Eskom can be fixed within a few years, says former executive Mick Davis

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  • Challenges facing Eskom require the right skills and support for its leadership, says former Eskom executive Sir Mick Davis.   
  • The ex-head of Xstrata says the state needs to take a step back and allow Eskom's leaders to do their work.
  • The power utility's debt has grown to R488 billion, while it is owed R31.4 billion by municipalities.

Eskom has a mountain to climb in addressing its generation problems and mounting debt, but the challenges faced by the power utility can be solved within a few years, according Sir Mick Davis, a former executive at the power utility who is now based in the UK.

With extensive experience in mining and a history at the struggling power utility - which is saddled with a R488 billion debt burden - Davis said Eskom needed to confront its operational challenges with the right skills and a shift in legislation to help ease its capacity constraints.

"Eskom has a mountain to climb as an organisation that is actually insolvent. Its assets are overvalued and it has a massive amount of debt," Davis told delegates at the Joburg Indaba, a mining industry conference.

A former executive director at Eskom, Davis has a long association with the mining industry, having been the head of Xstrata and leading the creation of Ingwe Coal as well as the listing of BHP Billiton on the London Stock Exchange. The current challenges facing Eskom have stifled growth and contributed to investor jitters, and the company has a "mountain to climb".

But he said that, with the right skills to fix the power utility's ageing infrastructure which is often the cause of power outages, the organisation can make a turnaround.

"It's a problem that can be resolved. Eskom's challenges can be fixed within a period of a few years with the right focus and the right support for the CEO of Eskom," he said.

Debt threat

"If government takes a step back and allows the teams to do the work that they need to do, it can be fixed within a reasonable period of time," he said, adding that energy supply from independent producers could be one of the ways to ease constraints to the grid.

Davis said the company has no choice but to collect the money owed to it by municipalities. Eskom's municipal debt currently stands at a staggering R31.4 billion, and the utility has in the recent months had to resolve to attaching assets and bank accounts of some defaulting municipalities.

Sharing the platform with Davis was Eskom CEO Andre de Ruyter, who also acknowledged the debt burden has plagued the power producer for years and put a strain on public finances, as most of the debt is guaranteed by the state.  

He said Eskom's financial modelling indicates that the power utility can only achieve independent financial sustainability if its debt balance is reduced to R200 billion, a closing cash balance of R30 billion, and an EBITDA margin of 35%.

"The debt owed to Eskom by municipalities, which continues to increase, is an undisputed threat to Eskom’s financial sustainability," said de Ruyter.

In the 2019 Budget, National Treasury allocated R23 billion to Eskom to help the company service its debt. It was then allocated an additional R59 billion over two years (R26 billion in 2019/20 and R33 billion in 2020/21) by means of a special appropriation process.

De Ruyter said while the equity assistance from National Treasury continues to be an indispensable source of support for Eskom, it was clear that structural solution must be found.

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