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Please send your suggestions, or any queries, to IRfeedback eskom. Integrated results Skip to content. Integrated results. Financial year ended 31 March Integrated report for the year ended 31 March Provides an overview of our governance, strategy and performance, both financial and operational. Read more. Sustainability report Supplements and provides more detailed information on our sustainable development impact than that provided in the integrated report.
Results presentation for the year ended 31 March Presented to stakeholders on 31 August Integrated results survey To complete a short survey on the integrated report, please scan the code or click on this link. There is however more to it than expenditure increasing faster in that period. Referring to the slide, revenue increases as sales decline.
This revenue increase is primarily due to significant tariffs since the multi-year price determination MYPD 1. Why are there low increases in prices between and ? It is particularly because before the South African government through Eskom went on a large investment drive thus there was significant overcapacity for electricity due to many plants being built across the country and therefore it was able to provide electricity to the market at low costs.
Consequently, the South African government was able to have low inflation price increases. In there were changes in policy which caused the electricity tariffs to increase significantly. Several elements determine tariff level. The regulatory asset base is the key determinant because revaluation of asset base was necessary to allow Eskom to finance future expansion.
Eskom has never been afforded a full return on its asset base which means that tariffs are not cost reflective. A cost reflective tariff would require higher tariffs and revenue for Eskom.
The income Eskom received may just be enough to cover operation costs but not enough to make investments. He handed back to his colleague to speak about expenditure. Within that, Eskom wants to have a certain level of comfort to some extent and some of the inefficiencies and problems in Eskom may be reflected in that tariff. The question for the oversight process is even if there are large levels of inefficiencies that can be reduced over a period of time, how do you deal with that?
Is Eskom too big to fail? How much inefficiency do we have to keep up with because of that? It makes the rigour of the oversight process really important to ensure that we keep Eskom on its toes and as efficient as possible.
He referred to the figure on page 13 to illustrate the point that the South African electricity industry is predominantly a coal industry. This gives the sense that Eskom is still very much a coal business. The pie chart on page 13 was taken from the integrated annual report of the Energy Department. In the last few years there have been increases in the uses of gas turbines and renewable energy but their percentage is quite low on the pie chart.
The development of electricity and the coal industry from the s occurred rapidly. There was a development of washing of coal that separated grades from run-of-the-mine coal and this created opportunities for Eskom and the coal mines. This meant that the high quality coal could be exported and the lower grade coal could be used by Eskom. From the s we see that SA becomes one of the largest exporters of coal and this was pretty high grade coal.
The rest of the lower grade coal was used by Eskom. Therefore, Eskom secured supply and supported the coal mining companies by entering into long-term cost plus contracts.
Eskom provided capital for development of the mines and took risks based on the geology of the mines. It also entered into a long term 40 year contract to supply coal to new power stations. This meant that mining companies developed new infrastructure and port facilities to export coal. New power stations were built at the coal mines and thus saved transport and other related costs. By signing these agreements, Eskom took the risk of the operating costs of the mines. Today we see that many of the mines are old, some are 30 years old, and some of them 40, which means the cost of coal mining from those mines has become expensive and the quality of their coal has declined over time.
So Eskom has not been able to get adequate supply from these mines and also the cost of running these mines has increased. However, at the time when these mines were built, this was a huge opportunity for Eskom. The mining companies developed new rail infrastructure with the state entities and also port facilities to export coal.
Today we talk about BEE but it is worth mentioning that Afrikaner businesses and mines were supported more by Eskom because it was at the time dominated by the English mining companies. The term minerals and energy complex MEC does not only describe the sectors but also describes a system of accumulation.
This includes relationships between the State, SOEs and private sector corporations that shape economic outcomes. The evolution of the MEC required close coordination between these actors. For example, with the increase in demand, the response was to build enough capacity to meet this demand.
And the result was a rapid upscaling of generation capacity. There was rapid growth from the s and because of this there was overcapacity. Due to the overcapacity and the rapid tariff increases during the s, Eskom was able to pay down debt and keep prices low.
In the s Eskom played an important role in electrification because from the s there was increased demand for electricity in response to rapid global and domestic economic growth and electrification. During this period the tariffs were not cost reflective. At the same time the age of the mines and the electricity generation capacity reduced the quality of coal and the efficiency of electricity production in the plants declined.
Due to this, there was a backlog in the maintenance that Eskom is still trying to catch up. It also means that they must keep proper management of plant and it means taking off a large capacity of the plant for months at a time to ensure against load shedding.
