Saving Eskom requires tough decisions – not magical thinking
Already three finance ministers ago, Eskom was described as the biggest risk to South Africa. Tough decisions had to be taken, but instead what unfolded was a search for that pot of gold at the end of the rainbow. It’s necessary to cut through the BS.
South Africa and Eskom today are back where they were in January 2019, except worse for wear. Eskom’s debt has increased in the past seven months to R450-billion, from around R419-billion. And it can’t meet its obligations after October, as President Cyril Ramaphosa put it in his June State of the Nation Address. The power utility pushed South Africa to the edge of financial collapse at the end of March, triggering an emergency intervention to fund Eskom’s liabilities it could not otherwise meet.
What are the financial options?
All choices are bitter, particularly given the frayed public purse. But the options haven’t changed, regardless of political massaging and kicking for touch in the hope of a unicorn solution. It might not be a case of either or, but there are only three options:
One, cash bail-outs. That’s already happened, once and then again. February’s Budget allocated R23-billion for 2019, and the next nine years after that. On top of that came an addition R26-billion for the 2019 financial year, and R33-billion in 2020, under a Special Appropriation Bill tabled in Parliament on 23 July.
Although the bill raises the possibility of conditions for the transfer of R59-billion over two years, because no conditions actually were announced this money is effectively a free handout. To put it slightly differently: this R59-billion bailout wipes out the R50.3-billion government saved by cutting down in departments and state entities, according to the 2019 Budget documentation.
Two, the government takes over some of Eskom’s debt. The power utility at the start of 2019 had lobbied for R100-billion – it didn’t happen in the Budget as National Treasury put its foot down – and now the figure mooted is R250-billion. Taking debt off Eskom’s books should allow it to borrow money internationally at better rates, while the government is seen as able to carry billions of rand more debt even if it pushes the debt to gross domestic product (GDP) ratio to 60%, that threshold is where investors may start to think twice.
A twist to this was the notion the debt should be taken over by the Public Investment Corporation (PIC) that manages R2-trillion assets of government workers’ pensions and social savings. This version was first mooted by the ANC top six in mid-2018. Trade unions and federations like Cosatu and South African Trade Union Federation (Saftu), but also Fedusa, pushed back as their members’ monies are at stake.
Three, a special purpose vehicle to take over the debt and deal with it by, for example, issuing bonds. The idea of a green fund of up to R200-billion has also been mooted – some from within the presidential Eskom sustainability task team such as Professor Anton Eberhard have lobbied for this in public, as reported in City Press. But, again, that green fund is a walk down the yellow brick road given the financial pressures on the national coffers.
But there had been a plan for money for Eskom to unbundle and more. What happened?
Politics and politicking.
In his 7 February 2019 State of the Nation Address (SONA), Ramaphosa had talked tough about Eskom – and the need for government’s financial support to the power utility, users paying for services, and also the utility’s unbundling.
“It is imperative that we undertake these measures without delay to stabilise Eskom’s finances, ensure the security of electricity supply, and establish the basis for long-term sustainability,” he said. But a week later Ramaphosa had backtracked, saying unbundling meant neither privatisation nor retrenchments.
It was all supposed to happen in sync, more or less: government’s financial support, appointing the chief restructuring officer (CRO) and unbundling Eskom into three entities for generation, transmission and distribution.
The first such entity, transmissions would be up and running as soon as mid-2019, according to Annexure W of the February Budget documentation. Incorporating “all existing Eskom transmission network assets, including grid and substations and association infrastructure, national control centre”, it would transfer existing supply agreements, “crowd private investment into the electricity sector” and provide “open access to the grid” while furnishing a stable platform for secure lowest-cost electricity.
Or as Finance Minister Tito Mboweni said in his Budget speech on 20 February 2019:
“Pouring money directly into Eskom in its current form is like pouring water into a sieve. I want to make it clear: 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 [unbundling]. The fiscal support is conditional on an independent chief reorganisation officer…”
Instead, weeks passed when “names are being considered”, according to official responses, in what signalled disagreement in Cabinet. That the finance and public enterprises ministers were not necessarily on the same page emerged when Mboweni, in introducing the Eskom Special Appropriation Bill in the House on 23 July, said a CRO could be appointed later that day, “pending finalisation of consultations” with Public Enterprises Minister Pravin Gordhan.
That didn’t happen. It was only on 30 July during Eskom’s financial statement announcement, some five months after the initial announcement, that Gordhan named the secondment of South African Institute of Chartered Accountants (Saica) CEO Freeman Nomvalo as Eskom CRO.
In a subsequent statement, Saica said it was putting together “a team of specialists” led by Nomvalo after he agreed to act as CRO.
“The Saica board agreed to the request based on the importance to South Africa and its economy to avoid a possible downgrade at Eskom, which is likely to result in a sovereign downgrade if the Eskom restructuring is not urgently guided by responsible leadership,” it said, adding this assistance to government project would be part of Saica’s “nation-building” initiative.
