Eskom a textbook case of electricity generation failure

ESKOM has become the most hated institution in South Africa. It is now the swear word “Eishkom”, denoting annoyance, as people curse the rising severity of planned and unplanned outages. Power for the election was specially provided for and collapsed thereafter. Every week, there is uncertain electricity supply that jeopardises jobs amid rising unemployment.

Electricity generation illustrates the crisis of the ANC and the entire state bureaucracy. The plight of Eskom illustrates the way in which patronage and crony capitalism works in the country. Huge resources were thrown into coal power generation, but a disaster has followed the greatest investment ever in South Africa.

What became the electricity disaster was planned as Black Economic Empowerment by the ANC, empowerment for itself. It is a case study of arrogance, fronting foreign firms, conflicts of interest and incompetence – and continuing failure. In the language of accountants, this has been fruitless and wasteful expenditure.

Former president Thabo Mbeki was warned in the late 1990s that massive investment in power generation was needed. He delayed as he wanted to see Black companies and the elite benefit. In anticipation of the mega-deal, the ANC set up an investment company, Chancellor House, which then formed a consortium with Hitachi.

The contract for the first new major power stations in two decades was awarded to this consortium. About 60% of the contract was to be performed by local subsidiary Hitachi Power Africa, which is 25% owned by Chancellor House. The ANC company then had a R3 billion stake in the contract, and would secure sufficient money for the party to fund its own bureaucracy as well as feed off the state. Amid rising unemployment, cadres could enjoy the “double dip” of two salaries: one from the party, the other from the state.

The ANC took command. An avalanche of appointments or “deployments” was made by the ANC to constitute the new Team Eskom. This resulted in eight out of 10 Eskom board members being sacked by Jacob Zuma in 2011 and 10 chief executives skipping in and out of power in 10 years. Hopefuls were “given a go” on the board and in the administration.

The vision was dramatic. Two gigantic power plants drawing on the country’s considerable coal reserves were planned. Although the World Bank had a policy against investment in coal generation, Mbeki managed to secure the required approval for start-up funding. Instead of engaging a specialist management company, the ANC decided the consortium could manage the massive project, which meant more money for itself.

The investment programme included two 4 800MW coal-fired power plants, Medupi and Kusile, which, upon completion, would be among the biggest the world has seen. It was the most complex project in South African history and required brilliant specialist project managers. Instead there was mismanagement from the start, with labour disputes, cost overruns, penalties for companies that had to be paid to wait to enter construction, extortionate consultation fees – and no improved generation of electricity.

Gross mismanagement by Team Eskom (ANC Pty Ltd) resulted in breakdowns of the old and poorly maintained power stations and massive cost overruns at the two new plants. No one knows the exact final cost, but it is at least three times the original $3.7bn (about R60.5bn) borrowed from the World Bank. A conservative estimate of the cost to completion for Medupi and Kusile in 2016 was R208.7bn and R239.4bn, respectively. Capital expenditure at these two plants has been modestly estimated at R450bn, or $30bn.

That’s beginning to look like money; a grant pledged at the COP26 climate conference to cover the green transition in SA is only $8.5bn.

Meanwhile, the average price of electricity increased fivefold (500%) since 2007, while Eskom’s debt grew nearly tenfold. Mismanagement has led to a monstrous disaster with incompetence of the highest order. Despite an infusion of immense capital spending, tariffs soared as coal power generation staggered from outage to outage. Every outage arises from the so-called baseload coal generation.

From the boast of the cheapest electricity in the world, South Africa now has some of the most expensive, if fully costed – and its supply is irregular.

There are design faults that should have been anticipated. For example, mega power plants are not built next to a mine. All coal is transported long distances on a conveyor belt, which has frequent breakdowns. The alternative? Hiring truck companies that cost a fortune and reduce the roads to rubble. Another is heavy rainfall that leads to “wet coal”, which delays handling and results in outages.

Then there is corruption and mismanagement. Inferior coal coming from corrupt deals is used and flareups of heat break up the refractory furnace bricks.

The oversight and management of Eskom have to be utterly transformed to achieve efficiency and workers’ initiative to provide power for jobs, cities, manufacturing and mines. Corporatisation and unbundling will only lead to painful adaptation chaos and profiteering, rather than effective reconstruction.