South Africa has been living with Stage 2 load shedding for almost a week. The odd thing is that in sharp contrast to December 2019 or October 2019, load shedding has not been accompanied by a dire narrative. Contrary to past episodes, it does not feel as if the load shedding potentially presages the collapse of the entire grid, which would leave South Africa without power for up to two weeks. 

There seem to be a few reasons why this is the case. First, it is summer, so the amount of time we spend in the dark is more limited. 

Second – and more relevant – this time around, it appears to be planned. There has been clear communication that the load shedding is facilitating long-term maintenance on power plants. We have also been warned that the load shedding is likely to persist (to varying degrees) for the next 18 months. 

The new Eskom CEO has explained the causes as a combination of a lack of maintenance, inadequate providers of maintenance and poor-quality coal, which have together resulted in a declining energy availability factor over the course of the past five years. Operational stability is key to fixing Eskom, and that problem has been clearly laid out. 

Third, there has finally been a societal consensus that the financial crisis at Eskom needs to be dealt with. Cosatu has proposed that the Public Investment Corporation (PIC), the Development Bank of South Africa (DBSA) and the Industrial Development Corporation (IDC) should collectively acquire up to R250-billion of Eskom debt and convert it to equity.

That would go a long way to lowering the unsustainable interest burden that Eskom faces. However, while recapitalising Eskom has to be a key part of the plan, a recapitalisation without an operational plan that dramatically lowers coal costs (and improves coal quality), improves maintenance and streamlines the workforce will ultimately fail. It will simply give the utility room to acquire more debt and end up in exactly the same situation in another five years. 

If the fiduciary issues around utilising the money in the PIC, the DBSA and the IDC to recapitalise Eskom can be overcome, the next challenge is to ensure that any such recapitalisation does not result in massive moral hazard. After all, it is very unlikely that Eskom equity is going to recoup the value of the debt in the future. 

The justification for such a decision would be that the debt conversion would support the other assets that each of those institutions holds by stabilising Eskom, supporting confidence and boosting South Africa’s growth outlook. However, for this to occur, any equity conversion would need to be contingent on the necessary operational improvements occurring.

If the PIC is indeed able to consider debt to equity conversion, any such conversion should be contingent. Step one would be a six-month interest holiday. If Eskom meets specific operational targets, then step two would involve an extension of the interest holiday for a further period, perhaps 18 months. If Eskom meets a more comprehensive set of operational targets, which should include the set-up of an independent buyer of electricity, then the debt would be converted into equity in two years’ time.

In this way, Eskom would receive the financial relief that is badly needed to give it room to make badly needed operational improvements – without removing the imperative to make these changes. The risk of an immediate equity conversion is that when the pressure is removed, no operational changes are made.

The biggest injury to confidence in South Africa is the incessant feeling that we are hanging off the edge of a cliff – in various ways; fiscally, electricity supply and crime. The largest cause of the persistent slide towards the precipice has been the government’s unwillingness to take decisions, especially hard decisions. The inability to implement structural reforms, such as visa regulation or opening the grid to private generation, has led to weak GDP growth. The inability to control public-sector wage growth has resulted in an unsustainable budget deficit. The inability to overhaul Eskom’s coal procurement means that Eskom’s income statement is structurally under pressure.

We are now at the point that the only solution is for decisions to be taken. Maintaining the status quo will tip us over the edge. This is not a surprise. This trajectory was visible in 2019. Promisingly, decisions are now being taken. The worry is that it took Stage 6 load shedding in mid-December 2019 for government to make decisions. Rebuilding confidence requires the average household or business in South Africa to believe that government planning, policies and decisions are considered and forward-looking.

I’m grateful that we seem to have made a fair bit of progress on Eskom in the past six weeks. However, long-term growth requires hard decisions to be taken before we are about to fall off the cliff. And while Eskom needs financial relief, it cannot be so much relief that the immediate pressure on the entity and government to make hard decisions is removed. DM