Eskom presented their latest financial results yesterday. To a surprise of many, they produced an annual profit of R3,6 billion. Although in general a profit is what you would want a company to produce, in this case it raises serious questions about the management ability, motivation and morals.

In the last financial year where we have seen the capacity utilisation drop, meaning that of the installed capacity to produce electricity, less was available to actually produce electricity because power stations were offline for repairs. This lead to forced load-shedding, impacting most of the economy. What Eskom seems to forget is that electricity is a vital ingredient to the functioning of an economy, much like water is a vital ingredient to life. Without it, much of the economy simply doesn’t exist. Thus manufacturing plants had to lay idle for a few hours a day, shopping centers had to close early and restaurants were not able to serve food. Stopping the flow of electricity has a multiplying effect that is far greater than the actual cost of the electricity. When you produce a R3.6bl profit, surely more could have been done to reduce the amount of load-shedding. I remember that one of the reasons given at the time was that they did not have enough money to spend on diesel to keep the expensive gas generators running. Well, seeing that they did report a profit, that must have been a false statement.

Another concern is why they tried hard to lobby for steeper increases in electricity prices if they managed to produce a profit in the financial year. Seeing that electricity is a forced input cost, it should be in everybody’s interest to keep it as low as possible. The low electricity prices used to be a big competitive advantage to producing in South Africa, but that is now truly in the distant past. The current electricity supply is a detractor to the attractiveness of manufacturing in South Africa.

I however have a suspicion that reducing the maintenance capex derived the profit. The maintenance capex is the money spent on maintaining the capital. Like anybody would know who wants a house, it requires regular upkeep to prevent it from falling into disrepair. Transmitting cables, transformers, power stations and their general infrastructure have a given lifespan. Even though they still work, they would need to be replaced before they break, to prevent the system from collapsing. The bigger the infrastructure is, the bigger your maintenance capex should be. So, by just reducing it a bit gives you a massive boost to your cash flow and to your bottom line. It can make the company look good, even though they have just kicked the can down the road, and more problems will emerge further down the line. In the meantime, management can pad themselves on the back, and pay out handsome bonuses.