BUDGET 2019 ANALYSIS

Mboweni’s The Eskom Job: The devil lives in the details

By Marianne Merten 21 February 2019
Caption
Finance minister Tito Mboweni prior to his 2019 Budget speech in Parliament on February 20, 2019 in Cape Town, South Africa. (Photo by Gallo Images)

Finance Minister Tito Mboweni delivered an uncompromising Budget on Wednesday, cutting the public wage bill and closing the piggy bank for state-owned enterprises. But the tale on Eskom was not quite complete, not in rands and cents, nor in policy.

Eskom definitely gets R23-billion in the 2019 financial year, and the same for the next two years, or a total of R69-billion over the medium term to the 2021/22 financial year. This is for it to deal with its precarious finances, including its R419-billion debt and its restructuring into three entities under an Eskom Holdings umbrella body.

With this comes conditions such as the appointment of a chief reorganisation officer, to be appointed jointly by the ministers of Finance and Public Enterprises.

That’s the clear-stated, public commitment by the government as outlined by Finance Minister Tito Mboweni to MPs in his maiden Budget speech.

The national government is not taking on Eskom’s debt. Eskom took on the debt. It must ultimately repay it. We are setting aside R23-billion a year to financially support Eskom during its reconfiguration.”

As always, the devil is in the detail, and with Eskom’s bailout that detail is found in Budget Review Annexure W3. There, the possibility of further financial support emerges:

Beyond the medium term, the size of support will depend on several factors, including economic growth, tariffs and the implementation of Eskom’s strategy.”

And so pencilled in for Eskom is the continuation of the R23-billion annual support over a decade, amounting to an amortised R150-billion, National Treasury confirmed to Daily Maverick after Wednesday’s Budget.

And while it was emphasised that this support was not a given and would depend on the state of play in three years’ time, the provisions have been pencilled in. That it wasn’t publicly and expressly stated in the Budget could be a narrow technical approach, as a budget cycle runs over three years, or the medium term. But by planning possible support for Eskom for a decade, it’s clear the problems at the power utility will not be resolved in three years.

The devil in the detail goes further. It includes significant private investment, diversification of energy producers, the restructuring of the energy market “across a multitude of power producers” and even private equity partners across the unbundled three units of Eskom.

With regard to the unbundling of Eskom into generation, distribution and transmission, as announced by President Cyril Ramaphosa in his State of the Nation Address earlier in February, a new transmissions company could be established as soon as mid-2019.

It would include “all existing Eskom transmission network assets, including grid and substations and association infrastructure, national control centre”.

According to Annexure W3:

Supply agreements with existing clients would need to be migrated to the transmission company.”

With regard to what is now called the “institutional separation” of Eskom, it is clear that process is aimed to “crowd private investment into the electricity sector” and provide “open access to the grid” while providing a stable platform for secure lowest-cost electricity.

Effectively, a wholesale re-orientation of Eskom is proposed in this annexure. The Budget review merely talked of the first step of the separation process being the transmission company inviting “the participation of strategic equity partners”.

Mboweni was asked at his pre-Budget media briefing whether bringing on board strategic equity partners did not amount to privatisation.

The president is correct when he says that Eskom will not be privatised,” he said, adding later that the national grid would stay with government through, for example, a debt-for-equity swap by the Public Investment Corporation, the asset manager of some R1.2-trillion in government workers’ pensions and social savings. This echoes a proposal floated by top ANC officials in mid-2018.

The bailout is crucial as Eskom remains the most significant risk to the South African economy, alongside the increasing pressure of other state-owned entities (SOEs) on the strained public finances.

Public Enterprises Minister Pravin Gordhan welcomed the announcement on Eskom on Wednesday, saying, “It’s moving in the right direction.” The announcements on Eskom alleviate one ministerial headache, although it still leaves him with the financially troubled SAA and Denel to deal with.

As SAA is renegotiating loan repayments on R12.7-billion in debt due in March, it is also set to require an additional R4-billion facility funded through a mix of recapitalisation, effectively a cash bailout, and government guarantees. That would mean SAA could also find itself with a chief reorganisation or reconfiguration officer, if Mboweni’s caution stands that it could no longer be a free lunch for SOEs given their “very serious risks to the fiscal framework”.

While Mboweni’s maiden R1.83-trillion Budget hit the usual notes on social grants, education spending and crucial infrastructure expenditure, it was a hard reality check in the wake of declining tax collection revenues and strained public finances — and made possible only by lifting the expenditure ceiling by R14-billion in the 2019/20 financial year.

A key win for the National Treasury, after years of battles across the governing ANC and its alliance partners, is the cut in the public sector wage bill — by R27-billion over three years with the anticipated early retirement, without penalties to their pension, of 30,000 civil servants, according to the Director-General, Dondo Mogajane.

The public sector wage bill, at 35% of Budget, was “unsustainable”, said Mboweni on Wednesday, adding that the first step would be the graceful retirement of older public servants, complemented by limits on overtime, bonuses and pay progression.

Intellidex analyst Peter Attard Montalto said National Treasury “managed to squeeze through public sector wage cuts and other trimmings… to in part fund the Eskom equity injections. Nevertheless, the money for Eskom (R23-billion annually over the medium term) is insufficient given the length of time that the Eskom reorganisation will take and the pitfalls that are ahead”.

And the cold facts of South Africa’s strained public finances include a daily interest payment price tag of R1-billion. This is incurred by borrowings to finance the gap between the R1.5-trillion revenue income and R1.83-trillion expenditure.

Put another way, we are borrowing about R1.2-billion a day, assuming that we don’t borrow money on the weekend. This coming year, interest expenditure will be R209.4-billion. This is R1-billion a day,” said Mboweni.

Opposition parties without fail bemoaned the lack of detail in Mboweni’s Budget. EFF leader Julius Malema said Mboweni “has nothing to offer”, while United Democratic Movement chief whip Nqabayomi Kwankwa described the Budget as “very scanty, no details”.

DA MP and finance spokesperson Alf Lees also questioned the lack of details, describing the Budget as “a valiant effort to pull a rabbit out of the hat given the state of the economy and that we are heading into an election”.

IFP spokesperson Mkhuleko Hlengwa said there was little new:

We’ve been down this road before and we’ve been unable to point to deliverables.”

It was a tricky Budget for the governing ANC, whose ministers sat largely grim-faced in the parliamentary benches as Mboweni delivered his reality check on public finances. But the ANC welcomed the Budget as one to give effect to growth and renewal.

It’s tough times. We need to take difficult decisions,” said ANC Treasurer-General Paul Mashatile. “The shift of resources to economic activity is correct.”

Enoch Godongwana, the chairperson of the ANC economic transformation National Executive Committee, said he welcomed the focus on fiscal consolidation, the positive focus on economic growth and message on SOEs. The announcements on the public wage bill did not amount to a reduction of the absolute wage, and should not stress out labour, Godongwana said.

Both said it was a Budget that the governing ANC could live with and market to its constituencies.

But then Mboweni put it very precisely in his Budget speech to MPs. While the president had outlined policy, it was his role to put the rands and cents to that policy. And rands and cents he delivered, with aplomb, in a squeaky-tight financial environment with very little wiggle room.

It’s just about Eskom, one of the biggest and most significant risks to South Africa’s economy, that questions remain: On the real required rands and cents, and the lack of a White Paper to outline a clear policy stance, not only on the power utility but the wider electricity energy sector. And that raises potentially difficult questions about governance. DM

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