ESKOM CEO Brian Dames is facing an uncertain future as rising costs, unpopular tariff hikes and delays in building new power stations erode his political support. Market watchers said this week that Mr Dames may leave in July, when Paul O’Flaherty steps down as chief financial officer.
The two were instrumental in getting government guarantees and raising financing for Eskom’s R350bn capital development plan and in stabilising power supply after rolling blackouts in 2008.
However, delays at Medupi (a crucial project to increase electricity supply), maintenance backlogs, rising coal and staff costs, an application for five years of above-inflation tariff rises and Eskom’s business model are making Mr Dames unpopular.
The African National Congress’s national executive committee last month opposed the proposed tariff hikes, reportedly asking Public Enterprises minister Malusi Gigaba “to attend to the matter”.
Minister in the Presidency Trevor Manuel said this week that the government was doing all in its power to moderate tariff increases.
Also this week, Mr Gigaba took the unusual step of trying to resolve a labour dispute at Medupi, where workers have been barred from the construction site for more than five weeks. The minister ordered representatives of Eskom, contractors and unions to return to the negotiating table and urgently resolve the issues.
One industry expert said: “Eskom needs a CEO who really has the support of government. From what we’ve seen in recent weeks, Dames is not enjoying that support.”
But Public Enterprises spokesman Mayihlome Tshwete said the department was “supportive of the CEO in his position”.
“The CEO hasn’t been given an easy to task to handle, and he’s doing the best he can in these circumstances.”
Zola Tsotsi, Eskom chairman, denied that Mr Dames had resigned and said he still had “the full support of the Eskom board”.
In the end, however, it is thought that Medupi will end Mr Dames’s decades-long career at Eskom.
The 4,800MW coal-fired power station under construction in Lephalale has been hit by significant budget and time overruns.
Back in 2007, Mr Dames, then the head of Eskom’s generation business, announced a budget of about R70bn and a starting date of September 2011.
Since then, the price tag has jumped to an estimated R130bn, including interest, with a starting date of December 2013. The Energy Intensive Users Group (EIUG) expects a further delay for the commissioning of the first unit.
Pan African Capital chief economist Iraj Abedian said it would be no surprise if Mr Dames left in July as he had overshot capital expenditure by nearly 400% and, five years after the rolling blackouts of 2008, Eskom still had no credible solution for the energy supply.
“Dames is in a tough situation, and has been for a long time. His capex projects are running way too late, he seems to be receiving it from all sides, from the political side, from the labour union side and from the business side. All these are sufficient reasons for either shareholder dissatisfaction with him, or his own resolution that he cannot deliver, so he has to move on,” Mr Abedian said.
“Even if they got God to replace Dames, He will still get in trouble taking on this job,” said Mike Schussler, economist at Economists.co.za.
A review of Eskom’s funding model was needed, he said.
To stabilise supply, Eskom is buying back electricity from energy-intensive users like ferrochrome smelters, taking productive capacity out of the economy.
The EIUG estimates that about 2,000MW of demand is offline, either through buybacks or companies willingly cutting electricity usage.
“If this demand comes back online, we have significant problems,” said Shaun Nel, executive at the EIUG.
Mr Abedian said Eskom had caused much instability in the investment and business sectors. “Clearly yet another round of heavy annual increases is simply a vindication (of claims) that Eskom does not know how to do what it is supposed to do.
“The results are both financial and perceptional damage to the country. By raising the cost base of doing business in South Africa, Eskom has forced the closure of many businesses, has reversed the hard-won beneficiation of some mineral products, and — just as important and damaging — it has caused much uncertainty within business,” Mr Abedian said.
“Eskom has put a major question mark over South Africa as an investment destination and a place for doing business. It has also made a contribution to the country’s credit rate downgrade,” he said.
However, he pointed out that Eskom could not have done so much damage if the government energy policy was framed differently, if independent power producers were allowed to enter timeously, and if the generation and distribution of energy had been separated a few years ago.
“So, in a way, all the problems at Eskom are the predictable outcome of a confused and inappropriate energy policy,” Mr Abedian said.
The National Energy Regulator of South Africa will rule on Thursday on Eskom’s application for increases of 16% a year for the next five years, which would raise prices from 61c/kWh to R1.28/kWh.
Tariffs have risen 250% over the past five years.
* This article was first published in Sunday Times: Business Times