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RR RUEHBZ RUEHDU RUEHGI RUEHJO RUEHMA RUEHMR RUEHPA RUEHRN RUEHTRO
DE RUEHSA #2315/01 3171508
ZNR UUUUU ZZH
R 131508Z NOV 09
FM AMEMBASSY PRETORIA
TO RUEHC/SECSTATE WASHDC 0197
INFO RUCPDC/DEPT OF COMMERCE WASHINGTON DC
RHEBAAA/DEPT OF ENERGY WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCNSAD/SOUTHERN AF DEVELOPMENT COMMUNITY COLLECTIVE
RUEHZO/AFRICAN UNION COLLECTIVE

UNCLAS SECTION 01 OF 04 PRETORIA 002315 
 
SIPDIS 
SENSITIVE 
 
STATE PLEASE PASS USGS 
DEPT FOR AF/S, ISN, EEB/ESC and CBA, and OES/EGC 
DOC FOR ITA/DIEMOND 
DOE FOR T.SPERL, G.PERSON, A.BIENAWSKI, M.SCOTT, L.PARKER 
TREASURY FOR D.PETERS, P.STEWART 
 
E.O. 12958: N/A 
TAGS: ENRG EPET EMIN EINV ETRD ECON SENV PGOV SF
SUBJECT: Eskom Leadership Crisis Exacerbates Capacity Challenges 
 
REF: A) Pretoria 2166; B) Pretoria 1762 
 
This message is sensitive but unclassified, not for Internet 
distribution. 
 
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Summary 
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¶1.  (SBU) South African power utility Eskom is in crisis with recent 
resignations of Board Chair Godsell and CEO Maroga, just as the 
company and its shareholder, the South African Government, grapple 
with financing for huge capital investments needed to meet 
electricity demand and avoid brown-outs, or - in the worst case - a 
shut-down.  Proposed rate hikes are meeting strong resistance from 
residential and industrial customers.  Economists estimate that 
proposed rate hikes of 45 percent a year for three years would 
increase inflation by about half a percent per annum.  Gold miners 
claim rate increases would increase their operating costs by up to 
30 percent over three years.  Given that today's prices are well 
below market, these rate increases are needed to economically 
justify new capacity (coal or alternative energy).  The only other 
alternative would be significant subsidies that the government 
cannot afford.  End Summary. 
 
----------------- 
Management Crisis 
----------------- 
 
¶2.  (SBU) An epic boardroom battle at Eskom over future strategy and 
blame for the 2008 power crisis has led to uncertainty at the helm. 
The byzantine timeline was as follows:  Some time during the last 
week of October, the Eskom Board of Directors asked Chief Executive 
Officer Jacob Maroga - at the helm during the power crisis (see Ref 
A and previous)- to resign.  Eskom Board Chairman Bobby Godsell, who 
was brought in as a fixer in July 2008 after the power crisis, told 
Eskom staff November 5 that the Board had accepted Maroga's 
resignation.  Friday, November 6, a press conference was called, 
then abruptly cancelled.  Various groups decried or acclaimed 
Maroga's departure, then reports surfaced that Maroga had not/not 
resigned.  Godsell met with President Zuma on Sunday, November 8; 
there were no reports on what was said in that meeting.  Godsell 
himself resigned November 9 over lack of government support.  As 
with Maroga, various groups decried or acclaimed Godsell's 
departure.  Finally, on November 12, the Acting Eskom Board Chair, 
Mpho Makwana, put out a formal statement reporting Maroga's 
resignation. 
 
¶3.  (U) Two contrasting vision documents presented earlier to the 
board by Godsell and Maroga were provided to the press.  In his 
"turnaround strategy" document, Maroga introduced the issue of race, 
claiming over-reliance on "white supervisors."  Maroga's vision 
document also referred to a choice of U.S. "Change Management 
Consultancy" Telein Group Inc. as his "leadership and organizational 
effectiveness advisors, rather than traditional business 
consultants."  Godsell's document was more narrowly focused on how 
the Board, the CEO, and the SAG needed to work together, but did 
express concern about "the time, responsibility and stress burden 
being carried by our CEO and his executive team" and that the 
company was "failing to deal decisively with a number of important 
issues." 
 
