State obliged to bail out Eskom

Private sector must be included in future plans

THE recent news that three Cabinet ministers are working together on a recapitalisation plan for Eskom is encouraging — if belated.

The saga of Eskom’s beleaguered finances goes back at least as far as 2008, when the government first injected capital into Eskom in the wake of a regulatory ruling that gave it less by way of a tariff increase than it had asked for.

At that time, in the wake of the power crisis of January 2008, the government granted Eskom a R60bn subordinated loan, disbursed over three years. A guarantee facility of more than R100bn was included.

But that still left a R300bn funding gap which had to be narrowed if Eskom was to remain a going concern and to complete the major build projects on which it had embarked — Medupi, Kusile, Ingula and the rest.

The government then had to extend the guarantee facility to R350bn late in 2010 and Eskom managed to put in place a funding plan to close the gap — or so it seemed. The trouble was the plan was premised on 25%a-year tariff increases until 2015 at least. That, of course, has not happened. There were just two years of 25%, then Eskom (not very cleverly) asked the National Energy Regulator of SA (Nersa) to reduce this to 16%, then early last year it asked for 13% for itself for the next five years, plus 3% for independent power producers — and last year received 8% in total from Nersa.

So Eskom now still has a huge funding gap, but this is not new — it was evident more than a year ago, when Nersa made its ruling, at more than R200bn. The number has swollen given that sales volumes have fallen short of expectation and that Eskom has had to spend extra billions in its battle to keep the lights on. But the problem has been there all along.

Indeed, given that Nersa was probably never going to grant years and years of tariff increases that were unaffordable for SA, the huge funding gap has been there ever since Eskom was mandated by the government in 2004 to embark on building the new power stations SA desperately needed — without any idea of where the money was going to come from.

That the three key ministers — of public enterprises, finance, and energy — are now working on a recapitalisation plan is welcome. But let’s not come up with yet another plan that just pushes out the problem as the last one did. It is crucial that the ministers tackle the issues around Eskom’s balance sheet for once and for all. Eskom was believed to have asked the government for double the R60bn in capital it was actually granted more than five years ago. Now it is said to have asked for R50bn. Arguably, if the government had faced the problem then, the country would have saved itself much grief in the interim and we would not still be there now.

In theory, financing huge infrastructure build programmes which take a long time to deliver could be done through user charges. In practice, if that involves the kind of tariff increases Eskom has been asking of the regulator since 2007, it is simply not going to happen. Nor should it.

There is every reason for the government to inject capital into a state-owned entity whose balance sheet needs propping up to enable it to fund infrastructure at this level. But if Eskom is to be recapitalised it must be properly designed and adequately done. It is not just a question of handing over the appropriate amount of capital (assuming the government has the fiscal ability to do so).

If Eskom is to be recapitalised it must be properly designed and done. It is not just a question of handing over capital

The government must also review the mandate it has given Eskom to ensure that it is focused on what SA most needs from the state-owned power utility. The government has imposed all sorts of objectives on state-owned entities, in the hope that it can get them to deliver the jobs, skills, industrialisation and other goodies that proponents of the developmental state believe the state can deliver.

That comes at a cost. And if the government wants Eskom to make delivering new capacity at an affordable cost the priority, perhaps it should see if that is possible along with all the myriad other targets it has demanded.

Then there is the fundamental question of where the state’s role should begin and end. SA will need more capacity than Eskom can deliver or fund. And after the delivery troubles that have plagued Medupi, Kusile and Ingula, we surely should be looking at other delivery models.

The private sector is keen to invest in public infrastructure. The government must make it a priority to ensure that it brings the private sector in to invest in, own and operate new power capacity in years to come.