constraints and could be half that if the rolling blackouts that are essential to prevent a catastrophic grid collapse intensify.


The power crisis has also become a lightning rod for criticism of the ANC and its ability to run a sophisticated emerging market economy, especially since its roots can be traced back to the Mandela's successor, Thabo Mbeki.

In a 1998 energy White Paper, the government's own experts stressed the urgent need for new power stations because of the rapidly growing economy and mass electrification of large parts of the country kept in the dark under apartheid.

"The next decision on supply-side investments will probably have to be taken by the end of 1999 to ensure that the electricity needs of the next decade are met," it said.

Instead, Mbeki did not give the go-ahead to two huge new coal-fired power stations until 2004. After massive cost and time over-runs, neither is close to completion.

"When Eskom said to the government, 'We think we must invest more in terms of electricity generation,' we said no," Mbeki admitted in late 2007. "We said, 'Not now, later.' We were wrong. Eskom was right. We were wrong."

Eskom said on Friday it had agreed with France's Alstom to terminate a construction contract at the much-delayed Kusile power station project, replacing it with Swiss-based ABB Ltd.

An Eskom spokesman said the development would not delay the completion of the plant, which is scheduled to produce its first power in 2017. But it will raise fresh questions about Eskom's ability to meet its deadlines.


As more power cuts, or 'load-shedding' as it is known locally, hit in December, the cabinet set up a 'War Room' to oversee Eskom's woes, which could ultimately drag South Africa's sovereign rating into junk territory.

But analysts say the extra layer of control is concerned mainly with fighting day-to-day fires, and is blind to the big picture - reform of a bloated "vertically integrated" monopoly that controls electricity supply from start to finish.

Again, the need was outlined in the 1998 White Paper, which said Eskom would have to be split into separate generation and transmission companies to "assist the introduction of competition into electricity generation".

Yet the recommendations were ignored and powerful figures such as ANC secretary general Gwede Mantashe, whose political roots lie in the unions and Communist Party, continue to shoot down the idea of a shake-up.

(READ MORE: Eskom inquiry is credit negative: Moody’s)

"Privatisation of electricity supply is not a panacea," he said last November.

However, others argue that without root and branch restructuring to introduce competition and accountability, Eskom will be unfit to serve 21st century South Africa's needs.

"The vision outlined in 1998 was too far-sighted for the ideologues within the ANC, within the South African Communist Party and within the labour movement," independent energy expert Chris Yelland said.

"We never implemented the government policy and so we're stuck with an old apartheid dinosaur that has not moved with the times."