SA's had enough: Eskom must get its act together. Here's how
While its employees hold the country to ransom, we need to fix the economy by reducing the cost of power
Let’s talk for a moment about the destruction of jobs that has been caused by Eskom.
StatsSA’s quarterly labour force survey shows that the number of people employed in manufacturing fell from 2.1 million in the first quarter of 2008 to 1.85 million in the first quarter of 2018. That’s 12%, or 250,000 jobs lost over the course of a decade.
Research by Zavareh Rustomjee at the University of Johannesburg shows how this happens in one corner of the manufacturing sector, the machinery and equipment industries, which employs 10% of the total manufacturing workforce. One part of this industry is foundries, which cast machinery parts out of molten metal. Power costs make up 16% of their input costs. The number of operating foundries had fallen from 265 in 2007 to 165 in 2016, eliminating 6,000 direct jobs. That same experience can be multiplied across the manufacturing sector.While de-industrialisation has many causes, rising electricity costs is certainly one. For energy-intensive manufacturing such as foundries, the dramatic increases in the cost of electricity, which has risen by 356% between 2007 and 2017, simply render them uneconomic. When that is factored into the equation alongside increased competition from Asia, the viability of many industrial companies is extinguished.The amount of electricity consumed in SA in the first four months of 2018 was 5% lower than the first four months of 2011 when consumption peaked. Why is that? Part of the answer is that energy-intensive businesses have been shutting up shop.
But while that has been happening in the economy at large, employment costs at Eskom have multiplied dramatically.
The number of employees rose from 32,674 in 2007 to 47,658 in 2017, a 46% increase. Staff costs rose from R9.5-billion to R33.2-billion, a 287% increase.
The average Eskom employee now receives R696,630 in salary and other benefits, compared with R290,751 10 years ago, a 140% increase. Incidentally, inflation has risen 74% over the same decade. When you are used to increases running at double the inflation rate, the 0% offer made to employees this year was a rude shock.It is clear that the Eskom of 2007, before the load-shedding era, was a massively more efficient entity than it is now. Staff costs are only one line among the ballooning expenses, which overall have increased by 340% in the decade. That while selling 5% less electricity.
Part of the expense increase is due to the independent power producer (IPP) programme, which was initially launched to meet the CO2 reduction targets SA agreed with international partners in 2009. Those are ring-fenced in Nersa’s cost determinations, so revenue covers them independently from the rest of Eskom’s expenses.
While the first IPP projects were expensive, thanks to the innovative procurement model new IPPs are now coming in far cheaper than Eskom’s CO2-belching production, delivering new production on time and on budget. It is clear that IPPs are part of the solution to reducing the cost of energy in SA, but that solution has to include a more efficient Eskom.Eskom’s expenses exclude the massively expensive new power stations, the costs of which are capitalised, and the masses of debt Eskom has taken on. The investment programme is running at around R57-billion per year while it has about R29-billion a year in interest to pay on its debt. Both must be funded out of Eskom’s operating cash flows which last year amounted to R46-billion, enormous thanks to the electricity increases it has been granted, but far from enough to cover it. Eskom is still in a cash crisis and there is no solution in sight.
Sharing the pain
Something has to give. Simply continuing to increase the costs of power will destroy more jobs in the rest of the economy and constrain growth. Eskom cannot continue to protect its bloated workforce, which is a third larger than comparable international utilities, while destroying jobs elsewhere.
But Eskom employees don’t carry the pain alone. It is not off the table that lenders will take some of the pain too. The government has guaranteed some, but not all, of Eskom’s debt. The unguaranteed portions could be subjected to rescheduling to reduce Eskom’s interest bill.There is also potential to reduce capital expenditure on Khusile and Medupi. While Eskom has contracted itself out of much flexibility, slowing down construction could be an option to reduce cash burn. SA’s energy consumers and workers in the rest of the economy have already shouldered more than their fair share.
None of this is going to be very comfortable.
Eskom’s employees are in a powerful position, able to hold the country to ransom. But the country has taken enough pain already. If we are to put the economy back onto a sustainable growth path, with a vibrant industrial sector able to create jobs, we have no option but to reduce the cost of power.
Eskom needs a thorough overhaul to do that, reducing headcount and slashing the wage bill. There is no alternative.