The Sunday Read: What we know about the Eskom unbundling so far | Fin24
 
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The Sunday Read: What we know about the Eskom unbundling so far

Feb 24 2019 09:27
Jan Cronje, Fin24

In his State of the Nation Address earlier in the month, President Cyril Ramaphosa announced that state-run power utility Eskom would be unbundled into three divisions – generation, transmission and distribution – which would fall under an Eskom parent company. 

Splitting the debt-laden power utility into three separate entities had been proposed by energy analysts before Ramaphosa's address, who argued it had become unwieldy in its current state.  

Ramaphosa’s announcement was rejected outright by some unions, such as the National Union of Metalworkers of SA, who said it was the first step towards privatisation. The EFF also echoed these sentiments. 

For the DA, meanwhile, Ramaphosa didn’t go far enough, as the three divisions will still be "wholly owned by the holding company".  

Here is what we know so far about what the Eskom unbundling means. 

1. What does unbundling mean?

The crisis at Eskom was front and centre in Ramaphosa's address. While he referred to the debt-laden power utility by name only once in his 2018 address, he mentioned it 14 times in this year's speech. 

Ramaphosa said that, in order to stabilise Eskom's finances and operations and help it through its current crisis, it needed a new business plan, which includes splitting it into three. The subsidiaries would still fall under the Eskom parent company. 

The president did not provide much detail on how the utility would be split, but said the unbundling would help isolate costs, improve oversight and enable the subsidiaries to independently raise funds.

It fell on National Treasury to broadly outline the initial steps on Wednesday, when Finance Minister Tito Mboweni presented his maiden Budget.

2. How will unbundling help Eskom?

In Treasury's view, Eskom is outdated.

"[Energy] systems no longer resemble Eskom’s vertically integrated monopoly model," it said in an annex to the Budget review.  

In a pre-budget briefing with journalists, Finance Minister Tito Mboweni – known for being one of Cabinet's most candid ministers – said the "Soviet Union collapsed a number of years ago," a reference to the USSR's state-controlled economy.

"We need to move with the times," he said.

Treasury, which controls SA's purse, said that currently, because of Eskom's vertically integrated structure - challenges in part of the business "threaten the entire company and places the country's electricity supply at risk". 

Once unbundled, the government hopes that risks will be contained within the three divisions and financial contagion will be limited.

It also hopes the split will improve transparency and allow each subsidiary to separately raise funds. This means that the whole power utility will not be saddled with the debt level of the worst performing part. 

3. How will it work in practice?

Exactly how Eskom will be split up is still up in the air. 

Government, expecting blowback from unions, has promised a consultation process with labour, Eskom and other stakeholders "to work out the details of a just transition".

Ramaphosa, meanwhile, has denied that the split amounts to privitisation. 

According to Treasury's initial overview, Eskom would migrate its assets, debts, people and licences to the three subsidiaries, which would each have its own board. 

In time, each subsidiary would have to provide separate audited financial results. 

Of the three, the transmission company is set to be created first, and its board is expected to be appointed by mid-2019. 

This company – whose name has not been made public yet – will take over assets including Eskom's grid and substations, as well as what the power utility calls its "Peaker power Stations" – pumped storage, hydro and gas turbines, and other infrastructure. 

Details around the composition of the other two subsidiaries – and how the three will split up the R69bn support package announced by Mboweni, was not yet known at the time of writing.

4. What reaction has there been to the unbundling?  

Reaction to the move spanned the gamut from anger by some unions, disappointment from the DA, a wait-and-see attitude by credit ratings agencies, and praise by some analysts and business organisations as well as the ANC. 

One of the most immediate problems facing Eskom management now is convincing unions to get on board.

Numsa, one of three recognised trade unions at the power utility, on Thursday published a 14-page statement lambasting the Ramaphosa-administration for having "right-wing, neo-liberal capitalist agendas". 

The union, together with the National Union of Mineworkers, flexed its muscles last year after Eskom proposed salary freezes. Pickets and industrial action soon forced Eskom to up its offer as the country experienced its first load shedding in years. 

Weeks of negotiations followed until the sides, including the Solidarity trade union, all agreed to a 7.5% wage increase. 

On Thursday, Public Enterprises Minister Pravin Gordhan told Parliament that government has had two meetings with labour.

"That is the beginning of the process," he said. Government and Eskom have a responsibility to the utility's 48 000 employees, said Gordhan, to ensure that they have some sort of job security. This may involve preparing them for the shift in the energy sector which is moving towards renewables. 

The labour minister, meanwhile, is arranging a meeting between the department of public enterprises and the National Economic Development and Labour Council on March 5. 

Ratings agencies took a broadly cautious view of the unbundling, saying they wanted to first see how promised cost cutting measures were instituted and what energy price regulator National Energy Regulator of SA (Nersa) decided on tariff increases. 

S&P, for example, said that it would wait for more clarity on the financial support package. 

For the Democratic Alliance, the plan does not go far enough. It said the plan did not prepare the generation unit for privatisation in a way that placed it on an equal footing with independent power producers, nor did it allow for well-functioning metros to be able to source energy directly by independent suppliers.

eskom  |  budget2019  |  budget 2019  |  tito mboweni  |  budget
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