WHAT'S REALLY WRONG WITH ESKOM
COMMENTARY: WHAT’S WRONG WITH ESKOM
Eskom is asking the National Energy Regulator of SA (Nersa) to allow it to hike electricity prices by 19.9% and prices to municipalities by 27.9%. This means that Eskom’s prices have increased nearly 5x in 10 years. Public Enterprises Minister, Lynne Brown, has defended Eskom’s request saying that Eskom’s average price of 85c/kWh is “far lower than any comparable international price for a coal based system”. Unfortunately Ms. Brown, we live in South Africa, not “internationally” and Eskom’s proposed price increases will only put more pressure on an already crippled economy.
Some things just don’t add up…
In 2007, Eskom spent about R10 billion on coal. In 2016, it spent closer to R48 billion. But, during this period it produced less electricity and the global price for coal actually went down a little; which means that this might be the appropriate time to point out that Eskom’s annual financial statements for 2017 showed irregular and wasteful expenditure of at least R3 billion for the year. Everyone from the Finance Minister to the ratings agencies has identified the electricity producer as a systemic risk to the economy. Eskom is now South Africa’s single largest liability with total debt of around R360 billion. R202 billion of this is currently guaranteed by the government and there is a further R148 billion of available guarantees.
So… what on earth is going wrong?
Everyone knows about “state capture” and Eskom’s corporate governance issues, here is what they really mean: Since 2007 Eskom’s fixed investments have increased from R140 billion to R540 billion and it plans to continue investing R70 billion more per year, even without nuclear. But, as we pointed out, the volume of electricity sales has actually gone down by 7%. However, the massive price increases have meant that Eskom has been able to show off strong top line revenue growth, even with declining sales volumes. On the bottom line, things look even worse as profits have been steadily declining. Eskom’s return on capital (the amount of money it makes from all these investments) has dropped from positive 4% in 2007 to negative 0.9%. Simply put, a catastrophic collapse in corporate governance and strategic planning have lead to reckless expenditure and cost control that is quite frankly out of control.
Wait.. it gets worse.
Eskom has blocked other producers, frustrated the development of alternative energy projects and lobbied the government hard to subsidise the development of unsustainable new energy intensive projects like smelters and refineries. NERSA have made it easier to register solar systems with local authorities (municipalities) in that any system under 1MW does not need approval from NERSA. However, with the explosion of solar, municipalities are losing revenue from the sale of electricity and are looking at ways to mitigate this. There is a rumour that they will start charging grid connection fees for people/companies with solar and shift the tariffs so that there are more fixed costs as a portion of your bill. i.e. They're going to start charging more for DEMAND (kVA) and less for CONSUMPTION (kWh). Solar systems produce kWh.
Where to from here…
Consumers, business, government, investors… pretty much everyone is now sick of it. But it’s not a simple as saying Eskom is a disaster. Eskom isn’t a disaster. Right now my lights are on, my computer is charging and there are thousands of dedicated and highly skilled employees working hard to make that happen. The Chinese say that “the fish rots from the head”. The Public Investment Corporation (which Eskom owes over R85 billion) as well as banks and other lenders get that. They have given government an ultimatum to replace the Eskom board by November or they will stop lending. Hopefully things will get better with a new “head” at Eskom.
(Nersa, Fin24, IOL, City Press, Business Day, Mike Bleyenheuft)
The ABSA purchasing manager’s index [“PMI”] for October came in at 47.8, which was better than economist’s expectations of 45.9. This was an increase of 2.9 points over the previous month and the 3rd consecutive monthly increase. Sounds great...right? Hmmm, not quite. In PMI terms, 50 is considered the neutral level, which means that any number below 50 indicates a decrease in manufacturing activity. So the manufacturing sector is actually still contracting, but at least the trend is reversing and we will hopefully see some expansion soon. Out of interest, the index reached a low of 35.1 in April 2009 and a high of 61.1 way back in April 2002. May 2017 (51.5) was the last time there was a reading above 50 and March - July 2016 was the last time the manufacturing sector expanded for more than 3 consecutive months. We’ve been chatting to small engineering firms on the East Rand and almost everyone has been telling us that business is slow!
(Bureau for Economic Research)
You can learn more about the PMI index, its role as a leading indicator and what it means for your business by watching this very short video on our Facebook page (click here) or Instagram (click here). Please have a look and leave us a comment.
An additional 92,000 people got jobs in the third quarter of 2017 according to Stats SA. However 33,000 more people looking for a job meant that the official unemployment rate remained stable at 27.7%, which is 0.6% points higher than the same time last year. The finance sector; community social and personal services; and transport added the most jobs, while manufacturing, construction and agriculture all lost jobs. The youth unemployment rate is disproportionately high at 38.6%. The fundamental problem with unemployment is that our economy is growing too slowly for the increase in our working age population. If you include the number of people who would like to work, but did not actually look for a job, then the national unemployment rate is closer to 36.8%. Education is key as those who do not have a matric make up 57.4% of unemployed. Speaking of which…
The University of Cape Town is the top ranked university in South Africa according to the “Best Global University Rankings”, which evaluated 13 factors that measured academic research performance and global and regional reputations. UCT came 113th out of 1,250 universities, Wits #216, KZN #336 and Stellenbosch #359. Cairo University was the highest ranked non-South African University at #450, while Harvard, MIT and Stanford occupied the top 3 slots. (US News)
The Bank of England increased interest rates for the first time in ten years to 0.5%. Governor, Mark Carney, said that Brexit is the main risk to the economy, aggravating existing weaknesses and holding back potential growth. The Bank hinted that it was broadly comfortable with a two more quarter point increases in the next 3 years, but most economists don’t expect further increases before the UK leaves the EU in 2019. You can read about how political uncertainty impacts the South African economy by clicking here to read a previous Louwdown.
US President Donald Trump has nominated current Fed Governor, Jerome “Jay” Powell as the next chair of the US Federal Reserve when Janet Yellen’s term ends in February. Mr Powell is expected to provide continuity on interest rate policy with a lighter touch on financial regulation. The head of the Federal Reserve (the US’s central bank) is considered the second most important job in America, but in many ways the Fed chair is the most powerful person on earth, given their ability to influence the global economy.
(NBC, Wall Street Journal)
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