But the CRO now is just about the financing – and the debt problem – rather than the unbundling of Eskom into three sustainable entities of generation, transmission and distribution as Ramaphosa announced in his 7 February 2019 SONA. Business Day on Monday quoted Gordhan saying the sole job of the CRO was to make recommendations on the restructuring of Eskom’s debt.
But many analysts and economists at this stage say there really are no other options than the three already identified long ago (see above).
“The credibility deficit with investors now clearly lies with the government and the lack of decision-making, range of (political, ideological, ego and capacity) blockages and need for clarity on the way forward rather than can-kicking,” was how Intellidex Capital market research head Peter Attard Montalto put it in a recent brief.
So what about that unbundling? Has anything happened?
Politics and politicking.
Former finance minister Nhlanhla Nene in 2018 expressed similar concerns, describing Eskom as a “threat” to South Africa’s investment strategy at a June 2018 World Economic Forum roundtable. He had already said the restructuring of Eskom was “top of the agenda” when addressing investors and others in London, according to Reuters.
Nene was gone by October when he resigned after it emerged he had met the Guptas in contravention to an earlier denial. But his successor, Mboweni, in the 2018 medium-term budget policy statement (MTBPS) also maintained the need for Eskom’s restructuring given the “significant” threat the power SOE posed to South Africa. It was eventually announced by Ramaphosa in his pre-election February 2019 SONA.
It’s complicated, because some of the politicking is intricately linked to the support Ramaphosa got in his campaign to clinch the ANC party presidency – Zingiswa Losi, then a Cosatu deputy president, now the labour federation president, was deputy secretary-general on the CR17 ticket – but also in the ANC election campaign that heavily featured Ramaphosa.
Subsequently, Cosatu and the South African Communist Party (SACP), which also strongly supported Ramaphosa, stepped in to prevent the appointment of some of the more controversial candidates amid factional jockeying. A Cosatu insider has outlined talks not only ahead of the Cabinet appointments, but also at Parliament where Cosatu/SACP intervention stopped, for example, former state security minister Bongani Bongo heading the justice committee, although he was announced as home affairs committee chairperson.
That influence meant Cosatu affiliate the National Union of Mineworkers (NUM) could summons the president and two of his Cabinet ministers, Gordhan and then still energy minister Jeff Radebe, to its offices in the not so lekker parts of downtown Johannesburg, as happened on 18 March.
“Eskom workers are very angry towards the attitude demonstrated by the leadership in government who are, in most instances, unable to explain what the unbundling would mean to them in terms of job security,” said the NUM.
“Most importantly, the NUM is relieved after being assured by the president that no jobs will be lost in the process of unbundling and that the power utility will remain 100% state-owned”.
In an economy with persistently high unemployment, job cuts and retrenchments are always going to be prickly – politically, and also from a human point of view, given the dim prospects of another job. But Eskom has about 600 mangers, not all of whom seem to have concrete responsibilities, as MPs of the public enterprises committee heard earlier in 2019 when they were told Eskom was technically bankrupt.
So what’s the next step?
Overdue, but it must be the so-called “special paper” or roadmap that is now supposed to outline Eskom’s broader future. That would have to be the unbundling into three entities, and more.
It’s not quite a White Paper, the jargon for a widely consulted-about government policy instrument, but it is meant to set out the broader context of Eskom’s future. Or, as Ramaphosa described it in his reply to the post-2019 election June SONA: “a special paper on Eskom detailing a roadmap for the entity’s future”.
But it’s more politics and politicking.
It’s not quite clear who exactly is drafting this special paper that was initially widely expected, at the latest, with the Eskom Special Appropriation Bill towards the end of July.
At one stage it seemed the drafters were the National Treasury. Finance director-general Dondo Mogajane at the start of July indicated the special paper was just about done and dusted. But now it seems the drafters are from Public Enterprises – with others. Gordhan is quoted in Monday’s Business Day as saying the special paper that is being drafted by officials from the Presidency, the National Treasury and the departments of energy and public enterprises would be ready by mid- September.
Whether that will happen remains to be seen, but the presidentially mooted deadline for such a “roadmap” was before October’s MTBPS.
As far back at the 2017 MTBPS, then finance minister Malusi Gigaba said the governance and financial failures at Eskom were of grave concern.
“As government is guarantor over a significant portion of Eskom’s debt, it has become a significant risk to the entire economy. Eskom is simply too important to the country to fail, and we will not allow it to.”
In 2019, Eskom remains a severe headache for Mboweni. He described it as a “significant” risk to South Africa.
“Fiscal support [to Eskom] will come at a significant cost to the fiscus and the South African taxpayers,” said Mboweni on 23 July when he introduced the Eskom Special Appropriation Bill in the House.
“We really and truly cannot go on like this,” he added later.
It remains to be seen if the political backbone exists to take those politically unpalatable decisions – and act on them without delay. DM