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The Company that Anticipated History

strategy+business | February 16, 2007

Eskom employee. Photo by Graeme Williams.

Driving along the old two-lane road from the Republic of South Africa's political capital, Pretoria, to its commercial hub, Johannesburg, a visitor sees two strikingly different nations. The first South Africa looks like an emerging economy in hypergrowth. Hundreds of acres of rolling hillsides are rapidly giving way to new four-lane highways, office parks, shopping centers, and housing developments of modest and McMansion-style homes. Bars and restaurants cater to young, university-educated, upwardly mobile professional blacks—a category that didn't exist 15 years ago.

The second South Africa consists of a predominantly black population mired in poverty. Next door to many of the new malls and mansions are sprawling shantytowns of rusting metal shacks. Men and women in tattered clothes walk from them daily through tall grasses down to the urban roads. On their heads, some balance baskets filled with fruits and vegetables or trinkets they will try to sell to travelers. Day laborers jam themselves into ramshackle minivan taxis that take them to pickup points for construction or farm work.

South Africa's president, Thabo Mbeki, calls these two South Africas the "first" and "second" economies. They are a legacy of apartheid, the system of racial segregation that governed South Africa from 1946 to 1994, effectively excluding nonwhites (who make up 79 percent of South Africa's 47 million people) from the nation's economy and politics. Even with GDP growth averaging three percent since 1994, and more blacks rising out of poverty to enter the first economy, whites' per capita income of 82,000 rand (11,000 U.S. dollars) is still more than five times that of blacks, and black unemployment remains a problem.

Access to electricity is always an important first step up the economic ladder. In South Africa, Eskom Holdings Ltd. provides that first step. A government-owned corporation headquartered in the Johannesburg suburb of Sandton, Eskom generates 95 percent of the country's electricity.

Many organizations debate whether their business has social responsibilities, but Eskom's core business is itself a social responsibility. Without electricity, educating children is difficult; families must heat their homes with coal or wood, a major cause of respiratory diseases; and new businesses and employment opportunities can't grow. Eskom receives 80 percent of its revenues from industrial customers, but the company also has a self-imposed mission: to deliver electricity to all individuals, especially those who, in every sense, have lived without power.

Eskom adopted this mandate not in the wake of apartheid's fall, but in the mid-1980s, when it was legally prohibited from providing electricity to black communities. The company's early embrace of "electricity for all" (as the policy is called) allowed the company to play a leadership role early on in the social transformation of South Africa.

Ahead of Change

Eskom's leaders take the position that because no business can perform to its full potential in a society that is failing, companies must be involved in the societal health of their country. "It's not only that society needs strong and sustainable businesses. Businesses need sustainable societies in which to operate," says Wendy Poulton, Eskom's general manager of corporate sustainability. "Our view is if you don't recognize this as a business, you're going to be out of business."

Since the inception of "electricity for all," Eskom has electrified an average of 300,000 additional homes annually. In 2006, Eskom reported delivering electricity to 3.3 million homes, compared to only 120,000 during the last years of apartheid. To be sure, this electrification rate lags behind those of other emerging economies, such as India and China, but it means that 66 percent of the South African public has electricity, which is up from 30 percent a decade ago. This rate is more than four times the percentage in the rest of sub-Saharan Africa.

Throughout its history, Eskom has had to manage the complex relationship among South Africa's government, financial, and industrial sectors. The utility traces its origins to private entrepreneurs at the beginning of the 20th century who won the first concessions to transmit electricity to the newly discovered gold deposits of the Witwaterstrand, the mountain range in northeastern South Africa that now houses the richest gold mines on earth. In 1910, when the Union of South Africa was formed, the Transvaal provincial government, representing the heart of the mining region, declared that supplying electricity was too important a public service to leave in private hands.

In 1923, when apartheid was still a relatively informal policy in the country, the Electricity Supply Commission, abbreviated to Escom (the spelling was later changed), was created to absorb and run South Africa's electricity assets, with no profit requirement.

