Crucial for Labour to be part of Eskom plan

Why will an Eskom in three parts be better than one big Eskom?

That’s the question that President Cyril Ramaphosa did not quite answer in Thursday’s State of the Nation speech. There are some compelling reasons, though. Similar proposals have emerged from the ANC, the DA, the Eskom board, Ramaphosa’s expert task team.

Unfortunately, outside of this broad consensus, stands labour and elements of the old Jacob Zuma order.

Taking labour along on Eskom’s new journey will be critical to whether the plan succeeds or fails.

Importantly though, if done well, the unbundling should help the biggest stakeholder in the game – the consumer – of which an important subset is business. How will it work?

The starting point is the current state of Eskom. The company is in what has been described elsewhere in the world as “a utility death spiral” brought about, in part, by rapid changes in technology.

Eskom’s death spiral is more acute than usual because of the enormous debt burden it has taken on in the past eight years to construct two new mega coal-fired power stations.

The debt now stands at R419bn and is projected to rise to R600bn in the next three years. Eskom is unable to service this debt and stagnant demand for electricity means there is no prospect of it being able to do so in the future.

The split, which it is expected to take two to three years to implement, will result in a generation company that owns Eskom’s power stations; a transmission company that will own and operate the national electricity grid; and a distribution business, which will take care of infrastructure such as substations. It will do three things quite quickly. By giving each entity its own balance sheet and set of accounts, it will be far easier to see where efficiency improvements can be made.

Secondly, it will enable the three parts to independently raise funding. Eskom’s huge debt will be apportioned to the three parts.

As this is mainly related to new plants Medupi and Kusile, it can be expected a very large portion of this will be held by the generation division. This will have the effect of ringfencing Eskom’s good and bad parts, in the same way that a troubled bank might be saved by a split into a good and a bad bank.

Negotiations around the debt with bondholders will be an important part of the process. So will negotiations with the National Treasury, which must decide how much of Eskom’s debt it is able to take onto the national government’s own balance sheet without the fiscal implications being too damaging.

Eskom’s guaranteed debt (about R350bn) is reflected as a contingent liability for the government and therefore not included in the calculation of the debt to GDP ratio.

As debt service costs are the fastest-growing item in the budget, the government is under pressure to stabilise this ratio, previously having pencilled in a target of just under 60% in 2024, that will now almost certainly be pushed out further. Reading between the lines of Ramaphosa’s speech, the government does not expect this bailout can be big enough to avoid a tariff increase for Eskom over the next three years. Ramaphosa described the increase as an “affordable one” which can be taken to mean something between CPI and the 17% that Eskom has requested.

Thirdly, the split will open the way to increased competition in the energy sector. The key to opening up the market is the establishment of an independent owner and operator of the transmission grid that would contract with power producers. It is critical that this arm operates entirely independently from Eskom generation, enabling it to buy power from the cheapest sources.

The last piece of the Eskom unbundling puzzle – distribution – is the most complex. The expert task team tried to sidestep this issue by recommending that the split produce only two separate entities – generation and transmission – leaving distribution out for now because of the risk that it would slow things down.

This is because Eskom owns only part of the distribution network, with the rest owned by municipalities. A previous attempt by the government to restructure distribution in 2003 by establishing regional electricity distributors was abandoned in 2010.

But the ANC and the government insisted that Eskom distribution business be included in the plan. Distribution, especially the parts of the network owned by municipalities, has been badly neglected with consumers facing frequent power failures due to poorly maintained equipment.

While consensus on the general direction of the new Eskom is growing, the next urgent task is to broker a meaningful deal with labour that can take workers along.

The next urgent task is to broker a meaningful deal with labour…