Eskom has to keep a balance between keeping the lights on and proper maintenance of the plant. This was also fuelled by an increase in labour, water and other costs. It meant they had to spend more on maintenance, property, plant and equipment. In addition to this, primary energy costs particularly of coal rose significantly.
He went on to describe the index of selected expenditure items of Eskom. He explained that the index starts at about percent and we see a rapid increase six times by , referring to the graph on page 18 of the report.
The second light line is the cash spend on equipment. Wage increases on average have been above inflation level. There was spending of about R10 billion on diesel and this was Eskom trying to reduce load shedding.
This means Eskom was using much of its operating costs to pay for diesel and this was a difficult period for Eskom. Capital can be in the form of equity and debt, and this is of particular importance as well for government because government is the primary shareholder and Eskom relies heavily on government support — be it in the form of loans or equity or guarantees.
She described the long term debt and debt to equity ratio of Eskom which has been on the rise the past decade. She described the meaning and significance of the interest cover ratio. The lower the interest cover ratio, the greater the burden of the debt expense on the entity.
She explained that a high ratio portrays a risky scenario and it is unfavourable for investors. Total liabilities have been steadily increasing over the past ten years and Eskom has increased its reliance on financial backing from government from onwards. There was an equity injection of R23 billion, a shareholder loan converted to equity amounting to R60 billion and about R billion contingent liabilities available; R billion used.
Auditors continue asking questions such as how long will you feed the beast. Given these conditions, government will have to continue funding Eskom. External lenders are usually sceptical of funding Eskom and usually require guarantees. She asked how the inefficiencies in Eskom can be improved through interventions. There is a heavy reliance on government funding.
We are close to the danger zone of 1. Mr Mohamed said on a light note that the sign of a good accountant is their ability to sober you up and they are very happy to have a good accountant on their PBO team. Mr Mohamed said that what they were trying to do when talking about the history is to show that the problems they have now are not just problems of the last ten years or caused by poor management or inefficiency but instead they developed over a long term period of 30 years or more.
Due to the old mines they found that they have to use diesel which is a very expensive way of generating electricity to meet the demand. The problems we have now are not new but due to old mines and low quality coal.
We are sitting with a problem today based on a long term problem but we have to deal with it to fix it. They have situations where the consumers insist that they have paid and need to be supplied with electricity. The courts have found in favour of the consumers such as in the Newcastle case. Eskom does not take pride in taking a municipality to court and have Eskom employees face community attacks.
There is nothing Eskom can do except cut the supply and when they do they are interdicted. The court considers other factors and tells Eskom to continue to supply.
The result is when they started litigating the matter with different municipalities, the debt was about R1 billion and now it is R20 billion. So litigation is not the solution. There are too many investigations going on for irregular and fruitless and wasteful expenditure - by the thousand.
Eskom believes it has given everything required to the SIU and NPA but the wheels of justice turn slowly in a democracy. They have done various lifestyle audits. There are some contracts that although defective, have to continue due to urgency. There is a suspicion that Eskom employees are complicit on the prices and on the service level arrangement but one has to say that one will have to come back to that later.
Mr Mabuza replied that Eskom is not able to give the costs for unbundling. However the benefits include de-concentration of risk, efficiency and focus on each of these entities. When the President presents the Eskom paper, it will provide these details. Mr Mabuza replied that again in simple business economics, you must sell what you buy, you must collect what you have sold and bank you have collected. Their formula is broken. Eskom is not selling what it has produced, if it sells it, people are not paying for it.
If people pay, it gets stolen before it gets banked. He said he has spoken about the environment and making the case for Eskom generation to play in the renewable space more than the little involvement that they have that would replace the coal fired power stations that it is decommissioning. DOE gives them a certain amount of money to electrify communities. On Soweto and all the municipal situations, Eskom has a full appreciation that not everyone can economically be able to pay for electricity.
However one really needs to distinguish that a certain consumer cannot pay and one accepts that or that they do not want to pay. There are those that cannot and there are those that will not — we need to separate those.
The question is, therefore, those that can pay what is the incentive for them to pay if the neighbour cannot and does not pay. There is a need to bring back the culture of user pays. For those that cannot pay one needs to have a different discussion and "we cannot talk right but walk left".
It is a political conversation — these people are part of our communities and they cannot pay and this is the plan that government has for them. However, Eskom must be paid for it whether through the taxpayer, through subsidies, through bailouts — because one has to remember this when discussing Eskom's losses. Some of the challenges Eskom faces is not only that the communities are not paying them. They have big customers that are not paying which include state-owned enterprises ranging from educational institutions, enterprises and social services providers like hospitals.
