Pencils are out as disaster looms

Tim Cohen, Weekender, Johannesburg, 12 April 2008

Journalists have many failings, but one little area in which we can often claim a modicum of expertise is that we do have an instinct for an impending disaster.

I often imagine in a fanciful sort of way that journalists most closely resemble the pack of wolves they are when something really deliciously disastrous is seemingly just around the corner. When this happens, all kinds of quiet sharpening of pencils takes place behind the scenes, which in a different time would look like hundreds of blades being sharpened over a grindstone.

The signs of a truly excellent disaster often look like something else: they seem to the people involved like they are getting to grips with a difficult situation. Hearing “the situation is under control ” is often a leading indicator of the situation that is about to become not under control. Any time anyone says that, I imagine the pack of wolves smiling sweetly, nodding genially and then quietly nipping off around the corner to get out their pencil sharpeners.

There is another leading indicator: acts of wanton disregard for common sense. Such as Eskom’s application to the National Energy Regulator of SA (Nersa) to approve a 60% tariff hike backdated to the beginning of April. It has all the signs of panic and a bizarre disregard for what people might think.

This week Eskom published its reasoning for the move, which comes only three months after it applied for an 18% increase and was granted 14,2%. That in itself is grounds for a quick pencil-sharpening exercise. But there is more.

Eskom’s justification for the increase is poorly elucidated. Nowhere in the report do you find the obvious things you think would naturally be there.

The most obvious is a simple calculation of what coal cost the organisation in the past, and what it will cost now. By some estimates, the coal price has increased 30% between December, when it made its 18% application, and now. Hence, a 30% increase might seem logical. So, either Eskom made a terrible mistake when it applied for an 18% increase, which is bad, or it’s massively overestimating now, which is worse.

The possibility that it is overestimating its requirements was strengthened after Nersa ran the numbers and found that Eskom would make a R12,7bn in profit if it were granted its 60% request. This would be about four times the profit it made last year after tax, and a larger profit than all but a handful of the very largest companies listed on the JSE. (Eskom keeps talking about a 53% increase, but this is a sleight of hand because it is reducing the extent of its actual application by chopping off inflation.)

Eskom’s own calculation is that it would make a profit of between R1bn and R4bn after the 60% increase. But this doesn’t make sense, because it also claims that without this increase — but with the 14,2% increase it has been granted — it will make a loss of around R10bn.

The proportions are just all wrong. Instinctively, even with the rise in coal prices, it seems extraordinary that a 60% increase in income would result in such a small change in profitability compared with the R6bn profit it made in 2007-08, unless of course there is something external we don’t know about, like a huge black hole in Eskom’s books.

One possible explanation is that Eskom wants to use the extra cash to build up stockpiles by buying coal on the spot market. If this is so, what happened to the existing stockpiles, and why were they run down? One possibility is that they were run down in order pump up the profit made by Eskom last year. And if they did that, then you have to ask whether this was done to pump up management’s bonuses, which are presumably based on the profitability of the company, as is normally the case.

All of this leads to an inescapable conclusion: we must, as a matter of urgency, find that pencil sharpener.

From: http://www.businessday.co.za/weekender/article.aspx?ID=BD4A746914

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