Publications
Partners
Johannesburg - A long-standing taboo in South Africa has been the possible break-up of Eskom and move to private power generation, Peter Attard Montalto, Nomura's emerging markets economist, said on Wednesday.
In his view the ideal set-up for South Africa would be for Eskom to be broken up and the private sector to become involved in power generation.
"The political, ideological and regulatory – not to mention logistical – hurdles to this are considerable and it would take an extremely long time to accomplish," he said.
"The start of the debate about the break-up of Eskom is not all it seems in our view and market reactions are overdone. The impact on Eskom’s bonds has been quite stark on Wednesday morning trade already."
Shareholder support
In Montalto's view the most urgent task at the moment for Eskom, the National Treasury and the department of public enterprises, is to prevent a downgrade of Eskom and so address the increase in shareholder - that is government - support that is required.
"We think during these discussions, which would have entered cabinet, some form of privatisation scenario will probably have been suggested by the National Treasury as part of its mapping exercise on the possible choices for the government," he said.
"However, we think everyone in the National Treasury would have recognised the political impossibility of such a proposal ever getting off the ground even if it were debated in the cabinet."
The government is in an extremely difficult position with regard to shareholder support, in Montalto's view.
It has to balance sovereign credit-worthiness against parastatal credit-worthiness within very tight "wiggle room" on the debt and deficit front.
Montalto thinks the government is likely to take a multi-faceted approach to increasing shareholder support.
This would include some additional equity injections, some increased guarantee structure, maybe some additional cash or even equity input from the Development Bank of SA (DBSA) or the Industrial Development Corporation (IDC) as well as increased tariffs.
"The government and Eskom are running out of time to make a public declaration of intent on the issue – they need to do that by the end of September to fit into the next ratings cycle," explained Montalto.
"This is the issue the market should be focusing on in our view, as it will have much broader implications than just Eskom."
Opposition from the left
Montalto says the issue has been elevated by a very strong opposition by many on the left, like Cosatu and the SA Communist Party (SACP).
"This is the movement that shut the debate down previously 15 years ago. Put simply, the involvement of the private, profit-generating, sector in running utilities is a total anathema to them," said Montalto.
"Overall, given our ongoing discussions within the ANC and tripartite alliance, we see no likelihood of a consensus or any form of approval on the subject in the near future."
Montalto cannot see the ANC accepting a break-up of Eskom or particularly private sector involvement without a policy conference and elective conference agreement.
This would mean such a policy could not be implemented before 2017.
"The process of implementation would then take much longer as a totally different tariff and legal framework would be required. And even splitting Eskom into different state-owned companies would be a lengthy and complex issue," said Montalto.
Parallel policy
He also thinks there may be some confusion with the other parallel policy strand occurring at the moment.
This would be to spin out a separate parastatal – an independent systems and market operator (ISMO) – to handle the buying of electricity from Eskom and renewable private sources domestically through the Refit process as well as foreign private-sector conventional-fuel-generated sources of power.
"There has been no call for the ISMO to be able to take in domestically produced conventional-fuel-generated power. This also would still be very much a state-controlled, politically influenced, body," said Montalto.
Market sell-off overdone
He thinks the market sell-off of Eskom debt this morning is overdone.
"Even if Eskom were to be broken up, the current set-up of central funding at a corporate level to finance its individual investment, generation and transmission strands could remain in place through a central funding body, or debt could be parcelled out to individual companies," he said.
"The structure here would be less important for us, however. What we think would be clear is the strong belief by the National Treasury that Eskom’s debt security is important and intertwined with the sovereign’s."
That would continue and manifest itself in some form of backstop for the existing debt under such a scenario – either an explicit blanket guarantee or similar.
Greater competition
"Our core view has long been that Eskom should face much greater competition through allowing for a domestic market in private-sector conventional-fuel-generated power," said Montalto.
He thinks that should be the priority in order to secure South Africa’s energy security.
"We think the breaking up of Eskom should be an ultra-long-run goal, but competition could refresh the market and force improvements in Eskom first, making it easier to eventually break it up into its constituent parts," he said.
"We think the long-run benefits from energy security and improved foreign direct investment are arguably worth the medium-run pain."
He pointed out that Eskom’s problems are deep and structural.
"Even glossing over the fact it has no permanent CEO yet and a largely new management team, the country needs to build a Medupi-sized (4.8GW) power station every five years up to 2030 to maintain long-run energy security," warned Montalto.
"Yet there are only sketchy plans for the next steps after Kusile comes on-stream (late)."
Eskom faces a constant battle for funding and skills to achieve this and the only way Montalto can see it occurring efficiently is by allowing greater private sector involvement and competition in the sector.
"The political and ideological sands would have to shift meaningfully first – something that could occur through the 2019 election into the end of the decade, but that would mean leaving such decisions awfully late," he said.
"Until then we expect the status quo to continue and the bond market should price that in."
- Fin24
