OPINIONSTA - Can Eskom be saved?
DAILY MAVERICK / 14 JANUARY 2020 - 16.21 / GHALEB CACHALIA
Eskom has been run into the ground by the agents of State Capture. But it can still be saved if the new chairperson and CEO are given licence to run it free from political interference and cadre deployment, and with sound business and engineering practice.
The resignation of Jabu Mabuza as chairman of the board of Eskom allows for some useful reflection on the history of the utility, focusing on the operation, structure and governance issues.
Mabuza’s resignation follows hard on the appointment of André de Ruyter as the new CEO – the 11th such appointment in 10 years and an oft-repeated mantra from the government that it will not allow Eskom to fail. The reasons, however, as to why the utility stands on the brink of catastrophe lie in its history and the litany of mismanagement and interference over many years.
Ghaleb Cachalia is a former leader of the Ekurhuleni caucus for the DA and now serves as an MP in the National Assembly. He is the DA spokesman on Public Enterprises and serves on the Ethics Committee in Parliament.
Predating Mabuza and starting from the beginning of the millennium, Eskom paid scant attention to providing assurance of the life of power plants. Plants were driven to operate at an average of 90% utilisation (Eskom won utility of the year in 2001). This followed the deregulation of the energy industry in the late 90s when the government stopped Eskom from planning and building new power stations.
Plants were run hard, with minimum maintenance budgets as the plan was to run the older plants down. During this period, the Department of Minerals and Energy released a policy paper warning that the country could run short of energy by 2007. The policy document recommended private investment in the industry, predictably resulting in inaction from the government. As early as 2004, it was clear that the inaction would entail a future energy deficit, requiring an almost impossible task of government needing to close the energy gap by 2007. It’s a tale of woeful mismanagement, political interference and growing graft that goes back many years.
In 2004, the government-mandated Eskom to build new power stations that would mostly come online in four years. This mandate was barely challenged, but in hindsight, it was strategically flawed and had set the organisation up for failure. Best practice shows that a two-pack coal power station project would take eight to 10 years to be constructed, but Eskom was mandated to do it in four. Planning alone is meant to take four years, then two years of pre-construction work and two years to construct and commission the first unit. It appeared to be lost on government that when governed by haste, folly is often not far away, and in the case of the commission and construction of power plants this dictum needed to be heeded, as the results later showed.
This trajectory resulted in the actioning of some very questionable decisions like simply copying and pasting the Majuba power station design and using cost estimates from the 90s with inflation. The pressure to execute the poorly planned programme resulted in some experts and knowledgeable employees leaving and taking their skills abroad, and as they say, the rest is history.
The lack of action from the government on the looming energy crisis in the 90s and the hasty decision in 2004 to start the capital programme with an organisation that had lost mega-construction project capabilities (in the 90s after Majuba power station), resulted in most of the current challenges. These are evidenced by poor maintenance of rundown power plants, cost overruns for poorly planned mega projects and a lack of leadership accountability and performance.
The poor planning and lack of foresight have now meant that Eskom has had to operate in uncharted territory, with no reference to utilities around the world with similar structures, finance and operation issues. Due to this, Eskom has had to change leadership and boards on an ongoing basis, with the government refusing to take accountability for the mess it created.
In the last 15 years, Eskom has spent billions of taxpayers’ money on external experts/consultants from across the globe who have been involved in different projects. The common denominator of the problem has however not changed, and hence the problems have been exacerbated over time.
Could the entity be fixed? Well, by way of historical reference, in late 2015, a bash was had to do just that. Despite objections from at least three influential McKinsey partners, the global business and strategy consulting firm, which had been previously involved in various initiatives within the utility, Eskom decided the risk was worth taking and signed on to what would become its biggest contract ever in Africa, with a potential value of $700-million. The project was called Top Consultant Programme (TOPS) – the “Top Consultants” being internal Eskom resources that were meant to execute the programme together with McKinsey, as part of a National Treasury requirement for internal capability building.
