Analysis: Is a major Eskom restructuring on the cards? Yes; No; Maybe?
- Branko Brkic
- 28 Apr 2010 12:57 (South Africa)
With South Africa's future depending greatly on the state of its infrastructure, Eskom's well-being is of great interest to all. And when the rumours of its restructuring start to swirl, we’d better know as much as we can about it.
On 16 April 2010, Fin24 published a report that may have startled some and sent shudders through ideological die-hards within the Tripartite Alliance.
The article was apparently based on discussions with Eskom’s new finance director Paul O’Flaherty, and human resources director Bhabhalazi Bulunga. It stated: “Eskom is planning a major restructuring, which could involve a partial privatisation and a major shake-up of its labour force … the company may be split up, and certain of its assets privatised, in a similar fashion to that of arms utility Denel”.
The very same day, this was promptly and vehemently denied in a press release from Eskom’s media desk, in which O’Flaherty was quoted as saying, “Eskom is looking at standardising and streamlining its systems and processes across the business. We have had no discussions about reducing our workforce and have not made any changes to our labour policies”. The press release stated categorically that Eskom had no plans of restructuring as outlined in the Fin24 article.
Two apparently contradictory reports? Let’s take a closer look at the three pillars of Eskom’s business – generation, transmission and distribution – to try to understand what’s actually going on here.
When Eskom reduced its MYPD 2 application to the national energy regulator late in 2009 for a price increase from 45% to 35% a year for three years, it made it clear that the downwardly revised 35% application was premised on the following new provisos:
- Eskom would need to sell a 30% to 49% stake in its Kusile power station (currently under construction),
- Eskom would not build Coal 3 (the next base load coal-fired power station after Medupi and Kusile), and
- Eskom would not build Nuclear 1 and 2 (base load nuclear power stations which would cost two to three times more than equivalent coal-fired stations).
In the event, the price increase determined by Nersa, in response to Eskom’s application, was even further reduced from 35% to 25% a year for three years. This means the utility will be significantly more cash-strapped, and begs the question what else will Eskom not be doing, and what else will Eskom have to sell off to meet the resulting increased funding shortfall.
Eskom’s rebuttal of the Fin24 report does acknowledge that, as part of its strategy of finding additional funds for its capital expansion, “the utility has appointed JP Morgan to help raise funds for its expansion programme and Credit Suisse as transaction advisor for the sale of an equity stake in the Kusile power station. JP Morgan will formulate a corporate view and advise Eskom on the best funding options available on the market, and these options will be presented to the Eskom board and the department of public enterprises for final approval.”
A wide range of options is apparently being considered, with up to 50 different funding models said to be on the table. The options will, of course, include the possible sale of the 30% – 49% stake in Kusile to private equity investor(s), but Eskom might find it easier and more rewarding to sell off some of its existing generation assets.
President Jacob Zuma announced in his state-of-the-nation address in February, “We will establish an independent system operator, separate from Eskom Holdings”. This work is in progress, and the department of energy’s working group 6 of the interdepartmental task team (IDTT) has prepared a concept paper (dated 15 March 2010) for the interministerial committee (IMC) on energy on the establishment of an independent system and market operator (ISMO).
This concept paper is sharply critical of a central role for Eskom, which it says inhibits the development of industrial cogeneration and the entry of independent power producers (IPPs). The concept paper says there is a need to change the current business model, funding model and the market operator to attract investors. To this end, it says that the implementation of the ISMO is critical for the development of a sustainable environment that encourages IPP participation in assisting to resolve the energy crisis.
In essence, it advocates carving out Eskom transmission, its systems operation and planning division and the Eskom single energy buying office from Eskom Holdings into a separate and independent state-owned company (the ISMO) in line with international best practice. This separate company will then also be the market operator, which will conduct the purchase of electricity from various generators, both Eskom-owned and IPP-owned.
The Fin24 report stated, “The first business unit apparently on the line is distribution. Up to half of [Eskom’s] labour force may be sold off to new owners as part of the partial privatisation, and jobs may be on the line”.
Apart from the word “privatisation” (which perhaps more accurately should read “corporatisation”), this is not out of line with current government policy. For a long time it has been planned to rationalise and “corporatize” the 185 municipal electricity distributors and six Eskom distributors into six independent, state-owned, wall-to-wall regional electricity distributors (REDs), separate from Eskom.
EDI Holdings, a state-owned project and holding company, has been established to facilitate this restructuring of the electricity distribution industry (EDI), and the previous seven Eskom electricity distributors have been restructured into six ring-fenced distributors aligned with the planned REDs.
A critical enabling factor for the restructuring of the EDI still is the valuation of Eskom’s distribution business and assets, and the resolution of financial compensation due when the business, assets and personnel of the six Eskom distributors are transferred from Eskom Holdings to the REDs.
Such disposal and financial compensation could be very useful to Eskom in its current funding dilemma. Its distribution business is hardly a money spinner and is currently cross-subsidised. Excluding municipalities, customers are mainly widely geographically dispersed farmers and low-income rural and township domestic consumers, characterised by high service costs and low sales volumes, with high levels of non-technical losses (theft and non-payment) of around 35% among Eskom’s residential customers.
So will all the restructuring, “corporatisation” and privatisation actually take place? Yes, we believe so – at some stage or other, and in one form or another - exactly when is difficult to say because a lot of this has been on the cards for years.
But when the environment suddenly changes and the cupboard is bare, dinosaurs quickly disappear – the old game is over and a new one begins. As in the final days of the old Soviet Union when the Wall came down, the old dominant players were generally confused and didn’t immediately realise what’d hit them.
Over the next 30 years, the costs of new generation, transmission and distribution capacity to meet demand, of replacing our current aging fleet of power stations, of cleaning up our act with nuclear and renewable energy and of meeting our CO2 reduction commitments in terms of the Copenhagen Accord, will significantly exceed R1.5 trillion. These costs are beyond the means of both Eskom and the state.
The writing on the wall is clearly saying that the days of Eskom’s monopoly are over, and a new era of local and international private-sector participation in the power sector has commenced. This is inevitable. Maybe we are going to need some more pain in the form of further blackouts, load-shedding and lost investment opportunities to convince the die-hards. And then the restructuring proper will begin.
By Chris Yelland
(Yelland is the Managing Director of EE Publishers)