Light at the end of the tunnel for Eskom’s Molefe

[miningmx.com] – IF Brian Molefe, the acting CEO of Eskom, wants a permanent post at the stricken power utility, he isn’t saying.

Asked at a recent presentation whether he would be seeing through to execution some of the “back-to-basics’ strategies he’s putting in place at Eskom, Molefe said: “I’m the acting CEO. That’s all we’ve said.’

Although, he added later that he saw himself playing the role of perceptive outsider whose non-expert ear role would be able to listen with fresh insight, bring cohesion, and install a plan.

That plan right now is all about stopping the onset of regular load-shedding that started at the tail-end of 2014 and which Molefe estimates is costing the South African economy about R90bn. “That’s what I heard it is costing us; I don’t know how that’s calculated.’

According to a report by Deutsche Bank earlier this year, load-shedding would cost the economy about R22bn per quarter – equal to 0.7% of gross domestic product (GDP) – assuming the degree of load-shedding was contained to “stage one’, which Eskom says is equal to about 1 000MW of power. Stage two load-shedding would cost R44bn or 1.5% of GDP.

As CEO of Transnet, however, Molefe has direct experience of the way in which load-shedding hurts business, especially given the tight schedules trains have to follow in order to lift coal delivery volumes from Mpumalanga province to Richards Bay Coal Terminal (RBCT).

Transnet has promised to keep breaking the record for coal deliveries to the port with 75 million tonnes pencilled in for the current financial year – a tough ask which asks of the transport utility that it doesn’t miss a beat.

“I do know the cost of load-shedding. There are 37 trains delivered to Richards Bay [Coal Terminal]; that’s a train every 45 minutes. If load-shedding affects a section of the line, then there’s no electricity on that part of the line,’ he says. So the trains just stop.

At the time of writing, there has been some improvement in the frequency of load-shedding in South Africa (less of it), which already feels like a massive improvement on the almost daily interruptions to power delivery of the previous couple of months.

However, Peter Attard Montalto, a senior economist at Nomura International, warns consumers not to overplay the seasonality of load-shedding. “There will be much less of it through winter from June to October,’ he said in a note.

“We think this will only in small part be driven by the changes Mr Molefe is making and much more by those seasonal factors, and may give a false impression of lower risk to the economy, which then gives way to more severe load-shedding from November to May next year,’ said Montalto.

Molefe’s timing at Eskom has also been somewhat fortuitous. Unit 1 of the Koeberg Nuclear Power Station had just returned to service at the time of writing, following its longest ever maintenance programme.

This has provided some 900MW of power to the grid. Only weeks before, Unit 6 of Medupi, was in commercial operation, delivering another 800MW.

There’s still a requirement for diesel in open cycle gas turbines (OCGT) to buff up the power reserve, which costs Eskom an estimated R1bn a month, but the pressure is nonetheless slightly reduced as Molefe thinks there’s juice in the system to provide 34GW of power – enough to keep the lights on through the coldest of winters.

Provided unplanned outages remain under control, about 2,000MW of which at any given time is “probably down to human error’, Molefe thinks that Eskom can set about its planned maintenance programme which would last two to three years to sort out.

Once that is completed, Eskom will seek 3,000MW in new power sources in addition to working on commissioning the next units of Medupi, followed by Kusile which will eventually provide a combined 9 000MW to the national grid.

“The short-term objective is to have 34GW available, as long as we stay within the maintenance budget – [about 9,000GW divided between planned and unplanned maintenance] we will not have any load-shedding. But we can’t do maintenance like we are children in the candy shop,’ he said.

Yet while Molefe’s role can be described as a kind of “Mr Fix It’, he’s only too aware of the broader perspective: that if he fails, it will tip the South African economy further into crisis – one that moved Mike Teke, president of the Chamber of Mines, to say that A would be “brought to its knees’.

“South Africa… and in particular the mining industry, face a big energy crisis that if not addressed properly and with a strong collaboration from all stakeholders, will bring the entire economy to its knees,’ said Teke at the chamber’s annual general meeting in May.

The short-term objective is to have 34GW available, as long as we stay within the maintenance budget. But we can’t do maintenance like we are children in the candy shop.

Molefe has consequently been working hard on attempting to change the perspective South Africans and international business have about Eskom.

One is that there’s a fatal flaw in the organisation that requires privatisation to fix it. “We don’t have systemic problem because the total [generative] capacity is 43.5GW and the peak usage is 33GW. There is no long-term structural electricity problem,’ he said.

Molefe has also suggested that while coal procurement is important to the group, the much quoted fear of a “coal supply cliff’ has been overstated.

So too has the prevalence of load-shedding. During such periods, he said, about 95% of South Africa has power – although the country’s mining industry is already using only 80% of its normal demand as its contribution to the alleviation of power shortages.

In short, Molefe seems to believe that Eskom’s problems have a touch of hysteria about them, partly fuelled by the media which has overplayed the problems – a combination of factors that makes running the organisation problematic.

“There are too many moving parts at the same time at Eskom: there is a fight about costs, tariffs, load-shedding, leadership, suspensions… and morale is very low,’ he said. “People get so engrossed with day-to-day problems that fail to see the big picture,’ he said of the difficulties of leading the organisation.

“But I am actually very excited because I can see light at the end of the tunnel. As long as we can stop load-shedding, get the media off our back, and then focus on planned maintenance,’ said Molefe.

TURMOIL

Events at Eskom since the resignation of former CEO Brian Dames in December 2013 (effective the following April) have been little short of breath-taking.