The influential consultancy was brought in to help drive and achieve the goals of the Eskom Business Productivity Programme (BPP). BPP was initiated by Eskom leadership at the time (2013-2014) to help the utility achieve the target set by the Multi Year Price Determination 3 (MYPD3) as determined by Nersa, the energy regulator. The programme included operations improvement, cost-cutting, balance sheet optimisation, process optimisation and completion of the new build programme. Successes at Majuba power station’s operation performance, cost reduction in procurement, and optimisation of certain schedule packages at Medupi were achieved and internal capability built through the TOPS programme.
But why was McKinsey – a strategy consultancy – involved in operations? In 2008, on a smaller scale, McKinsey had achieved a measure of success at the Kriel and Duvah power plants (stations that were run down in the 2000s). Some two years later energy availability improved to about 72% from about 56%.
Subsequently, McKinsey was brought in to intervene as part of the recommended external experts in 2008. Unit trips at both power station were reduced during the engagement to between three to six per unit/per annum – high in terms of global best practice, but considerably better than South African standards at the time. The consultancy firm had also developed some sustainable internal capability with a methodology around operation excellence in power plants. This was probably the reference McKinsey used to take on this huge task of helping Eskom overcome the challenges it faced.
Much of the engagement at Kriel and Duvah were driven by the needs of hosting the 2010 Fifa Soccer World Cup and the load-shedding incidence that had started in 2008. After the sporting event was successfully hosted, it was clear the biggest challenge around capacity issues at the time were divided into three: lack of new capacity, extremely bad planning and execution of outages, and generally poor organisational efficiencies and productivity.
With the change in leadership in 2010 (appointment of Brian Dames), the new leadership embarked on a strategy of reconfiguring the utility with the help of external advisors. This resulted in the establishment of the Outage Performance Improvement Centre under the guidance of McKinsey and procurement was centralised. A sourcing strategy was put in place under the guidance of Accenture, with specialised commodity sourcing being introduced. Ernst and Young was brought in to execute the “back 2 basics programme” (operating model), with Boston Consulting Group helping structure and execute the BPP programme.
By 2011 the schedules at Medupi were not integrated and optimised, and the build programme was running very late based on the original schedule time frames. At Medupi alone in 2011, the funding bill was approximated to have escalated from R80-billion to R120-billion. McKinsey had flagged these problems associated with integration and finance prior to this, but minimum intervention followed. McKinsey continued to work with the capital department for the next four years, focusing on improving productivity and schedule optimisation.
The engagement above highlighted the extent to which Eskom had gone to source external support. With all these interventions, impact was made mostly when the external support consultants were driving the engagement, and almost immediately stopped once the contract came to an end.
To solve this a development of internal capability was necessitated that would have similar skills to external consultants, but was dedicated to solving Eskom’s challenging issues on a permanent basis. So, at roughly the same time the Top Engineers Programme was instituted with an initial cohort of 17 people.
A second round of recruitment was initiated in 2013, resulting in a further nine additions. Their task was to benchmark outages, focus on Medupi productivity, up the availability of energy in generation, support the C-suite with ad-hoc requests and reduce the external consultant spend – at the time total consultant spend was approximately R3-billion. The programme was developed and managed by McKinsey. The TOPS operated from 2012 to 2014 with McKinsey support and from 2014-2016 without support from the US firm.
In 2016, Anoj Singh and his cohorts from Transnet entered the scene and immediately hijacked the TOPS programme. A board resolution was passed to increase TOPS exponentially – under the aegis of McKinsey, the programme changed name from “Top Engineers” to “Top Consultants Group”. The negotiations with McKinsey around this were privy to only Singh and his office support staff. Key Eskom staff were limited to only discussing the already-agreed-to scope. The contract and scope were finalised by Singh and his confidantes, with minimum input from responsible line managers. The contract has since turned out to be illegal and a violation of South African contracting law, with some of the payments channelled to an associate of the Indian-born family, the Guptas, at the centre of our swirling corruption scandal.
Despite TOPSs assertion and belief that they were capable of undertaking some of the tasks at hand, they were clearly told this decision was “above their pay grade”. It is believed that Singh, supported by the then chairman, overrode McKinsey’s ostensible objections to the terms of inclusion of Trillian, and essentially forced all concerned to accept his determination. Singh and Prish Govender appear to have coerced the procurement section to sign, with the support of Brian Molefe and the chairman of the board. The scope for the McKinsey engagement – now together with Trillian Capital Partners, a local investment management company – was said to be endorsed by the office of the presidency at the time.
