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The Eskom break-up: Ramaphosa 'immovable' about salvage operation

Feb 06 2019 19:12
Lameez Omarjee and Pieter du Toit

President Cyril Ramaphosa was allegedly "immovable" during a Cabinet meeting on Tuesday in Cape Town, where plans to salvage and streamline Eskom were discussed and adopted.

He is expected to announce on Thursday in his State of the Nation Address that Eskom is to be broken up into three different parts, but is also expected to emphasise that none of those – comprising of separate generation, transmission and distribution business units – will be completely privatised because of their strategic value to government and the economy.

A similar plan was shelved in the late 1990s because of political pressure and fears that local government could collapse if not allowed to sell electricity to consumers.

According News24’s information, Ramaphosa is adamant and anxious that Eskom should be drastically restructured to restore investor and creditor confidence, and that the power utility cannot be allowed to fail. Although there was heated debate in the Cabinet meeting, with pockets of opposition to the plans, the framework for Eskom’s future was eventually approved as the only sustainable way forward.

Holding company

Eskom looks set to be unbundled into a holding company, with the planned three separate business units being wholly owned by the holding company.

These companies, however, will not be required to do business with each other, which will open up opportunities for independent power producers and renewable energy producers to sell electricity to the grid. The plan, mooted by the Eskom advisory panel, is modelled on similar restructuring exercises in China and the United States.

Although private equity will not be able to invest in the new companies off the bat, the plan is to open them up to such investment in the future.

The urgency to break up Eskom was necessitated by the company’s debt situation, and the short-term timeframe will see details of the restructuring being announced in the budget speech in two weeks’ time.

The next hard date in the restructuring framework is March 31, when Eskom has to service its debt. If Eskom defaults on its debt, it will trigger a sovereign debt crisis and will eventually lead to a sovereign downgrade.

Eskom has a R350bn government guarantee facility and had used R255bn by the time the mini budget was delivered in October 2018. Fin24 understands that the power utility requires a major bailout from government, but ratings agencies will not take kindly to this unless there is a reform plan in place to ensure the power utility becomes financially sustainable.

Fin24 further understands government will agree to the bailout only to stabilise the company until its reconfiguration.

Eskom’s Chief Financial Officer Calib Cassim earlier said the company has R420bn of debt it has to service, and it is projected to make a loss of R20bn this year. Cassim previously told the energy regulator that the power utility has been relying on loans to pay off debt.

Although the break-up plans are expected to receive stiff opposition from trade unions like NUM and Numsa, Ramaphosa is allegedly determined to move ahead with the intervention. There will be urgent meetings with all stakeholders to explain the reasoning behind it, and the message will be that the only way to secure Eskom’s future is to reconfigure it. Plans will also be put in place to prevent the sabotage of power plants as has happened in the past.

A restructure or unbundling of Eskom, which has also been called for by some members of the presidential task team, would see its three functions - generation, transmission and distribution separated from each other, energy expert Chris Yelland previously said

Hilton Trollip, a researcher with UCT on energy policy, told Fin24 that the establishment of an independent transmission system and market operator (ITSMO), which other energy experts have also proposed, would create the legal framework within which the transmission network would work.

Instead of the transmission network sourcing power from Eskom, it can source the power from other power stations like independent power producers and the private sector players, which would be more profitable.

"One of the main objections to the ITSMO is that it would facilitate privatisation of the generation sector," he said.

Job losses

Numsa has spoken out against the unbundling because it would lead to job losses, particularly in the coal sector. The union has also said that they have not been consulted by government on Eskom's potential privatisation, Fin24 previously reported.

The presidency is yet to confirm whether there have been engagements with unions, but with less than 24 hours to the State of the Nation address, Numsa maintained on Wednesday that it had still not been consulted.

Trollip said the unbundling had been linked to job losses, because coal-fired power stations are no longer economically sustainable. Electricity from renewable IPPs is far cheaper than that produced at coal-fired power stations, according to Trollip.

"Whether Eskom unbundles or not there are going to be job losses," he said. For the SA economy to remain competitive, it must have low power costs.

Trollip explained that Eskom's debt problems have come about as a result of its generation system and not its transmission system.

"The transmission grid works very well," he said. "The problems with generation must be separated and sorted out to save the national grid."

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