Eskom reconfiguration set in motion

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Following President Cyril Ramaphosa’s State of the Nation Address (Sona) last month in which he announced government’s plan to split the utility into three divisions, government’s immediate focus is to address the substantial risks that the power utility poses to the economy and public finances.

The three entities will operate under a single state-owned holding company with the Eskom board currently developing a sustainable operational plan for each business which government will consider over the next three months.

Last week, the Department of Public Enterprises told Parliament that the utility in its current form is not financially sustainable.

The 2019 Budget Review document highlighted that the utility cannot meet the country’s electricity needs emphasising the Sona's urgent need to restructure the electricity sector.

Creation of a transmission company

Since the Sona announcement, Eskom has proposed the establishment of separate subsidiaries each with its own board.

The first step in the separation process will be to transfer a portion of Eskom’s assets to a new transmission company. In line with the president’s statement, the new company will invite the participation of strategic equity partners that will provide capital for the business and strengthen oversight.

The assets, debts, people and licenses of the respective businesses will be migrated to the subsidiaries. In time Eskom will be required to provide separate, audited financial results for each of their three businesses on a preliminary basis.

“Priority will be given to the creation of the transmission company by establishing a subsidiary of Eskom Holdings with an independent board appointed by mid-2019,” said the document.

The new company’s assets will consist of all existing Eskom transmission network assets, including grid and substations and associated infrastructure, national control centre and system operator assets as well as Eskom’s Peaker power stations (pumped storage, hydro and gas turbines).

In addition, all transmission servitudes and property rights currently held by Eskom will also need to be migrated to the transmission company. Meanwhile, the transmission license will need to be amended to allow for the buying and selling of electricity and will be transferred to the transmission company.

However details of the power utility’s turnaround and restructuring is expected to be finalised in the months ahead.

“The first step will be to appoint a chief reorganisation officer, who will work with the board and management to implement the Eskom sustainability task team recommendations.”

Strict conditions will be attached to the fiscal support to drive the changes that are required, including cost containment measures. The document spoke of the importance of the maintaining power plants as well as improving their technical performance.

”The management of the capital expenditure programme needs to be strengthened to ensure that expenditure is optimised, costs are contained and that the quality of work is closely monitored. To this end, the Eskom Board will be required to enter into a new shareholder compact with the minister of public enterprises [Pravin Gordhan] setting out these requirements.”

Among the other changes will be those around executive remuneration which will be tied to delivering on these commitments, which will be cascaded down throughout the organisation.

Government will not take on Eskom’s debt

In his budget speech tabled at the joint sitting of the National Assembly and National Council of Provinces, Mboweni said government will not take on the power utility’s debt.

“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 R23bn a year to financially support Eskom during its reconfiguration,” he emphasised.

The total R69bn the minister said at an earlier media briefing is a “shareholder” move to assist the utility to pay its debt.

“It is not meant for salaries,” he said, adding that the fiscal support is conditional on an independent chief reorganisation officer (CRO) being jointly appointed by the ministers of finance and public enterprises with the explicit mandate of delivering on the recommendations of the presidential task team.

“It is basically putting it under curatorship,” he said in response to a question at a packed Imbizo Centre.

“We will make announcements in this regard in the coming weeks,” he said, adding that Gordhan and a team from public enterprises will continue to closely monitor Eskom.

He emphasised that the financing is not a means of privatisation, adding that in the South African context, privatisation is an emotive one.

Unprecedented turnaround

He highlighted that the corporate restructuring of the utility -- which earlier this month implemented Stage 4 load shedding -- will be one that will be unprecedented in South Africa.

Meanwhile, government will undertake extensive consultation with all affected stakeholders. Treasury stated that the depth of the financial crisis at Eskom requires government to support the utility’s balance sheet, with amounts of R23bn per year provisionally allocated over the medium term.

These amounts it said will allow Eskom to service its debts which currently stands at R420bn and meet redemption requirements, while making resources available for urgent operational improvements.

“Establishing a more competitive electricity sector will improve business and consumer confidence, encourage private investment and reduce upward pressure on prices. Over time, this reform will encourage the expansion of renewable energy sources in the country’s energy mix,” said the utility.

Risk to the economy

The document also highlighted that Eskom is among the pronounced risks to the economic outlook.

“The main risks concern Eskom. Failure to fully implement the reconfiguration of Eskom could lead to a negative market reaction that would prompt capital outflows, with greater pressure on the rand,” it noted.

The failure of Eskom would also perpetuate weak investor confidence and reduce economic growth.

Other near-term risks to growth include load-shedding and higher electricity prices than assumed in the forecast.

Renewables

The document highlighted the need to establish a more competitive electricity sector that will improve business and consumer confidence, encourage private investment and reduce upward pressure on prices.

“Over time, this reform will encourage the expansion of renewable energy sources in the country’s energy mix,” it said.

To date, government’s renewable energy power producer programme has procured 6 422MW of electricity from 112 independent power producers.

Further steps in restructuring the electricity market will be announced in the months ahead. Government will require Eskom’s board to sign a new shareholder compact.