Trim wastage, reward good people, punish bad contractors: Gordhan on Eskom

Cost-cutting opportunities at cash-strapped Eskom may span trimming the fat off tenders and reviewing remuneration of bosses, public enterprises minister Pravin Gordhan has signalled.

In an interview with energy expert Chris Yelland, the minister indicated that an integrated plan to restructure Eskom’s debt and operations was likely by mid-year, a review of procurement contracts was needed, Eskom should modify its dynamic of pushing tariffs up each year, and the Medupi and Kusile operations will not become stranded assets.

Here is an extract:

Yelland: The unsustainable level of Eskom debt has been highlighted for the past few years, with several credible options for debt restructuring and refinancing now on the table. As minister of public enterprises, what is your preference, and how would you see this being resolved? When will the department of public enterprises (DPE) and the minister of finance be taking the necessary hard decisions to give some certainty all round, including to the financial community and rating agencies?

Gordhan: As far as the debt question is concerned, as the Ramaphosa administration we had two immediate priorities in getting to grips with the challenges that Eskom is facing.

The first was to provide whatever fiscal support could be given, and that’s the R23bn per year, plus the current appropriations indicated in the budget.

The second was to ensure immediate operational improvements, including cost savings within the Eskom framework itself. The next phase was to formulate the various options for managing Eskom’s debt portfolio. That work was done in the latter part of last year.

The third phase will be to focus further on operational improvements, while seeking an integrated way of dealing with Eskom’s debt, including the options of climate finance and other creative mechanisms, as well as the restructuring of Eskom in line with the Eskom roadmap.

When will all of this come to some kind of convergence? I think towards the middle of the year we will have a better appreciation of the options and the kind of direction that we want to take.

Electricity price - too high or too low? You yourself, the minister of minerals and energy, and customers have indicated that the price of electricity is too high. Eskom on the other hand says it's too low, and must rise by 30% to be cost-reflective. The utility is fighting in court for higher annual electricity tariffs, and to claw back over R100bn from customers to cover a debt hole that is growing by about R50bn a year. Are electricity prices in South Africa too high or too low - and if so, what is to be done about this?

Electricity prices are part of what we would call administered prices in the economy. The goal of government is set out in the National Development Plan (NDP), which states that we need to reduce the cost of doing business in South Africa. That would include port charges, freight charges, electricity, water and other tariffs that are generally within government control, as well as other more market-related costs.

ANC must take some responsibility for technical recession

For more episodes, click here.

Chat to us on Twitter at #STPoliticsWeekly

Subscribe: iono.fm | Spotify | Apple Podcast | Pocket Casts | Player.fm

International comparisons seem to indicate that objectively speaking, electricity prices in South Africa are not too high. At the same time, South Africa has its own structural challenges in terms of certain industries like mining and manufacturing - and the difficulties in these sectors need to be taken into account by Eskom itself.

Equally, Eskom has its own internal dynamic that it needs to modify. This internal dynamic keeps pushing tariffs up, and we’ve seen the numbers over the past 10 years or so. While there has been no increase in energy delivered, there has been a fourfold increase in revenue, largely resulting from tariff increases.

The flipside of this coin is managing costs within Eskom itself, so that its pricing can be kept as low as possible to ensure a competitive economy at the end of the day.

Pricing and energy supply are one side of the equation. The other side is energy efficiency. There has to be a greater focus and push from industry to become more energy-efficient in the way our limited electricity resources are used, and also to contribute to our climate-change goals.

Nersa – is the regulatory framework fit for purpose? Eskom blames Nersa for the utility’s dire financial and operational state. Are the current regulatory processes, and Nersa’s pace and cost-plus recovery methodology, really fit for purpose today?

I think the general principle of having a regulator that objectively determines pricing is a well-held and well-accepted principle. But there is currently the Nersa Amendment Bill that the minister of minerals & energy is taking through parliament, which would introduce an internal appeal mechanism into the regulatory framework, where a tribunal would adjudicate or arbitrate disputes without a court process.

There is still a dynamic within Eskom that endeavours to recover as much possible via the tariffs - and that’s a culture shift that we need to make under the new Eskom CEO and board that will come into place.

We need a shift towards greater cost efficiency, and a review of all contracts that contribute to cost inefficiency. We need to track down the different forms of corruption and recover money that was stolen from Eskom during the state-capture period.

All this will ultimately contribute to a different dynamic between the regulator and Eskom as a regulated entity.

Cost cutting – where are the opportunities?

There are numerous opportunities ... The salary scales and benefits of top management are the subject of public debate and calls for review.

If you look at the aviation industry right now in the context of the coronavirus crisis, Singapore Airlines has just said it is cutting the salaries of top executives by 15% and middle layers by 7%, while certain staff are placed on paid and unpaid leave. Various other airlines are following that model as well in the context of a crisis. So we’ve all got to work out what kind of sacrifices we can make during the Eskom crisis period.

There is also the broad area of procurement. Some of the excessive things that happened in the state-capture period have been curtailed, but there are still huge opportunities here. There is a general demand that we review all contracts, whether for coal, diesel or spares for maintenance and refurbishment processes. Eskom needs to review the arrangements it has with contractors, such as those who do maintenance, including the quality of the maintenance that is actually conducted.

There are many other forms of wastage that you are going to find in any organisation, whether in the public or private sector, but in particular in a monopoly like Eskom.

So the opportunities are certainly there, and I am confident that as the new CEO settles in and builds the right team around him, we will see the results of that introspection and careful examination of costs within Eskom.

On declining energy availability factor (EAF) and load-shedding as a result of ageing  plants, poorly performing new plants and increased maintenance that takes more units out of service:

I believe there are still possibilities for improving the EAF, even in old plants, provided that there is a more careful diagnostic of the problem. This is what the ministerial technical task team has been doing in recent times.

If Eskom doesn’t have the right kind of people or management skills, the new CEO will have to start recruiting certain types of engineers and artisans to get that right.

Eskom must revolutionise the maintenance approach and strategy in terms of the quality of maintenance done and the type of contractors utilised.

There must be penalties for contractors if they do a shabby job - which seems to be the case, as some of the more recent data is showing. These micro-diagnostics that the ministerial technical task team has been performing is now of increasing benefit to the Eskom leadership and management.

As I understand it, not everything can be attributed to old and ageing plants. It is also about people and the consequences of poor management. Already some of the managers at power station level are feeling the heat because there has been too relaxed an atmosphere.

At the same time, those who perform well at certain power stations, like Matimba and Koeberg, where the plant actually runs properly – those people must be rewarded and recognised.

Medupi and Kusile are experiencing massive cost and time overruns that have brought Eskom to its knees and resulted in the current load-shedding that is damaging the economy. What has to be done to fix these projects, and are they likely to become white elephants and stranded assets in future years?

Eskom management has now produced a maintenance plan, which involves taking each of the six generation units at Medupi out of service, one at a time, for up to 75 days between now and the end of the year, so that they can undergo a proper design optimisation and maintenance programme.

This would cover the various areas that have proved problematic, from conveyor belts to mills, boilers, fabric filters and whatever.

There is no doubt that these two mega-projects have had a massive impact on Eskom’s debt issue, but our immediate goal is to achieve some level of operational stability. This might not be as optimal as originally designed, but at least stability at a new level of optimality.

In this way, Medupi and, in due course, Kusile will still contribute whatever they can to meet the electricity needs of South Africa - and not become white elephants or stranded assets. This means the investments have opportunity to recoup their costs, and we can also learn important lessons about these sorts of projects going forward.

- Chris Yelland is managing director of EE Business Intelligence