July 30, 2019 / 5:54 PM / 2 months ago

South Africa's Eskom facing "death spiral": departing CEO

JOHANNESBURG (Reuters) - South Africa’s state power utility Eskom needs to change its outdated business model to escape a “death spiral,” its outgoing chief executive warned on Tuesday, as the firm reported a mammoth 20.7 billion rand ($1.5 billion) annual loss.

Struggling Eskom, which supplies more than 90% of the power in Africa’s most advanced economy but is dependent on government bailouts, is deep in crisis as its sales decline while debt-service costs soar.

The company expects to make a 20 billion rand net loss in the current 2019/20 financial year after the 20.7 billion rand loss in 2018/19, exposing the country’s public finances to grave risks at a time of fiscal constraints.

Fixing Eskom is one of the biggest challenges faced by President Cyril Ramaphosa, whose economic reform drive has been jeopardised by power outages that have dented growth this year.

“We are now facing a death spiral,” Eskom Chief Executive Phakamani Hadebe told a news conference, referring to a situation where customers are going off-grid or cutting power purchases because of rising tariffs and intermittent supplies.

“Our economy, which is under duress – and it’s been like that for some time - has not helped,” Hadebe added, citing falling demand from mines.

The root causes of Eskom’s financial woes lie partly in a steep run-up in its salary, fuel and debt-servicing costs over the past decade. But it has also been hampered by mismanagement and corruption scandals under previous executives.

TURNAROUND PLAN

When Hadebe steps down this week, Eskom Chairman Jabu Mabuza will juggle his responsibilities on the board of directors with those of interim CEO for up to three months while a permanent replacement is found.

The government has proposed giving Eskom a 59 billion rand cash injection over the next two financial years, in addition to 230 billion rand of bailouts spread over the next decade.

But analysts say even those bailouts won’t be enough to make Eskom sustainable in the long term.

Government officials and bankers are working on other options like swapping Eskom debt for government bonds or moving its debt to a government-owned special purpose vehicle. The plan is also to split Eskom into different entities for generation, distribution and transmission to make it more efficient.

An Eskom presentation showed Eskom forecast negative cashflow of 5 billion rand in the current year, despite the promised bailouts.

FILE PHOTO: Phakamani Hadebe, Eskom Group Chief Executive looks on ahead of Eskom's 2018/19 interim results announcement at the Eskom's head office at Megawatt Park, Sunninghill, South Africa, November 28, 2018. REUTERS/Siphiwe Sibeko//File Photo

Public Enterprises Minister Pravin Gordhan told reporters government would lay out its plans for Eskom in more detail in the coming weeks, including on the conditions which Eskom would have to fulfil to secure promised state funds.

He said Freeman Nomvalo from the South African Institute of Chartered Accountants would establish a chief restructuring office at Eskom.

($1 = 14.1814 rand)

Reporting by Alexander Winning; Graphic by Helen Reid; Editing by Emelia Sithole-Matarise and Edmund Blair

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