The only tool Eskom has is cutting the electricity. Eskom produces this electricity at cost and at the very least they have to recoup the cost. Municipalities are selling this electricity, which they have not paid for, at a profit to the detriment of Eskom.
Eskom has a say to consent to the cession of that contract to somebody else. Eskom does not get involved about who they sell those mines to but Eskom's role is to ensure that whoever they have sold to will honour the contract in the same manner, if not better, on the quality, security and quantity of the coal they have contracted for.
That is the end of the interest and Eskom does not pronounce on who is over-concentrated and competition matters. They are aware of the concerns the communities are raising and they are raising them with the right people. He thanked them for the compliments on the small improvements in governance. Mr Mabuza replied that chief restructuring officer CRO is in place and the office has been established. Eskom has done lifestyle audits and they have reported on this.
Flowing from that, they fixed a date in March last year. From that date no one who works for Eskom would do business with Eskom. Anyone who is found still in business with Eskom, they have the ability to discipline, fire, terminate the contract and blacklist that supplier. On vandalism, they have their own security and some law enforcement agencies involved.
However, as these agencies have experienced, for example with the Zama Zamas, these people are more armed than security guards. Mr Mabuza replied that they continue to learn every day but what they do know is what drove the R21 billion loss. Eskom is experiencing liquidity problems. They have challenges with some irregularities which some of them might stay with him through his term as board chairperson. Some of the contracts irregularly entered into have to run their course.
This is because if they terminate the contract, they end up getting into more problems. Some of the contracts are so critical and they are the only ones who can do the work. On coming to grips with Eskom's challenges, Mr Mabuza replied that he will probably not succeed in his term but he will not fail to try.
On unbundling Eskom, Mr Mabuza replied that the President has given a directive that they do what needs to be done but there will be no retrenchments. The other way is removing people who are not doing what they are supposed to be doing but sadly that process takes longer.
Mr Mabuza explained that the history on coal transporters goes back about four or five years. The coal transport contracts should have ended about four or five years ago. They are being extended on an ongoing basis from year to year, six months to six months, month by month.
The real issue is not that they do not want to do coal transportation, but their view is that they should go back to using more conveyer belts and if not they use rail or lastly road. The unfortunate part is that Eskom's existing contractors whose contracts have been extended over these last five years want only themselves to be contracted.
This insistence on a right is something Eskom cannot agree to. That is the real crux of the matter and must be seen for what it is. Eskom has started to deal with the contracting and aims to get appropriate contracts that are cost efficient.
Mr Cassim replied to Ms Tshabalala that the IPP bid window 1 to 4 contracts are generally long term contracts that are about years and many of them still have quite a number of years to continue. And in the future there will be IPPs supplying electricity to the grid. We see this benefit coming through in this financial year. Coupled with this, the new build power stations like Medupi with six units coming online has had a positive effect and contributed to uninterrupted power through the winter.
Mr Cassim replied that Eskom has R billion worth of debt which will take about ten years to pay, that is, about R45 billion per annum and with interest R40bn per annum. That is why the financials reflect R85bn per annum. If Eskom is only generating R30 billion cash from operations, to improve the ratios either cash from operations must improve from R30 billion to a higher number or the debt service commitment needs to be reduced from R85 billion.
The CRO and others will need to get a balance where the cash flow from operations is enough to sustain the operations and the debt service commitment. Currently Eskom is R50 billion short in its cash flow.
The R20 billion arrear debt owed by customers is once off so going forward if settled it gives about R8bn relief. This improves the cash flow to R40bn yet the debt commitment is R45bn. This is what Eskom and the government are facing: how to make Eskom sustainable.
He agreed that unbundling is important and it must be done. However, if the cake is too small and then it is cut into smaller pieces, it is still too small for everyone to enjoy the cake. Follow up questions Mr Marais noted that there was a parliamentary commission of inquiry into Eskom and flowing from that is the Zondo Commission. He asked if Eskom itself has a lawsuit against certain executives who benefited irregularly.
Has the pension fund payment involving Mr Brian Molefe been paid back as ordered by the court? Ms Mkhwanazi asked what the impact of a cost-reflective price increase would be on the indigent communities.
Ms Tshabalala said she heard the response on Soweto and implored Eskom to draw up a plan to adequately deal with the challenges.
In Soweto some have gone as long as two months without electricity. Some consumers like the grannies are paying and their neighbours are not.
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