Eskom a ticking time bomb
WARNING: MINISTER SAYS SOE WILL CEASE TO EXIST IN CURRENT FORM BY APRIL
If loans to power utility are called in, government has to service them.
Public enterprises minister Pravin Gordhan yesterday laid bare Eskom’s bones as he described to parliament how the state-owned entity was in far worse shape than anyone thought it was – and how it came to be there.
In his presentation to the portfolio committee on public enterprises, Gordhan noted Eskom was technically insolvent and would cease to exist at its current trajectory by April.
He has come up with a rescue plan for the embattled stateowned entity (see story left).
What this meant, said energy expert Chris Yelland, if people started calling in their loans to Eskom, the state would have to start servicing them.
“This would have severe consequences and would trigger other debtors calling in their loans and affect the country’s credit rating,” Yelland said.
By the latest estimates, Eskom had used about R336 billion of a R350 billion government guarantee. The rest of the Eskom’s R420 billion debt is on Eskom.
The country spent another day yesterday under a stage three load shedding lockdown and people’s moods were similarly dark on social media platform Twitter.
“Lenasia is due to have load shedding later this afternoon but many of the street lights are on during the day,” said Ibrahim Daya.
Tendani Thidela said there was load shedding at his office from 8am so he went home to work until that, too, was cut, upon which he returned back to his office.
On a lighter note, Oelof de Meyer noted load shedding was just in time for Valentine’s Day. “Candle light dinner whether you single or not,” he wrote.
There was little to joke about Gordhan’s presentation.
“The first point – because human memory tends to be short – is to remind ourselves this is the committee which had the inquiry into Eskom and in your report, you said the following: ‘The collective conduct of the previous Eskom Board and management rendered Eskom potentially financially unsustainable due to irregular procurement, mismanagement and non-compliance of existing policy and saw the purging of highly qualified, experienced and skilled senior staff members,’” Gordhan said. “That’s from your report.” Released on November 28, the report still reads like a horror story and despite being handed to the Commission of Inquiry into State Capture, action has yet to be taken.
Gordhan noted the accumulative effect of years of problems – particularly corruption – at Eskom had damaged the institution.
Gordhan said the R420 billion debt was 15% of the country’s debt and defaulting placed the economy at risk.
In his presentation, it was noted the cash being generated did not cover operating and debt servicing costs while municipal debt – and Soweto’s debt (R28 billion) – was growing at R1 billion a month.
The number of employees increased from 32 000 in 2007 to 48 000 in 2018 with the cost growing from R9.5 billion to R29.5 billion.
Much depends on how three assets are valued and what portion of debt each gets.
When African Bank collapsed, there was a clear focus on separating the “good bank” from the “bad bank”, salvaging whatever was possible. Eskom’s restructuring into generation, transmission and distribution might be similar.
Valuations
Its regulatory asset base has just been revalued. Although the valuation was questioned, it provided an indication of the possible asset allocation once Eskom is split. For 2019/20, Eskom Generation’s asset base is valued at R1 trillion, Transmission’s at R129 billion and Distribution’s at R111 billion.
It’s unclear how Eskom’s R420 billion debt will be allocated. Eskom’s biggest borrowings were for building the Ingula Pumped Storage Scheme and Medupi and Kusile power stations.
This debt should, therefore, be allocated to Generation. But it also borrowed to cover operational expenses when the National Energy Regulator of SA did not grant it the full revenue it applied for. What part of that should be allocated to Transmission and Distribution?
Generation gap
PowerX CEO and former Nersa member Thembani Bukula estimated 80-90% of Eskom’s debt should be allocated to Generation. It would be left with most of the debt, but fewer assets and a smaller income.
Auditors have been worried about Eskom’s ability to continue as a going concern. Generation on its own looks even worse. For Transmission and Distribution, this could, however, be good news. Bukula said both were fairly healthy, calling Transmission a “world-class business”.
Distribution would inherit consumer debt from municipalities and Soweto residents, but it might be in a better position to focus on collections on its own.
Strategic function
Transmission is the most strategic asset. Transporting electricity from generator to distributor is a strategic function that governments usually retain control of in deregulated energy markets, Bukula said. It’s then operated by a neutral system operator which guarantees non-discriminatory grid access. President Cyril Ramaphosa has indicated this is the direction in which SA is moving. This system operator would buy electricity from Eskom Generation and from Independent Power Producers.
Liquidity threat
Presenting its transmission development plan for 2019-2028 last year, Eskom Transmission said capital expenditure would be R109 billion. It added that Eskom’s liquidity position threatened the execution of the plan.
By separating the businesses, Transmission and Distribution are protected from financial contamination from Generation. But what to do with the “bad bank”?
Investment prospect
Selling stakes in power stations would reduce debt and improve the Eskom fleet’s performance. If it came to market with a longterm power purchase agreement it could be attractive to, for example, pension funds, Bukula said.
Economist Mike Schüssler said if different power stations were sold to different owners, it would introduce competition, promoting efficiency.
“If we don’t do it, the whole economy is at risk.”