Escom was one of the first parastatals — South Africa's state corporations. Together with Iscor, which produces iron and steel; Sasol, which refines liquid fuels and other products from coal; and Foskor, which mines phosphate, Escom provided the infrastructure and raw materials to grow South Africa's economy. The parastatals also provided critical support to the government's increasingly separatist regime. After 1948, when apartheid became national policy, the government and therefore Escom effectively wrote off most black townships, arguing that their inhabitants would one day return to the so-called homelands. This homeland policy, or "grand apartheid," inhibited investment in township infrastructure, schools, and other basic services. However, the demand for electricity increased among the white population — enough to drive Escom to expand its generating capacity dramatically in the 1960s and early '70s.

When the utility made plans to erect five coal-fired power stations, Dr. Ian McRae, then the head of power station operations, saw a large problem ahead: a shortage of white workers with the skills needed to staff those plants. "We realized we had all these new power stations coming on and we didn't have the people to operate them," recalls Dr. McRae.

His solution was to begin training blacks to fill these positions, even though most were illiterate and apartheid outlawed them from being anything more than unskilled laborers. At the time, the laws reserved certain jobs for whites, and white trade unions jealously guarded those rules. (Black trade unions were illegal until 1979.) Breaking the law, though, wasn't what most concerned Dr. McRae; rather, he worried whether Escom's employees would support such radical measures. So he set up meetings at each power station with trade union representatives, plant managers, and black laborers to discuss the idea of blacks' doing jobs traditionally performed by whites. Reassured that there would be minimal resistance, Dr. McRae started introducing blacks into the ranks in the new position of "operating assistant" and providing them with the training to develop their technical skills.

By the late 1970s, worldwide condemnation of apartheid had left South Africa isolated, and its economy was stagnating. Demand for power plummeted, and it soon became clear that the power stations Escom had committed to build were no longer needed. After the company jacked up prices to offset the costs of construction and operational misfires, it found itself in financial difficulty.

That's when the government stepped in. In May 1983, a commission appointed by the Minerals and Energy Ministry and led by mining executive W.J. de Villiers found fault with Escom's management of forecasting, governance, accounting, and investment. Escom was now a national embarrassment. The De Villiers Commission replaced its existing hierarchy with a new two-tier governance structure. An Electricity Council, appointed by and reporting to the government, represented the stakeholders, including consumers and unions, and set policy. Below that was the management board, which ran the company. For the first time, Escom would be accountable for profits and losses.

In 1984, the De Villiers Commission nominated Dr. McRae to be Escom's chief executive. For chairman of the new management board, South African President P.W. Botha chose Dr. John B. Maree. The two men, temperamentally quite different, took on financial and cultural reforms together. Dr. McRae was the consummate company man. Soft-spoken and professorial in demeanor, he had started at Escom as an artisan's apprentice in 1947. He was well-liked and respected inside the company and in the industry. Dr. Maree, a turnaround specialist, was renowned for his shrewd political instincts and his blunt management style.

Electricity for All

While Dr. Maree drove the company to higher performance, Dr. McRae started to champion the vision of "electricity for all"—a response to the change he believed was inevitable. "South Africa was facing political transition, either through armed struggle or political negotiation," he wrote in his memoir, The Test of Leadership (EE Publishers, 2006). "When (not if) the ANC came into power, Eskom needed to be performing to the satisfaction of everyone in our country and that included making electricity available to all, not just one third of the population."

Dr. McRae proposed that Eskom begin offering electricity directly to households in the townships. Other executives agreed, but saw his plan as too risky, politically and financially. They weren't convinced blacks really wanted electricity; the few who could afford it complained of poor service and exorbitant bills. Furthermore, there was no commercial logic for growing a customer base of poor households, especially because at the time it was still illegal for Eskom to do so.

Before pressing for further support within the company, he decided to see for himself if there was market demand. At great personal risk, he went to townships, where few whites had ever ventured, to ask residents directly whether they wanted electricity, and if they would pay for Eskom's service. With the help of the then-banned ANC, he met at night with people in churches and in their homes. On one visit to Soweto, Dr. McRae learned why the bills were so high: Meters were locked in cubicles on the sidewalks and were not read regularly. "When I went to those meetings, I got a clear signal that they did want electricity if the price was reasonable and they could get decent service," he says.

