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Unbundling Eskom will cost us, but not restructuring would be worse

Feb 18 2019 06:34
Lameez Omarjee

Debt-laden Eskom will be restructured and will get another bailout from the government to support its balance sheet.

Even though public finances are constrained, the country can't afford to have the power utility to continue on its current path as it would have dire consequences for the economy and jobs, analysts have warned.

President Cyril Ramaphosa told the National Assembly on Thursday there is no "single solution" to fix the entity and a combination of interventions, such as a change to its structure, financial support from government and a turnaround plan from Eskom's management are necessary to bring stability to SA's biggest energy provider.

Hilton Trollip, a researcher who has worked with UCT on energy policy, explained to Fin24 the unbundling would result in cost-saving by separating the generation function from the transmission and distribution functions of Eskom's business model.

The generation division is responsible for debt swelling to R420bn through the building of new power stations, he explained. Other costs in the generating division which have made it financially unsustainable include overly priced coal contracts and associated transport costs to get coal from mines to power stations.

Another element of inefficiencies is the high staff levels which grew from 32 000 to 48 000 in just a decade, and associated costs which grew from R9.5bn to R29.5bn. All the while, the electricity production has not increased, Trollip pointed out.

Through the unbundling, it is envisioned that the transmission entity will get electricity from the cheapest source. Through a competitive tender bidding process, the most affordable energy source could be the state-owned generation business which relies on coal mines and coal-fired power stations, or private players like Independent Power Producers which include renewable energy providers through the form of wind and solar energy.

READ: The Italian Job: A look at the international experts hired by Eskom

So far it appears Eskom's finances will be stabilised through the restructuring. Economists have put in perspective the effect of Eskom's failure on the economy, if there is no restructure.

Fiscus

Johann Els, chief economist of Old Mutual Investment Group, thinks it is not likely government will take on R100bn of Eskom's debt at this stage.

"It is more likely that Eskom will be given another fiscal injection to the tune of R15bn to R20bn," he said. This bailout could be done in a "deficit neutral manner", Els said. "For now, small injections are likely less risky than large debt transfers."

Investec Chief Economist Annabel Bishop pointed out that there are limited government guarantees available to Eskom – it has used 95% of its R350bn guarantee. Funds would have to be reprioritised from elsewhere, if government increases its expenditure, ratings agencies would view it negatively.

"In the budget, the funds for Eskom are likely to come from sale of non-strategic assets, the contingency reserve fund, unspent budgeted amounts from the previous fiscal year returned unspent to Treasury and from savings," Bishop said.

Sovereign credit rating

Els also explained that a bailout as big as R100bn would likely trigger a ratings downgrade by Moody's, which is the only ratings agency which has SA ranked at investment grade.

"Unless there is serious fiscal slippage or Treasury decides to take on R100bn of Eskom debt without a serious turnaround plan, I expect Moody’s to maintain its stable outlook and the current investment grade rating."

Bishop explained that increasing government expenditure by providing further financial support for Eskom would support a downgrade, unless expenditure is cut from other areas to yield no overall fiscal expenditure increase.

Nazmeera Moola, deputy MD at Investec Asset Management, warned that simply having a bailout from government without a restructure would lead to a downgrade. "Moody’s has already stated that any debt relief for Eskom from the government without immediate cost cuts at the utility would be credit negative. Since Moody’s is the only investment grade rating South Africa has left, retaining their confidence is key."

Jobs

Moola said that Eskom needs to cut operational expenditure – that means it needs to cut jobs. 

"Most of the studies we have seen suggest that about a third of the work force is not required. Cutting jobs in the current economic climate is difficult, but necessary," she said.

Any financial support provided to Eskom by government must be explicitly linked to the power utility containing its costs, she explained.

Unions are opposed to this as they believe it will introduce privatisation and cost jobs.

Trollip has explained that protecting jobs in the coal sector would come at the expense of many more jobs in other sectors of the economy, which could potentially be lost if Eskom defaults on its debt.

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