Eskom is a 100% state-owned electricity company that provides energy to greater South Africa (SA). Featuring 30 power plants and a nominal generating capacity of 44,172 megawatts (MW), Eskom services 6.2 million direct customers. Given its massive size and government-sponsored status, the utility conglomerate is the backbone of South Africa's energy infrastructure.
Unfortunately for the country's economy, Eskom has fallen on hard times. Widespread corruption, rising operational costs and staggering debt loads threaten to upend SA's utility framework. Barring a successful transition to a new, more efficient electrical system, the future of the country's industrial and economic growth is uncertain.
The Origins Of Eskom
Dating back to the late 1800s, electricity in SA has had a rich history. From the 1882 introduction of streetlights in Kimberley to the SA's first energy grid in Johannesburg circa 1891, electricity has fulfilled many important social and industrial purposes. One of the most critical was servicing the gold mining boom of the 1900s. The growing demand for electricity to mine for gold fostered the construction of hydro-electric dams, power stations and control facilities throughout SA.
In response to the increasing reliance on electrical power, the Electricity Act of 1922 was enacted by the SA government. The legislation sought to industrialise the power industry and "stimulate the provision of a cheap and abundant supply of electricity."
Upon the Electricity Act's ratification, the SA energy industry was positioned to be controlled and regulated directly by the government. Subsequently, the Electricity Supply Commission (ESCOM, also referred to as Eskom) was created on 1 March 1923. Chaired by scientist Dr. Hendrik Johannes van der Bijl, ESCOM sought to achieve a lofty, self-stated mission:
"There lies before ESCOM a great task and a great opportunity. It will be our endeavour to play our part not as those who follow where others lead, but as pioneers; to foresee the needs of a country fast developing, and by wise anticipation be ever ready to provide power without profit, wherever it may be required."
Over the decades, ESCOM evolved from being a hydro-electric-oriented company to a purveyor of coal, wind and atomic energy. According to data from 2019, Eskom generates more than 90% of SA's power and 40% of the total electricity in all of Africa. Due to the lack of a significant secondary energy source, Eskom is an extremely important facet of the SA economy.
Employment, Debt Loads Drag SA Economy
In addition to being the premier energy producer in SA, Eskom is a major job provider. It is estimated that the company employs more than 46,000 people, a sizable portion of the domestic workforce. Given SA's 29% unemployment rate, the value of Eskom as an employer has made the company a staple of the ongoing political dialogue.
The single largest issue plaguing Eskom's future is a staggering debt load. Rising overhead, budget overruns, corruption and financing costs have been major contributors to R440 billion in debt. Subsequently, the company ran a R20.7 billion net loss for 2018/19 and is projected to sustain another R20 billion loss in 2019/20. To service the budget shortfall, Eskom depends on loans to remain solvent, which are estimated to constitute 55.9% of the company's aggregate debt.
Indebtedness is a primary concern for the nation as a whole. It is projected that the public debt load may rise to 95% of GDP by 2024. A considerable factor in such estimates are a recent R59 billion government bailout package and plans for the SA government to assume Eskom's debt. According to the International Monetary Fund (IMF), the economic outlook for SA is tied directly to Eskom:
"Weak finances and operations of public enterprises, particularly Eskom, represent a major downside risk to growth. Against this background, action is needed to reduce the fiscal deficit."
Historically, the debt-induced operating inefficiencies have led Eskom to engage in power cuts and periodic blackouts. Dubbed "load shedding," the practice has been credited with severely hampering the mining, agricultural and manufacturing sectors. The impact of load shedding became evident in the first quarter of 2019 as the inconsistent electrical supply slowed SA's annualised GDP to 3.2%.
Ultimately, Eskom's impact on SA's economy is multifold.
- First, it is a leading provider of jobs to the embattled labour market.
- Second, domestic industrial growth is dependent upon the energy resources delivered by the company.
- Third, the massive debts incurred by Eskom are proving to be a significant drag on SA's budget deficit.
While the country relies on electricity to sustain economic growth and provide jobs, the public costs of preserving Eskom's solvency has a negative impact.
The Future Of South African Electricity
The February 2018 election of President Cyril Ramaphosa brought "change" to the topic of SA's domestic energy policy. A former unionist and wealthy businessman, Ramaphosa promoted the National Development Plan and the restoration of GDP growth to 5% per year. Aside from establishing a "free trade zone," addressing the power question and Eskom became a priority.
Early 2020 brought fresh pledges from Ramaphosa regarding the decentralisation of SA's energy sector. This was to be accomplished via the following mechanisms:
- Allow towns and cities to buy power independent of Eskom production
- Invite investors to bid on projects that generate renewable energies
- Split Eskom into three manageable businesses
- Forgive US$30 billion in Eskom corporate debt
Solving SA's energy problems will involve addressing several areas of the sector. Repair of existing infrastructure, restructuring Eskom debt and bringing new resources online will be integral to avoiding future electricity shortages. If these challenges are overcome, then the SA economy may be better positioned to achieve 5% annual GDP growth.
For nearly 100 years, Eskom has been the face of SA electricity. However, the degradation of assets, corruption and massive cost-overruns have contributed to severe financial challenges. As a result, periodic load-shedding has had a profoundly negative impact on the nation's economy. Output from the mining, agricultural and industrial sectors have underperformed due to the limited availability of electrical power.
The future of SA economic prowess is going to depend greatly upon how the energy sector evolves. If President Ramaphosa's promised reforms come to fruition, then an overhaul to the electrical system and Eskom will act as the catalyst for economic growth. If reform fails, the economy will continue to be hamstrung by an inconsistent supply of electricity.
Senior Market Specialist
Russell Shor (MSTA, CFTe, MFTA) is a Senior Market Specialist at FXCM. He joined the firm in October 2017 and has an Honours Degree in Economics from the University of South Africa and holds the coveted Certified Financial Technician and Master of Financial Technical Analysis qualifications from the International Federation…