TICKLING A NERVE

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

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.