To achieve that goal, the utility had to devise a completely new way to collect payment. There was no postal service, and most residents had no fixed address and did not hold regular jobs. Eskom came up with a revolutionary prepayment system that is still in use; an in-home metering system that changed the dynamics of the black political struggle — withholding payment was a frequent form of protest — and forever altered the business model of Eskom.

The in-home system used fare cards purchased at the post office; customers inserted them into the meter to activate the electricity flow. Four lights in the meter box allowed residents to monitor how much electricity they had left. The system also helped residents and the company avoid a mishap that both hated: service disconnections for nonpayment.

Equalizing Opportunity

As the company worked to desegregate power delivery, its leaders attacked segregation inside Eskom. Dr. Maree recalls becoming committed to the idea when the company opened its Matimba power station, near the Botswana border, in 1987. "I'll never forget one man who came up to me and said, ‘Dr. Maree, electricity has no color. Eskom should not have color.' That really hit me." To be a top-performing utility, he and Dr. McRae declared, Eskom had to fast-track development of the staff from all races. They also argued that Eskom would better serve black customers if black workers at Eskom held positions of authority.

Eskom's willingness to integrate its work force as far back as the 1970s paid an enormous dividend in building the company's capacity for leadership. "I joined the company in 1993, when the country's transformational initiatives were in their infancy," says Thulani S. Gcabashe, Eskom's current chief executive officer, who started as an electrification manager in Natal. "Eskom saw its chance to get an early start — make our own mistakes and learn from them. So by the time the rest of society was ready to start putting out guidelines, we were the ones being consulted. If you look at the Employment Equity Act of 1998, it is very much based on what we started doing in the 1990s."

Even today, Eskom is one of the few South African corporations to consistently meet or exceed the requirements of the first post-apartheid government's 1995 Reconstruction and Development Program, which included targets for promoting affirmative action and bringing water and electricity to poor communities. In 1993, 60 percent of all Eskom employees were black, and five percent of the managerial, supervisory, and professional staff were black. By the time Dr. Maree retired in 1997, more than 50 percent of the managerial and technical professionals were black.

Ubuntu Management

When Mr. Khoza succeeded Dr. Maree, he brought along his own visions for Eskom. As the company's first black chairman, accountable to South Africa's first black government, Mr. Khoza felt his mandate was to complete the integration of Eskom while ensuring it continued to perform at a high level.

To meet this management challenge, he applied an African humanist philosophy known as ubuntu. Translated from Zulu as "I am because you are, you are because we are," ubuntu is based on the idea that human beings derive their primary identity from the communities where they live and work, and that these communities must therefore demonstrate respect for people in large and small ways. Mr. Khoza says the ubuntu ethic helped him recognize that white executives held most of the skills and knowledge needed to manage the company. "I could not behave like a bull in a china shop and decree that there will be black managers tomorrow," he says. "I strove to understand the business, not just the business as it technically performs, but the people who deliver and how to motivate them to deliver."

Eskom sustains its social leadership without sacrificing financial performance. The company has consistently earned a profit since recovering from near-bankruptcy in 1984. It has also earned investment-grade credit ratings from Standard & Poor's, Moody's, and Fitch — a claim few state-owned utilities in developing countries can make.

But one doesn't have to be government-owned, or African, to find inspiration in Eskom's story. These days, every company's performance is in some way tied to the social and political environment in which it operates. If Eskom is a model for companies facing such enormous changes as global warming and soaring health-care costs, then the most effective approach is not risk management as usual.

Eskom thrived by anticipating the course of history and stepping out in front of change, thereby building its capacity to lead. Its example suggests that any other company can do the same.

This is an abbreviated version of an article reprinted here with kind permission from strategy+business.

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Read More: Development, Energy, Ethics, Jobs, Poverty, South Africa, Africa

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