Since then, there has been an apparent scramble to fix everything at once. Talk of retrenchments began to affect morale resulting in poor operations’ execution. Consequence management was lacking and resulted in negligence and lack of accountability. An absence of stable leadership resulted in poor strategy execution, and from the outside it looks like the current COO was being willfully misled by direct reports, resulting in a culture of poor performance. Organised labour continued to compromise management at every point of disagreement by firing warning shots with suspected plant trips at Medupi and other power stations. A shotgun approach to restructuring continued without the benefit of a sound strategic focus, resulting in a lack of execution and minimum impact on the company’s liquidity.
Overall action was and continues to be driven by the Shareholder Compact which focused on BEE, procurement, enterprise development, women empowerment, coal procurement, the increased employment of people via targets, and completion of Medupi and Kusile, with predictable results. The actual structure and operations issues are secondary in the shareholder compact resulting in a minimum impact on the burning issues, reflecting a lack of balance between social and economic goals for the organisation to operate sustainably.
Additional focus was aimed at energy availability, profitability, cost-cutting, debt management and municipal debt, and the regulatory side of emissions and water usage. Gatekeepers were instituted to govern bonuses in line with the above – particularly with regard to BEE and procurement, resulting in massive inefficiencies and hugely bloated procurement and transport spend and rent-seeking opportunities.
With regard to load shedding, the optimum effective outage scheduling and energy planning appear to have been discarded, with energy planning resulting in “unplanned load shedding”. Much of the embedded skills set that managed and stopped load shedding in 2009 and 2016 have since left, resulting in much on-the-job training at the expense of efficiency and impact on the economy.
It is clear that what is required now is for Eskom to focus on building the right capability and execution discipline, across energy planning, outages execution, emergency preparedness and new build programmes. Internally Eskom has a lot of talent, and key individuals who have been sidelined need to come out of the pension-watching shadows at the utility to add the proven value they are able to provide.
This would only be possible if the talented individuals were empowered and given space to deliver on their mandates as business executives and not be forced to comply with political pressure. Instead, operations and strategy are now overseen – their locus standi, unclear – by Minister Pravin Gordhan’s hand-picked interventionists/advisers.
What degrees of freedom the new CEO, André de Ruyter or the new chairperson of the board (appointment pending) will have to fashion and implement strategy is uncertain in the face of the old command and control measures that emanate from the heavy hand of the Ministry of Public Enterprises. A measure of long-overdue transparency and accountability is required. This situation cannot be allowed to continue, and the time has never been more acute.
Will an independent new chairman with the appropriate financial and technical knowledge be installed – who is grounded in solid ethical governance – by the shareholder? There are global energy executives with deep operations, finance and restructuring experience who could fulfil this role. Many of these executives are currently engaged in other projects in the USA and Europe. Others have worked in advisory capacities for the utility with the unions and other vendors. The shareholder should consider the appointment of a chairperson from candidates of this sort of calibre who already have a handle on Eskom’s operational and financial issues, and who will evince the measure of independence required.
The new CEO has his work cut out as he focuses on the following four areas: reducing Eskom’s ballooning debt, driving plant operation excellence, overseeing performance and consequence management, and reconfiguring the organisation into a more sustainable structure. This may well involve a degree of privatisation – notwithstanding the President’s disavowal of this route via his announcement at the ANC’s 108th birthday celebrations this past weekend.
The questions remain – will the new CEO be allowed to execute his own plan, choose his own competent team and apply proper business principles without political interference? Will a new, cadre-free and independent board be installed under the chairpersonship of a competent and independent professional to fix the sorry state of arguably our most important SOE? Will they be allowed to introduce the audit standards needed and will they have a free hand to usher in a new era of transparency?
The jury is out. Let’s hope it returns with the goods required. The future of the country depends on it.
Disclaimer - The views expressed here are not necessarily those of the BEE CHAMBER