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New Eskom structure 'more positive than expected' – Old Mutual Investment Group

Feb 09 2019 12:45

Eskom's proposed new structure is "considerably more positive" than previously expected, according to Johann Els, Chief Economist at Old Mutual Investment Group.

In a statement released on Friday, Els said all the right points had been addressed, but that he particularly welcomed the announcements made on the power utility.

Els also believes privatisation and cost cutting are necessary for a "comprehensive" solution.

Eskom will be split into generation, distribution and transmission businesses under a state holding company, with the aim of enabling each unit to manage its costs more effectively and making it easier for them to raise funding, the president announced on Thursday evening. 

"The speech addressed all key expectations by pundits and should therefore help stablise confidence," Els said. "Eskom continues to be a significant investment barrier in the country and a more investment-friendly Eskom structure could unlock further investment in SA."

He also welcomed the announcements on strategic equity partnerships in the structure and the president’s reference to urgent cost reduction measures and affordable electricity tariff increases, following consultation with labour unions.

Privatisation, cost control

"Without privatisation and major cost control measures, the new Eskom structure is not a comprehensive solution," said Els.

 "We didn’t anticipate any moves to cut costs before the elections, given the necessary reduction of Eskom’s workforce as part of this exercise and intense opposition to this by the unions.

"However, the President’s comments are encouraging as they signal clear commitment to reducing costs on Eskom’s balance sheet, which should include more definitive moves towards reducing its labour force," he said.

"The affordable tariff increases mentioned in the speech are also helpful," he added. "Tariff increases are a critical means of driving up Eskom’s revenue but there needs to be a balance between the needs of Eskom and the impact on the economy."

Els believes the President’s comments regarding balance sheet support for Eskom by government, with detail to be unpacked in the Budget speech later this month, are a sign that government is committed to safeguarding SA’s economy.

"The fact that he mentioned the need to take into account the impact on the credit rating as well as the rights and obligations of Eskom’s funders is also significant as its shows that government is serious about protecting all market players, including debtholders such as ourselves," he said.

"We’ve yet to see the detail on how this new Eskom structure will be funded when the Budget Speech is delivered on 20 February, but until then, we are comfortable that government appears to be on the right track for now."

Unions, however, have been critical in their response to the announcement. The National Union of Metalworkers of SA (Numsa) said it would "meet Ramaphosa in the streets" after the president announced the unbundling of Eskom.

The union said tariff increases would be "disastrous" for the working class, while concern has also been voiced over opening the door to possible privatisation of the power utility and consequent job shedding if Eskom is unbundled.

Public Enterprise Minister Pravin Gordhan will meet with Eskom's board as a priority, to map a way forward for the entity, according to a statement issued last week.  

eskom  |  numsa  |  soes  |  sona  |  energy


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