BUSINESS and FINANCE

South Africa. What Will Save Eskom

Eskom, the 6th largest company in Africa faces challenges. Will the company return to profitability?

The problems at the biggest power company in Africa continues. For the last 1 year, the company has made local and international headlines for the long reasons. Late last year, the company announced a power emergency, which reduced the power output by 10%. Early this year, the company announced massive layoffs. More than 2000 people lost their jobs. In March, the management of the company was sent parking. The company also reported more than R2 billion losses to power theft in 2014. In January, the company went very close to declaring bankruptcy. It took the intervention of the government which sold its stake at Vodacom to bail out the company. As a result of these issues, the company subjected its clients to unwanted blackouts and increased power costs. It has also subjected the shareholders, who include the government to significant losses.

Eskom’s capacity

In 2013, the African Report placed Eskom as the 6th largest companies in Africa. It was the best performing Power company in the continent with annual turnover of over $14 billion. Above it were: Sonatrach, Sonangol, Sasol, MTN, and Bidvest.  Eskom’s power sources come from: coal, nuclear powered stations, hydro power, gas powered stations, and wind. The company operates as a monopoly and its losses has led to more than R80 billion in annual losses.

ESKOM POWER

In 2014, the company reported revenues of R81 billion and a net profit of R9 billion. This was caused by increased operational costs brought about by a huge wage bill and depreciation of equipment. The declining sales were attributed to a number of issues such as: declining participation in the platinum, aluminium and gold sectors.

The electricity operating cost per kWh was sold for 62.14c/kWh2 with a cost of 67.14c/kWh. The company also caters to more than 40,000 employees. Other costs that the company grapples with are those associated with huge tax, debt, and electricity theft. The company’s debt to equity ratio has shot up from 1.2 in 2012 to 2.06 in 2014.

In 2014, the company announced a comprehensive funding program that will run to 2018. As shown in the figure below, the company expects to borrow from the domestic and international markets. The costs are expected to fund its current power projects as it moves to decommission the existing expensive coal plants.

ESKOM

Challenges

From the onset, Eskom faced major challenges that are currently being witnessed. One, the company suffered from political influences. As a government owned entity, the company operates not as a company, but as a government department. Globally, when government gets involved in business, the end result is usually tragic. For instance, to increase efficiency, the company cannot fire people because this would have a negative implication to the political class.  In the same way, in procurement, the company cannot perform as a good company should with rampant corruption in the procurement sector. Another main issue that the company faces is in the increasing costs of operations. At present, the company relies heavily on coal powered plants. While these are currently being decommissioned, the fact is that their cost is enormous. To reduce the cost implications, the company has diversified its power plants to nuclear and hydro.

The company also faces huge power costs in transmission. A large percentage of Eskom’s power distribution uses old technologies which break down quite often. This coupled with the increased power theft leads to further complications in the country.

Another major issue is the debt the company has from the major municipalities. Today, the major municipalities such as Soweto owe the company billions of Rands. Soweto owes more than R80 billion. Last but not least, the company faces a major challenge in the declining South African economy. South Africa, which belongs to the BRICS (Brazil, Russia, India, China, and South Africa) has been a let-down.

Way Forward

For Eskom to remain afloat, I believe that a number of things need to be done. One, the government needs to sell its stake to a strategic investor. This will however not be possible because of the political implications that will result from the transaction.

Secondly, the company’s management need to be overhauled. The current board composition remains ineffective in providing service to the customers. While the previous CEO did a good job resigning, I believe that his former team should also be showed the door.

Third, the company needs to put measures in place to force the debtors to pay back the money. Such measures will help the company receive the much needed finances to grow its capital base.

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