It wasn’t until August 2014 that the Department of Public Enterprises surprised the market by appointing former departmental Director-General Tshediso Matona as the utility’s CEO.

The suggestion that there weren’t enough operational skills at the top was only exacerbated in September 2014 by the resignations of long-standing Eskom troopers, Steve Lennon, group executive for sustainability, and Erica Johnson, group executive for enterprise development.

Several months later and South Africa was plunged back into prolonged bouts of load-shedding for the first time since the 2008 crisis, when the country’s mines stopped operating for a week.

In December, Eskom’s board was reshuffled and handed a five-point turnaround plan that Deputy President Cyril Ramaphosa to oversee the turnaround.

Throughout December and January, however, it was clear that Eskom’s newly constituted board was having to cope with some fundamental problems. There was unconfirmed speculation, for instance, that the board had secretly met without the presence of its chairman Zola Tsotsi.

In March, Zola called for an internal inquiry into the company’s affairs, the scope of which seemed undefined but which importantly resulted in the suspension of four senior executives, including Matona, barely a year into the job.

It emerged that the inquiry, initially dubbed as independent, would be closely monitored by the chairman who was then engulfed by rumours he had taken a direct interest in the procurement of coal contracts which can top R50bn.

The pressure heaped on Zola to raise the curtain on what seemed to be an internecine battle eventually resulted in his resignation leaving Eskom looking curiously bereft of full-time skills at its highest level, as it had in 2009 during the factious tenure of Jacob Maroga, a former CEO of Eskom. Enter Molefe.

THAT TARIFF APPLICATION

In some respects, Molefe was made to run Eskom: a challenge that – should he succeed in turning around its fortunes – would surely represent the zenith of his career.

Commenting in November 2011, Molefe said that running the Public Investment Corporation, the state-owned asset management company, which he ran from 2003 to 2011, had prepared him for dealing with the demands of scale.

Transnet employed 55,000 people, but it wasn’t intimidating to Molefe. “I took the PIC from managing R300bn in assets to R900bn,’ said Molefe. “You just learn to remember principles are the same whether it’s 10 people or 55,000; R10bn or R100bn, the principles are the same.’

Montalto has reservations, however. Although he believes tht Molefe’s appointment is “welcome’, and acknowledges his leadership skills, he also believes Transnet and Eskom are, in fact, different animals entirely.

The ANC has a stronger ideological view over Eskom than at Transnet which allows Molefe less freedom to stick to those principles. Eskom’s challenges are also broader.

Whereas Transnet is a business-to-business organisation, dealing with specific projects, Eskom has “… a much larger supplier network [of fuels], a much bigger scale and a different relationship with purchasers – shielded to a large degree from end consumers through municipality supply’.

Eskom’s financial problems are also more profound than at Transnet.

Increasing tariffs and managing demand – while not killing it – and sensitive matters that involve the popular vote. Consumers don’t take easily to hikes in their power costs; nor do they easily absorb the rationale behind them.

The 25% tariff increase application, subsequently rejected by he National Energy Regulator of SA (Nersa), gave Molefe nightmares in explaining.

The way Molefe rationalised it, consumers had to understand that the original tariff increase as granted by Nersa was 8%. Added to this is an additional 4.7% increase which represents Eskom’s right to claw the cost of under-funding from the previous financial year, making the tariff increase 12.7%.

Added to this, there’s also a so-called “selective re-opener’ consisting of a 6.4% increase representing the cost of buying diesel for the OCGT and then a further 3.1% to finance Eskom’s procurement of power from independent providers.

The total tariff therefore stood at a high and handsome 22.1% – although Molefe insists the “selective re-opener’ should actually be thought of as a tax, not an increase in the tariff – a miscommunication that ought to be put right in the minds of consumers.

The rest of the levy consisted of a 2.5% increase for the Eskom’s potential carbon tax commitments provided the tax is actually implemented as the National Treasury says it will be, during 2016.

Then the selective reopener of 9.5% consisting of 6.4% for OCGT and 3.1% for STPPP. The selective reopener is there to avoid load-shedding in the future which must be avoided, it was argued.

In any event, the tariff application was rejected by Nersa so how it is comprised is now just an academic exercise. In its absence, Molefe is confident that there’s enough funding flexibility for the utility to work its way out of its balance sheet issues.
This would be through a combination of bond rollovers, where investors are paid higher interest if they agree to non-redemptions, development funding, such as the R30bn World Bank loan agreement, or some $5bn (R61bn) that could be raised from the Chinese Development Bank, or international bond issuances.

In the event of these funding mechanisms, Eskom’s gearing against equity – a financial ratio investors keep a watch over – would top 75%. This is much higher than the 50% cap that Molefe was insistent should be maintained at Transnet, but necessary.

Deutsche Bank, Molefe argues, is state-owned and has gearing of 95% – although it should be argued that a German bank and a state-owned power utility with an ageing fleet and management crisis are quite different creatures.

So will he stay? He may if it’s the pleasure of President Jacob Zuma. Molefe certainly has the vote of Minister of Public Enterprises, Lynne Brown, who drafted him in following the suspension and eventual resignation of Matona.

“What I need is a full-time CEO who can do the job from the get-go,’ said Brown. “I need someone with a turnaround plan and skill.’

When asked if he would stick at Eskom for longer than the 12 months Brown appears to have given him, Molefe said: “We’ll cross that bridge when we come to it.’