Another R20 Billion to Eskom? The answer should be hell no!

The new Eskom team is reported to be begging local banks to lend it another R20 billion to help it keep going. If I was a bank I would say “hell no, not until you publish your interim financial results, show me a believable survival plan, and get the new board members to personally underwrite the new loan”.

Lending money to Eskom in its present form is like lending money to a gambling addict. Would anybody reading this article like their savings or pension to be put into another loan to Eskom?

Joking, but

I am, of course, joking about requiring the board members to underwrite the proposed loan. I am sure they all plan to do their best, but I am equally sure that every single one would run for the hills if presented with such a demand. Why, because Eskom’s business model is broken and getting worse every passing year. Besides, the new board has not even met yet, let alone started to come up with a viable survival plan.

Of course, the Zuma years of looting have done Eskom terrible harm, not just financial harm, but ‘planning for the future’ harm as well. Especially during the last decade, the world of power generation has been changing, but the politically-connected looters took their eyes off the road ahead, and allowed Eskom to head for a financial cliff, which is where it is now.

These are facts

*Eskom currently owes lenders almost half a trillion (R500 billion) rand.

*Much of this is underwritten by the government. So if Eskom goes bust the government goes bust and the whole economy breaks.

*Another R20 billion will keep Eskom going for another few months, at best.

*Eskom costs have risen massively. For example, the number of employees has doubled and salaries much more than doubled.

*Eskom is currently building massive new power stations – Kusile and Medupi – at more than twice the cost that was originally estimated.

*Electricity sales have not risen for years, and are more likely to fall than rise in the years ahead.

*Despite the massive increases in electricity prices over the last number of years, the current electricity price is much too low to enable Eskom to survive.

Either the extra R20 billion will be thrown down the drain or Eskom must devise and implement a totally new business model – but it must be acceptable to the government.

Several solutions present themselves:

# Sell off all the power stations (including Medupi and Kusile) one by one, by public auction. Limit bidding to black-empowered companies. Use the proceeds of the sales to drastically reduce Eskom’s R500 billion Rand debt (doing so could reduce interest payments by tens of billions a year). The ANC, even under Ramaphosa can be expected to oppose this with its ‘state must control everything’ mindset.

# Stop further construction on Kusile and Medupi (possibly acceptable)Drastically reduce staff (opposition from ANC and massive opposition from trade unions)

# Massively increase electricity prices (huge public opposition, further drop in sales, marginal businesses that use a lot of electricity closing down)

# Focus all new power generation on renewable energy. The cost of solar energy is down to the cost of coal-generated power and will continue to drop by as much as half in the decade ahead. The issue of solar batteries is a red herring as the storage capacity improves every year (probably acceptable as solar will produce more jobs and set South Africa on the road to cheaper electricity)

# Drop all thoughts and expenditure on nuclear power stations (probably acceptable except to Russia and hardcore Zuma faction)

Give Ramaphosa and the new board a chance

It is unlikely that any one of the above will turn Eskom around. The solution, if one can be found, is likely to lie in a blend of several of these options.

It is also highly unlikely that any new plan will be quickly arrived at by the new board let alone be accepted by government. Meanwhile, Eskom will move further into debt. Hence my scepticism.

In practice, the banks may be persuaded to throw more money at Eskom, strong-armed by a give ‘Ramaphosa and the new board a chance’ argument.

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