BHP Billiton will go to court if necessary to protect the special payment contract with Eskom that guarantees the global resource giant cut-rate electricity for its aluminium smelters until 2028.
The revelation of its secret agreement with the national power utility has provoked a public outcry and put Eskom, whose tariffs to other consumers rise cripplingly by the year, under intense pressure to have it reviewed.
In an interview after the release of the mining company’s results this week, Xolani Mkhwanazi, who chairs the company in South Africa, warned that the biggest loser if its sweetheart deal with Eskom was terminated would be the country — not BHP Billiton.
According to the latest results, South Africa is not terribly important to BHP, although Mr Mkhwanazi disputes this. Its assets in South Africa form only 4% of its global assets. But Mr Mkhwanazi says this percentage could come down further, which would have dire consequences for jobs and downstream businesses.
BHP’s investment in Richards Bay, where two of its smelters are located, was “the biggest investment South Africa has ever seen”, he says.
“If the government is seen to be reneging on big investments, who would ever bring any money into this country?”BHP Billiton’s image in the country has been badly damaged, but Mr Mkhwanazi says the controversial contract was all Eskom’s doing.
The original contract was signed in the early 1990s when there was a surplus of cheap electricity, which the government used as bait to attract foreign investment. It was extended 10 years later, by which time there were clear warnings that South Africa would soon face severe power shortages.
The approval was given by the national energy regulator, headed by Mr Mkhwanazi. Then, in 2005, one year after leaving the regulator, he got a top executive job at BHP Billiton. In 2008 he became its chairman.
Earlier this month, Eskom said the contract that the regulator approved would cost it R11.5-billion in liabilities during the term of the contract.
Mr Mkhwanazi says Eskom “miscalculated” and has only itself to blame, which seems like a disingenuous answer, given that he approved it when he was at the regulator. Is that not so?
“The board [of the national energy regulator] approved it,” he says — admittedly on his recommendation, but on the basis of information supplied by Eskom. Now it cannot renege.
“You don’t sign a contract today based on your own assessment, and something was miscalculated or unforeseen and then five years later you say look, I’m getting out of here.”
BHP expects Eskom to honour its commitment and will consider legal action if it does not.
Mr Mkhwanazi says BHP has honoured loss-making commitments to Eskom and expects Eskom to do the same for it.
“We supply more than 20% of Eskom’s coal. Quite a few of those contracts have been money-losing since long before the aluminium contracts became an issue. But we never made these coal contracts an issue because we believe in contracts.”
The public has targeted the wrong villain, he says.
“People keep presenting this as BHP trying to rob Eskom, but it was Eskom that came to the regulator. It was an application by Eskom, for goodness’ sake, it was not BHP that asked for it.”
Should the regulator have approved?
“With the information given to us at the time, yes. Eskom predicted that there would be no need for new power until about 2013.”
It was not the regulator that got it wrong, he says, but the fact that Eskom did not build new capacity.
Eskom told the regulator there was sufficient capacity, that it had evaluated future demand and that there would be more than enough for its own needs for the duration of the contract because there would be more power coming in, he says.
Whether that information was tested or not, it convinced the regulator that the price agreement with BHP would be a good thing.
“Eskom miscalculated in terms of the fundamentals supporting its application.”
How crazy was it to approve a contract committing Eskom to supply electricity until 2028 at less than half the cost of producing it?
“If a power station had been built in 2001-02, we wouldn’t be seeing these production prices,” he says. “Between 2001 and 2008 capital costs more than tripled. All that was unforeseen.”
He agrees that it is tough on consumers who are in effect subsidising BHP.
“Present customers should not have to fund infrastructure for future customers.”
That is of course what is happening. Mr Mkhwanazi makes it sound like BHP is shouldering its share of the burden. But it is not at all the case, is it?
BHP supplies more than 20% of Eskom’s power and loses a lot of money in the process, he repeats. And it only consumes 4% of Eskom’s output.
“So we’re not just guzzlers of electricity, we also help to create it.”
He says he can understand why BHP Billiton is taking so much flak.
“It is not unfair that the public thinks the way it thinks, because this is how it looks on paper. But Eskom knows the truth.”
We all do now because of a court order forcing Eskom to release the details. And it does not look good for BHP.
“It won’t look good for the country if you try to change this contract, believe me,” he says.
According to its results, the smelters are not profitable even with the hand-out from Eskom. Some are even running at a loss. Mr Mkhwanazi says too much has been invested in them to shut them down and so they will keep going until the aluminium price turns — or the contracts are reviewed.
Was it ethical to accept a top job at BHP after doing them such a big favour?
“I didn’t do any favour to anybody. The decision-making body at the regulator is the board. So it was not me, it was the board.”
Does it set a dangerous precedent if a regulator accepts a job from a company that benefited from his decisions?
“The regulator approved nothing from or on behalf of BHP. It approved an Eskom application. If I had gone to work for Eskom then you’d be right. There was never any interaction between BHP and the regulator.”
Mr Mkhwanazi, 58, has an MSc and PhD in applied physics from the University of Lancaster in the UK.
While lecturing in physics at the University of Swaziland, he worked for the ANC underground. A comrade was arrested by South African security forces, became an askari — in other words was turned — and betrayed him.
Notorious police hit squad commander Eugene de Kock was sent to get Mr Mkhwanazi. He got the wrong guy who ended up, as did so many of those he came for, dead.
“I don’t want to think about that,” says Mr Mkhwanazi. “I tell you, I’m lucky.”
In 1988 he applied for asylum in Australia and lived in Perth until his return to South Africa in 1993.
• This article was first published in Sunday Times: Business Times