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Struggling power utility Eskom has been allocated a R69bn financial support package over the next three years by Treasury to help it service debts, but Finance Minister Tito Mboweni says this does not mean government is taking on Eskom's debt.
The finance minister tabled his maiden Budget in Parliament on Wednesday, where he announced long-awaited details on how government would provide financial support to the debt-laden power utility.
He also provided some of the first public details around how Eskom's unbundling would work.
In the State of the Nation Address earlier in the month, President Cyril Ramaphosa announced that Eskom – which he said was in a state of "crisis" – would be split into three separate entities, part of a strategy to help stabilise its finances. The three – generation, transmission and distribution – would fall under Eskom Holdings.
He also announced that government would help stabilise its balance sheet.
The financial support announced by Mboweni includes R23bn per year for three years. This is less than the R100bn support package said to be asked for by Eskom, which has a total debt of R419bn and does not make a profit from selling electricity at current prices.
Ahead of the budget, Mboweni told journalists that the support package was not a bailout. "I don't like the term bailout," he said.
He likened the financial support to a private company embarking on a capital raising exercise through a rights issue. In this case, however, the shareholder – which is government – would provide a liquidity injection.
In his prepared Budget speech, Mboweni said the financial support came with strict conditions.
"Pouring money directly into Eskom is like pouring water into a sieve," he said. "I want to make it clear: the national government is not taking on Eskom's debt. Eskom took on the debt, it must ultimately repay it. We are setting aside R23bn a year to financially support Eskom during its reconfiguration," he told Parliament.
The support package will be closely scrutinised by Moody's Investor Service, the sole major ratings agency to have SA’s sovereign debt at above investment grade.
In a pre-Budget commentary, Moody's said state financial support to Eskom would be credit neutral if it were "accompanied by measures that durably stabilise [Eskom's] financial health". But it warned that financial support without additional savings measures would be credit negative for the country.
Mboweni said that he would expect Moody's and ratings agencies to view the reforms at Eskom positively. However, he admitted that the team at Treasury had been having difficult conversations with ratings agencies over the past few days, and next week when Director-General Dondo Mogajane embarks on an investor roadshow, Treasury will be in a better position to gauge how ratings agencies would react to the financial support.
'There are conditions'
As part of the conditions related to the support package a "Chief Reorganisation Officer" will be jointly appointed by Mboweni and Public Enterprises Minister Pravin Gordhan.
The officer will work with Eskom's board and management to carry out the recommendations of the Presidential Task Team, which was appointed last year to advise government on interventions to save Eskom. Mboweni said more announcements on this would be made in coming weeks.
The funding should also help Eskom service its debt, so it can free up other resources for urgent operational improvements, according to the 2019 Budget Review document.
Restructure
The R69bn in support is also meant to support the splitting of the power utility into three entities - generation, transmission and distribution, according to Treasury.
Given Eskom's size and its vertically integrated structure, any challenge experienced by one part of the business threatens the entire company and places the country's electricity supply at risk, which warrants a change in structure.
Under its current structure, the power utility is financially unsustainable and cannot meet the country's electricity needs, Treasury highlighted.
It is envisioned that each of the three subsidiaries will have its own board. Assets, debts, people and licenses will be "migrated" to the three over time. Eventually Eskom will have to provide separate, audited financial results of each of the three businesses.
The transmission company will be established first, with an independent board appointed by mid-2019.
The transmission company's assets will consist of all Eskom's existing transmission network assets, including the grid, substations and associated infrastructure. All transmission property rights under Eskom will be migrated to the transmission company, as will transmission licenses and supply agreements.
A consultation process and new agreements with labour unions will also take place before the migration of the workforce, Treasury said.
Some unions have been critical of the decision to split Eskom into three, arguing it amounts to the first phase of privatisation.
Immediate changes
While Eskom's turnaround and restructuring will be finalised in coming months, in the short term, Eskom needs to work on critical maintenance of power plants and improve their technical performance, according to Treasury.
Government will also require Eskom's board to sign a new shareholder compact – as Eskom's capital expenditure programme needs to be strengthened and it will ensure costs are contained and work quality is closely monitored.
Executive remuneration will be tied to leadership's ability to deliver on commitments, and this principle will be applied across the organisation.
"The corporate restructuring and turnaround will be unprecedented in South Africa," Treasury said in an annexure. Government has committed to holding extensive consultations with affected stakeholders such as labour, lenders and independent generators.
