Lessons from SA power firm’s record loss

Last week, South Africa’s state-run electricity power utility, Eskom, announced a record loss of 20.7 billion rand (Sh145 billion), an increased loss of almost 800 percent from the 2017/2018 financial year.

Looking at the rise and fall of Eskom, there are a lot of lessons for Kenya to learn from.

First, Kenya is currently forecasting over-ambitious power demand numbers informing it to unsustainable bring on board new independent power producers an anomaly that will catch up with her in the near future just like Eskom.

Around 2007, the South African government convinced Eskom that there was a need to secure baseload by going for nuclear and coal options rather than renewable power generation.

Eskom went ahead to start building two of the biggest coal-fired generating plants in the world at highly inflated cost. These power construction projects that South Africa did not need and at the same time renewable energy was becoming cost-effective power generation option is what had made Eskom the biggest liability to South Africa’s economy.

In Kenya, the same narrative that we need to secure more baseload is being peddled around. The government is hellbent on pushing for the construction of a coal plant in Lamu that would see the power consumer pay heavy idle capacity charges. Also, the most recent development is Kenya reviving its plan to construct a Sh1 trillion nuclear power generation plant.

Second, Eskom provides a good case in point of how zombie companies like Kenya Airways rise especially with the renationalisation plan of the airline. Zombie companies are those that are unable to stand on their feet and need a series of bailouts to remain afloat.

We can start by looking at Eskom’s tigritude, and this is not an ordinary State -run firm, it is one of the world’s largest power utility in terms of generating capacity (51300 MW – 10 times Kenya’s capacity) and sales of electricity (generated revenue of 179 billion rand - Sh 1.2 trillion in 2018/2019).

But the state-run firm today despite its increased revenue can only cover its basic operating costs, its source of liquidity is debt and the state-run firm has accumulated massive debt cost and debt repayments forcing government to step in with bail outs. In fact, its increased revenue is not from increased sales but hiking electricity prices

So how did Eskom move from a success story to a basket case? The answer is affirmatively government involvement and interference.

First, South Africa’s two world’s most expensive coal power plant said to be the genesis of its economic woes were awarded through the influence of the African National Congress (ANC) party, its arm of investment is directly involved in the project.

Second, the qualification for top managers of Eskom has mainly been about loyalty to the ANC regime over meritocracy. Managers tend to work in the interest of lobbyists who influenced their appointments and not for the average South African power consumer.

Another reason is the risk of political over rational-business decisions associated by State-run company. Municipalities own Eskom’s unpaid debt of more than 30 billion rand (Sh210 billion) with Soweto municipality alone owing Eskom more than half of that.

Due to Soweto municipality being a vote rich bloc of ANC, Eskom cannot cut power supplies in order to collect its debt, and so, unpaid debt by the municipality keeps piling.

Last is the bloated workforce and wage bill problem. Eskom has an estimated workforce of 47,600 full time employers but according to a 2016 World Bank research report, the state-run firm only needs a third of the workforce. Despite its perennial financial losses, its top executives walk away with multi-million salaries and golden handshakes every year.

Now, if we are to contextualise Eskom’s woes from government involvement and interference in state-run firm in Kenya, we can already see Kenya Airways trajectory of a zombie company especially with its renationalisation.