C&B Notes

South Africa’s Sad State

We visited South Africa three years ago to better understand the country and visit with a number of companiesWe were hoping the country understood and would rectify its problems.  Despite finally forcing Jacob Zuma out as president, the country’s prospects have declined further in the last few years, and we are pessimistic that any real progress is on the horizon.  As we shared in a letter around the time of our trip, brain drain is a structural issue that will have long-term implications for the country. 

From the heady days of the 2000s, when growth topped 5 percent a year, the economy has struggled through two recessions, and debt ratios have tripled.  There have been almost daily revelations of state corruption, the nation’s final investment-grade rating is hanging by a thread and budget surpluses have turned to ever-widening shortfalls. 

And then there’s Eskom Holdings SOC Ltd., which supplies 95 percent of the nation’s power.  Driven to the brink of collapse, it secured a record 69-billion rand ($4.9-billion) bailout in the national budget Wednesday — an allocation that will force the government to break its expenditure ceiling.  Company chairman Jabu Mabuza said even that might not be enough. The utility had wanted 100 billion rand to help service its mountain of debt, pay its bloated workforce and maintain an aging fleet of power plants that intermittently trip and cause rolling blackouts.  “We are paying for the past, the nine years of waste,” said Colin Coleman, chief executive officer of sub-Saharan Africa at Goldman Sachs Group Inc.  “South Africans are going to pay for that for generations to come.” 

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Eskom is a South African success story gone wrong.  Founded in 1923, the utility built dozens of mainly coal-fired plants over six decades to become the world’s fourth-largest power company.  When white minority rule ended in 1994, its spare generating capacity during peak demand times was more than double the international norm of 15 percent.  Seven years later, it was named power company of the year at the Financial Times Global Energy Awards in New York, with all of its 78 production units considered to be in good working condition. 

But by 2005, South Africa was running short of power, after the government underestimated the scale of demand and delayed investments in new generating capacity.  The real rot at Eskom set in following Zuma’s election to head the ruling African National Congress in late 2007.  He became president in May 2009. By last year, after Zuma had been booted from office, a series of inquiries placed the utility at the epicenter of a looting spree of billions of rand in taxpayer funds by allies of the then-president, with his tacit consent.  Zuma denies any wrongdoing.  Meanwhile, the utility’s staff soared by a third, to 48,628, between 2007 and last year, while its generating capacity rose just 7 percent and power sales volumes less than 3 percent.  Electricity prices surged almost five times over the period and Eskom’s debt ballooned almost 10-fold. 

“Eskom is a symbol of where South Africa finds itself today, a combination of having a lot of potential and messing up on that due to wrong decisions, wrong management actions,” said Roland Henwood, a political science lecturer at the University of Pretoria.  “The government has been forced into making concessions to Eskom, but there’s no other option.”  The National Treasury now considers Eskom the biggest threat to the nation’s finances.  But the decay that occurred during Zuma’s rule wasn’t just at the utility.  Other state entities, including South African Airways, the national carrier; armaments company Denel SOC Ltd. and the public broadcaster also fell victim to graft and bad management decisions and appointments.  They too are in dire financial straits and in need of bailouts. 

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