TICK­LING A NERVE

Eskom’s rev­enue short­fall is about R225bn, which equates roughly to the cost of build­ing Medupi and Kusile

Financial Mail - Investors Monthly - - Contents - THABI LEOKA Thabi Leoka is an economist at Re­nais­sance Cap­i­tal.

Thabi Leoka col­umn

Per­haps Eskom should be un­bun­dled and its power sta­tions sold off, leav­ing Eskom with trans­mis­sion and dis­tri­bu­tion ca­pa­bil­i­ties.

This may sound con­tro­ver­sial, but Eskom is faced with in­tense cost pres­sures, owing mainly to de­lays and bud­get over­runs on its two new power sta­tions, Medupi and Kusile. Eskom’s rev­enue short­fall is about R225bn, which equates roughly to the cost of build­ing Medupi and Kusile. In 2007, the Medupi power sta­tion was es­ti­mated to cost R70bn, but that has more than dou­bled to roughly R170bn, re­quir­ing more tax­pay­ers’ funds to keep the util­ity afloat. Medupi’s com­ple­tion date was planned for 31 Oc­to­ber 2013, but this has now been pushed back to 30 June 2018.

Eskom’s fund­ing dif­fi­cul­ties have placed the Trea­sury in a tough po­si­tion. Ear­lier this year, it asked the Trea­sury for as­sis­tance in the form of an eq­uity in­jec­tion of at least R50bn, but in the Medium-Term Bud­get Pol­icy State­ment last month, the Trea­sury promised to ad­vance only R20bn, which will not come out of the bud­get but from the elec­tric­ity tar­iff hikes re­cently ap­proved by the Na­tional En­ergy Reg­u­la­tor of SA, ef­fi­ciency sav­ings and the sale of as­sets such as prop­erty, di­rect and in­di­rect share­hold­ings in listed firms, non-strate­gic gov­ern­ment share­hold­ings in state-owned com­pa­nies and sur­plus cash bal­ances in pub­lic en­ti­ties.

Moody’s low­ered its rat­ing on Eskom to non-in­vest­ment grade be­cause of Eskom’s weak fi­nan­cial pro­file, ris­ing op­er­at­ing costs and con­tin­ued roll-out of the large cap­i­tal pro­gramme, de­spite the gov­ern­ment’s com­mit­ment to pro­vide Eskom with the eq­uity in­jec­tion, which is likely to ease short-term fund­ing pres­sures.

Eskom’s non-in­vest­ment-grade sta­tus com­pli­cates fu­ture cap­i­tal rais­ing, given that some large in­ter­na­tional in­vest­ment funds are not per­mit­ted to buy bonds from an en­tity rated as non-in­vest­ment grade. I ex­pect Stan­dard & Poor’s and Fitch to follow suit soon.

Most of Eskom’s power sta­tions are in the mid­dle of their pro­duc­tive life and, be­cause they have been run hard over the years to com­pen­sate for ca­pac­ity short­ages, re­quire con­stant rou­tine main­te­nance. Planned main­te­nance re­quires that units be taken out of ser­vice, and given the cur­rent sup­ply con­straints, most power sta­tions are un­der im­mense pres­sure.

There is a risk that Eskom may un­der­per­form in fu­ture, which would im­ply higher elec­tric­ity prices for longer than ex­pected. Not only have high elec­tric­ity prices added to the

I also see no guar­an­tee that the gov­ern­ment’s eq­uity in­jec­tion will re­sult in a health­ier company

ever-in­creas­ing ex­penses fac­ing house­holds, but in­dus­tries have also in­di­cated that high in­put costs — par­tic­u­larly high en­ergy costs — im­pede per­for­mance. Ac­cord­ing to Stats SA, the non-fer­rous met­als (alu­minium) and gold min­ing in­dus­tries are the sin­gle largest con­sumers of elec­tric­ity in SA, ac­count­ing for about 14% of to­tal con­sump­tion. They are also sig­nif­i­cant con­trib­u­tors to SA’s ex­ports and thus for­eign ex­change earn­ings. The next four largest con­sumers of elec­tric­ity to­gether ac­count for about 25% of to­tal con­sump­tion, and the top 15 con­sumers of elec­tric­ity con­trib­ute about 45% of GDP. The in­dus­trial sec­tor is the sec­tor most sen­si­tive to price fluc­tu­a­tions, which also af­fects com­pet­i­tive­ness.

Or­di­nar­ily, an in­vestor would be re­luc­tant to put money into an as­set with a poor per­for­mance record, a his­tory of fi­nan­cial mis­man­age­ment, de­lays in project im­ple­men­ta­tion and sub­ject to po­lit­i­cal in­ter­fer­ence and so on. I also see no guar­an­tee that the gov­ern­ment’s eq­uity in­jec­tion will re­sult in a health­ier, bet­ter-per­form­ing company.

Pri­vati­sa­tion is a sen­si­tive no­tion in SA, and any un­bundling and sale of Eskom will not come with­out re­sis­tance, es­pe­cially from labour. Al­ready the Na­tional Union of Me­tal­work­ers of SA, which rep­re­sents work­ers at the power util­ity, has cau­tioned that un­bundling would neg­a­tively af­fect the man­u­fac­tur­ing sec­tor, lead­ing to fur­ther de-in­dus­tri­al­i­sa­tion of the econ­omy.

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