¶4.  (SBU) Maroga is said to have been defended by President Zuma. 
The ruling party (ANC) youth league and Black Management Forum also 
QThe ruling party (ANC) youth league and Black Management Forum also 
came out in Maroga's support, with some accusing Godsell and others 
of racism.  Godsell supporters include Eskom's board and staff, 
labor unions and industry observers.  The National Union of 
Mineworkers, which has about 11,000 members employed by Eskom, as 
well as the COSATU General Secretary, insisted Godsell is not a 
racist, and ANC secretary-general Gwede Mantashe said that the 
matter should not be simplified into a racism issue. On November 13, 
media reported that Barbara Hogan, Minister of Public Enterprises, 
favors Godsell's return. 
¶5.  (SBU) Maroga's tenure as CEO was marked by power shortages, a 
record loss of R9,7 billion ($1.3 billion) in its 2008/2009 
financial year ending March 31, 2009, and controversy over price 
hikes to finance capital investments.  Maroga received a 
controversial 27 percent salary increase in 2009, taking his annual 
salary to $674,000.  Eskom spokesperson Andrew Etzinger admitted in 
a briefing for the American Chamber of Commerce on November 12 that 
personally, he had not thought "things could get any worse for Eskom 
than the crisis over load-shedding, but the current leadership 
 
PRETORIA 00002315  002 OF 004 
 
 
challenges have now added another challenge for the power utility." 
 
 
--------------------- 
CREDIT RATING WORRIES 
--------------------- 
 
¶6.  (SBU) Political meddling and uncertainty in resolving the power 
struggle at Eskom have raised questions about the South African 
Government's management of Eskom and other state-owned firms.  A 
political analyst at Standard Bank Securities, Alistair Sparks, 
said, "Serious institutions will be much more reluctant to lend 
money to Eskom, and if they do, it will be at a much higher interest 
rate because the risk seems to be higher."  Eskom's total capital 
expenditure program is R385 billion (about $52 billion) to increase, 
modernize, and diversify electricity supplies, of which R270 billion 
is targeted for the next three years.  The SAG has provided R60 
billion as equity and R176 billion in loan guarantees (still to be 
raised in debt markets), leaving a gap of R40 billion.  To cover the 
gap, Eskom is seeking a record loan of up to R23 billion ($3.1 
billion) from the World Bank and lesser amounts from the African 
Development Bank and other international institutions.  Eskom's 
credit rating fell over the past year amid uncertainty over funding 
plans for its expansion program.  Three major global rating agencies 
said they were concerned about the leadership tussle, even as 
Science and Technology Minister Naledi Pandor dismissed fears that 
it would scare off investors. 
 
------------- 
Skills Crisis 
------------- 
 
¶7.  (SBU) The Eskom crisis is further exacerbated by the high number 
of vacancies it faces for competent and skilled positions.  A 
confidential Eskom report showed a vacancy rate of 50 percent in key 
posts during the load shedding crisis, the Democratic Alliance (DA) 
said on  November 2.  Cobus Schmidt, DA shadow deputy minister of 
energy, said his party was in possession of the report from Eskom's 
Corporate Technical Audit Department authored in late 2007 that was 
circulated internally just a few months before the country was hit 
by major electricity supply shortages.  Schmidt said in a statement 
the report showed in clinical detail how Eskom's management had 
comprehensively failed to address "critical vacancies" in two 
critical areas: senior management posts, and short and long term 
coal procurement positions. 
 
--------------------------------- 
Timing of Rate Hike Application 
--------------------------------- 
 
¶8.  (SBU) Eskom has long called for significant rate increases to 
cover operating and capital costs and as an incentive for attracting 
private investment.  The National Energy Regulator of South Africa 
(NERSA) issued a 25-page document on October 30 asking for public 
comment within a month on Eskom's proposed rate increases of 45 
percent a year for three years beginning April 1, 2010.  NERSA will 
organize public hearings in all provinces from January 11 to January 
22, 2010, with a final determination on Eskom's tariff application 
by February 24, 2010. 
 
-------------------------------- 
Why such a Significant Increase? 
-------------------------------- 
 
¶9.  (SBU) Eskom says it would require a 146 percent tariff increase 
to avoid running at a cash deficit in 2010-11, considering both 
Qto avoid running at a cash deficit in 2010-11, considering both 
operating and capital costs.  To achieve this, the company requested 
even increases of 45 percent per year over three years.  Investec 
analyst Annabel Bishop said the tariff increase of 31 percent 
approved in 2009 had not been sufficient to cover the utility's 
costs and led to the record $1.3 billion loss for its 2009 financial 
year.  Eskom's operational expenses include the costs of water, 
coal, and imported diesel and nuclear fuel, as well as staff costs, 
consultancy fees, and maintenance.  Eskom also faces an 
environmental levy, borrowing costs, depreciation, and coal road 
maintenance. 
 
---------------------------------- 
Reaction to the Proposed Increases 
---------------------------------- 
 
¶10.  (U) There has been a significant outcry against the severity of 
 
PRETORIA 00002315  003 OF 004 
 
 
the proposed tariff increases from many areas of the economy, 
particularly from the retail and mining sectors.  Retailer Pick n 
Pay (PnP) CEO Nick Badminton identified rapidly rising electricity 
costs as one of the big challenges the retailer would face in the 
medium term, speaking at PnP's interim results presentation.  "This 
is a dramatic situation SA faces, not just for the business, but for 
the consumer.  We need to sit down as a country and work out how to 
go forward.  It would be a midsummer night's madness to allow this 
to go through." 
 
