Eskom’s corporate governance underpowered

Corporate governance expert Mervyn King often says the role of non-executive directors is not to explain to fellow board members what they know, but to ask questions about what they don’t know.

This is to ensure they act in the best interests of the company and pursue this by making prudent decisions that ensure their fiduciary duty is being carried out.

King also highlights integrity, competence, responsibility, accountability, fairness, and transparency — the pillars of governance that all board members need to embrace on a foundation of intellectual honesty.

So what questions are the non-executive directors of SA’s state-owned enterprises asking?

Not a week goes by without a state-owned enterprise coming under the spotlight. The High Court in Pretoria recently set aside the National Energy Regulator of SA’s (Nersa’s) proposed 9.4% Eskom tariff hike; the Organisation Undoing Tax Abuse is threatening court action because of the lack of public consultation on nuclear and Thyspunt; the Treasury is seeking clarification on the pricing of coal contracts; and Futuregrowth and Jyske Bank say they will no longer lend to Eskom.

There is also a rising chorus claiming Eskom’s comparisons of the cost of one form of energy with another are fallacious, and part of its persistent campaign to prove electricity procured from independent producers is more expensive than coal or nuclear.

As energy expert Chris Yelland points out, what Eskom is doing is like “trying to compare the price of petrol per kilometre with the full AA cost per kilometre of operating a motor vehicle — which includes the capital cost of the car, finance costs, petrol, oil, tyres, insurance, and other operating and maintenance costs”.

It is false to assume the cost of electricity could ever be identical for each type of energy; they are all different — from their capital costs to the manner in which they operate and generate electricity, to their sustainability.

There is also a shifting scale of cost for all the energy sources, based on low or peak demand, the ease with which each form of energy can be switched on or off, and the age of the infrastructure.

We also have to question how Eskom derives its real pre-tax rate of return on assets at about 8.5%, which is far higher than the international norm of less than 5.5%. Presumably consumers are paying for, among other things, Eskom’s burdensome structure; electricity before it is delivered; and, as in the case of Medupi and Kusile, for plants before they are even operational.

Eskom’s tariff model is economically unsustainable. Brian Kantor and David Holland spoke about it at a Nersa public hearing in January 2013 when they tore Eskom’s case apart in 25 minutes. They widely circulated their recommendations in a document called Electricity Pricing — Principles That Should Apply To Eskom.

What did Eskom’s board decide to do? As a stakeholder, one can only assume it carried on as normal, which makes one wonder, what questions are their non-executive directors asking?

Are they asking why Eskom is still chasing a revenue model when it does not foster prudence? Chasing tariff hikes and applying to Nersa for claw-backs through the Regulatory Clearing Account does not promote the effective, efficient, and economic optimisation of the national electricity supply.

Compounding the woes are municipalities who hold onto the electricity revenues they have collected to balance their shortfalls.

This revenue model approach creates a perverse incentive that will eventually price Eskom out of the market, if it has not already done so. Which is why Eskom does not want independent producers to expand, because it compromises the utility’s revenue model by reducing its inflated revenues.

Kantor and Holland made it very clear if Eskom continues to demand unsustainably high rates of return on nonproductive assets in their fleet, the cost of electricity in SA will be unsustainable. It will compromise all consumers, including commerce and industry, with Eskom ending up as a beached whale.

Eskom needs a CEO and executive directors who can collectively operate as a virtuoso conductor in the electricity orchestra — who can holistically assess the company, and balance prudent expenditure, return on assets, and all the other costs and associated revenues.

And it needs nonexecutive directors who can recommend which instruments are detracting from the performance; in Eskom’s case, which assets are not performing. They should either be addressed or shut down, and planned projects that are not prudent should be cancelled.

While it may shrink Eskom’s asset base, it would make for a far more robust entity, working with the independent producers to create an electricity supply that is fit for purpose and more financially sustainable.

Unless we demand this of Eskom’s board, then if the proposed nuclear plants are approved, we will carry the cost of them for many years before any power is generated, and we all know that Eskom’s development costs have a knack of doubling, tripling, and more.

Civil society needs to be increasingly vigilant, because corporate governance principles are not being adequately applied. When this happens the motive and mandates of the board can no longer be trusted. If we don’t keep up the pressure, as it states in When Money Destroys Nations by Philip Haslam with Russell Lamberti, we will find ourselves diving down suicide gorge without any opportunity of turning back.

First published in Business Day on Wednesday, 7 September 2016.

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