Eskom knows that the increase is not going to be popular, so it’s implicitly suggesting we all just go back to the fleecing-the-taxpayer modus operandi.
ailure is such a terrible thing, that it’s hard to think about rationally. I once asked a former editor what it was like running a money-losing newspaper (in the days before that situation was not standard operating procedure) and he said it was like standing on top of a runaway train crashing through everything in its path and there was absolutely nothing you could do to change direction. Everything you attempted made no difference at all. The train kept on going where it wanted to go.
There is a reason for that old joke which asks you to describe failure in two words. Answer: I can’t.
I’ve been thinking about failure because honestly, I can’t help wondering about whether Eskom has entered a situation in business called a “death spiral”. A death spiral happens as a consequence of a combination of financial, operational and strategic problems that compound over time. Lots of businesses go through declines, but many recover simply by paring back a bit, focusing more closely on what works, or changing the business plan. Often it’s just luck or endurance: the business context changes and suddenly the company bounces back.
A death spiral is different: the key is the compounding aspect. This is all easy to imagine because it happens often enough. Your product becomes less popular but your costs remain the same, so you raise your prices to try and balance income and expenses. But this makes your product even less popular, which increases your losses and compounds the problem. And so on.
On the brink
I would say Eskom has not entered a death spiral but is on the brink of doing so. Eskom has shocked and surprised South Africans by managing to keep the lights on for an unimaginable 200 days plus, which is fantastic. It’s truly an extraordinary achievement and the management and staff should be congratulated. Except, of course, this is their job. In most worlds, doing that would simply be the baseline.
Having achieved the first step in its turnaround – actually producing electricity – Eskom has now entered the second stage, which is to try to stabilise its finances. And here is where the problem starts because Eskom has asked its regulator, Nersa, for an absolutely whopping 36% increase in electricity tariffs for the 2025 financial year. And that’s not the end of it: Eskom has asked for an 11.8% increase in fiscal 2027 and a 9.1% hike the following year. When you compound that out, electricity will become two-thirds more expensive over the next three years. I am not making this up.
The first question is whether Eskom is just being greedy, taking the opportunity to increase income at a time when the public is experiencing shock and awe that it’s finally managing to do what it is intended to do. If you look at Eskom’s accounts, sadly the answer is “no”. It’s sad because if that were the problem, Nersa could just refuse the increase, and we could all just carry on.
But the problem is clear and present. As of the last full year financial results, all Eskom’s key financial indicators are heading in the wrong direction: turnover down, usage down, debt up, consumer boycotts up, etc, etc. Now, that might have all changed with the end of load shedding, and every time I hear Eskom chair Mteto Nyati talking on the radio, I feel Eskom is going to be fine. But every time I look at Eskom’s results, I just go into a cold sweat.
As we all know, Eskom’s essential problem lies in the mismanagement of its huge construction efforts: the Medupi and Kusile coal-fired power projects. As we are discovering, poor management oversight made it possible for the organisation to get absolutely ripped by contractors of every description. Just last week, former Group Five CEO Mike Lomas, once a leading figure in SA’s construction boom, was extradited to SA at the age of 78 to face charges in the Tubular Construction Project case. So, in the end, it wasn’t only the Guptas.
The projects ramped up Eskom’s debt, which forced the utility to increase its charges. In normal circumstances, utilities have to go through this difficult process because every now and then you have to renew a plant. But it’s manageable because utilities have an unusually tight grip on their customers, who normally aren’t in a position to go elsewhere.
But, this is South Africa and Eskom customers, it turns out, do have a choice – they just stop paying. Deep in the Eskom financials you will discover some harrowing facts: total arrears debt is now around R70-billion, including interest. Basically, this is brought to you mainly by municipalities that just don’t pay their Eskom bills, even though many continue charging their ratepayers for providing electricity. And this is after mountains of debt have been written off. Around 80% of the debt owed is interest, and it’s increasing while Eskom’s overall electricity provision is declining. You see the problem. But you do have to ask: how is this humanly possible?
Debt and corruption
But you know what is interesting about the debt; it’s broadly confined to only two provinces and one city. The city is Soweto, where only about 20% of the residents pay their bills. The provinces are the Free State and Mpumalanga. And what is significant about that? They are the provinces which had the most corrupt ANC provincial leaders. What are the chances that the municipalities not paying their Eskom bills are doing so with the tacit or explicit blessing of provincial authority? I would guess pretty high.
Anyway, the question is, what will happen when electricity prices go up by 50% over the next three years? Just a rough guess, but I think the answer is that the proportion of municipalities that don’t pay is going to increase. The number is increasing already, and Eskom actually expects to increase further. And there is another problem too: with the price increase, the incentive for honest Eskom users to go off the grid will also increase.
Obviously, people in Eskom know this, so why are they still applying for such a large hike? The answer is that up till now, government (that would be us, the taxpayer) has provided Eskom with great waterfalls of money. Last year alone, government announced it would provide debt servicing cost relief of R254-billion over the next three years, which will make a huge dent in Eskom’s existing debt approximating R450-billion. But, like all debt relief, it comes with conditions and one is that Eskom can’t raise more debt without the written permission of the Minister of Finance. Essentially, it can’t borrow more from the market. In its latest annual report, it actually mentioned that it wanted to raise around R30-billion in 2024 financial year, and it seems permission was refused.
So with the “government will just give us money” avenue closed, Eskom has gone to Nersa with a request for a frighteningly huge increase. This is all a game of who blinks first; Eskom knows that the increase is not going to be popular, so it’s implicitly suggesting we all just go back to the fleecing-the-taxpayer modus operandi. But its currency with the government has been poor of late because load shedding affects the ruling party’s electoral popularity. It’s a stand-off.
Behind this jockeying is an inconvenient truth: this is an organisation on the verge of a death spiral.