¶11.  (SBU) The Chamber of Mines economist told Energy Officer that 
what Eskom is asking for is not possible and it will get less.  He 
argued that Eskom will never be the panacea for the power crisis; 
private participation and greater efficiency must be encouraged. 
"We can kiss the beneficiation of minerals goodbye," African 
National Congress secretary-general Gwede Mantashe said on November 
6, asserting that three years of 45 percent increases could kill 
certain sections of the economy.  Gold miners across the board are 
asserting that the proposed tariffs would increase the cost of gold 
production by up to 30 percent over three years.  AngloGold 
Ashanti's chief executive Mark Cutifani expressed hope in finding a 
solution in consultation with Eskom and government, but said 
restructuring would be needed at his company's South African mines 
to ensure that they remain profitable.  The combination of a 
stronger rand, higher electricity tariffs, wage increases, and 
temporary shaft closures has already lifted the company's operating 
cost of each ounce of gold by 18 percent quarter-on-quarter (to 
September) to $525.  Gold Fields CEO Nick Holland said that the 
hikes would have a devastating effect on the industry and the 
economy.  He explained that the higher tariffs would increase the 
cost of mining gold by 17 percent even before taking into account 
the knock-on effects of wages and steel prices.  South Africa's 
third-largest gold producer Harmony Gold Mining cautioned that the 
tariff hikes could increase its costs by over 15 percent a year. 
Harmony CEO Graham Briggs said electricity costs would then increase 
from 13 to 25 percent of total costs in three years.  Briggs said 
the increases would boost the cost of steel and other commodities, 
while pushing inflation up to 2 percent higher.  He added that as a 
result, wages would increase 8 percent to 10 percent a year (in 
contrast to the forecast 6 percent). 
 
¶12.  (SBU) New projects in a number of sectors based on South 
Africa's relatively "cheap" electricity have been cancelled or put 
on hold.  It remains to be seen how existing long-term electricity 
contracts that attracted aluminum smelters and others will be 
handled. 
 
¶13.  (SBU) With respect to smaller users, increased tariffs could 
well cause an increase in non-paying customers; already a large 
percentage of consumers do not pay their bills and there are 
substantial illegal connections to the grid.  Seventy-six to eighty 
percent of the South African population has access to electricity. 
 
 
--------------------- 
Macroeconomic Impact 
--------------------- 
 
¶14. (SBU) A consensus view is emerging among economists that the 
Q14. (SBU) A consensus view is emerging among economists that the 
proposed electricity price rises could add about half a percentage 
point to inflation and cut the economy's growth rate by half a 
percentage point or more, stalling recovery from the global 
recession. 
 
------- 
Comment 
------- 
 
¶15.  (SBU) Eskom's leadership crisis weakens its ability to contend 
with its long-term power capacity and skills challenges.  Current 
well-below-market power pricing precludes essential private 
investment in the sector.    Without such investment, any 
substantial recovery in demand risks grid shut-down, which could 
take three weeks to restore.  The government cannot afford 
significant subsidies as an alternative source of investment.  At 
the same time, the company's request for a steep increase in 
electricity rates appears unlikely to be approved without 
modification.  Loans from multilateral development banks, essential 
to the company's efforts to bolster electricity supply before demand 
recovers and surges during the World Cup games (mid-June to 
mid-July), will need to be carefully scrutinized by donors. 
 
 
PRETORIA 00002315  004 OF 004 
 
 
¶16.  (U) BIO NOTE: Mpho Makwana was named by the Minister of Public 
Enterprises and the Board on November 12 as de facto interim 
executive chair, a chairperson with executive authority.  Meanwhile, 
the board has initiated a process to find a new CEO.  They hope to 
complete this within 90 days.  Makwana was appointed as a 
non-executive director for Eskom in 2002, holds a Bachelor of 
Administration (Honors) degree in Public Management, and is also 
Chairman and founder of investment holding company Epitome 
Investments.  Business Report noted that he served previously as 
Chief Executive of Saatchi and Saatchi in South Africa and sits on 
the Boards of Educor, WWF South Africa, and the International 
Marketing Council.  Makwana is reported to be a member of the 
Alliance for New Humanity, founded by mind-body physician Deepak 
Chopra as a network for those wanting a more compassionate world. 
In a radio interview on November 12, Makwana dismissed accusations 
of racism at Eskom, noting that the board is diverse by race and 
gender with majority black representation.  A number of black 
executives resigned during Jacob Maroga's tenure. 
 
Gips