For The People

Eskom: A Threat to the Fiscus

As reported elsewhere in this edition, Minister Mboweni while it is good news that the President recently announced that Eskom would be split into three companies, responsible for generation, transmission and distribution, the Minister of Finance’s failure to indicate how this split will work and how the assets and liabilities will be apportioned between them was notable, but perhaps not unexpected.

Alarmingly, Moody’s the ratings agency has signalled that more detail is needed in the form of a credible and detailed plan for Eskom’s reconfiguration before it would revise its outlook for the troubled power utility.

In other words, announcing the unbundling of Eskom into its generation, transmission and distribution businesses alone is not enough. And nor should it be enough for the citizens of South Africa since their futures and those of their descendants depend very heavily on whether or not we can collectively restore the power utility (in whatever new form it takes) to good financial health.

Why does what Moody’s think matter you might ask? Because they are the last of the three big credit ratings agencies to rate SA government debt at investment grade. In other words, they are the last to have the confidence that the South African government will be able to honour its debt thereby maintaining reasonable returns and preserving South Africa’s reputation as a low-risk investment destination. That Moody’s is wavering in its confidence is reflected in their post-budget statement that they are sceptical that the government of South Africa will be able to maintain spending restraint should economic growth remain weak, and, they are not convinced that Eskom will not remain the “source of contingent liability risks weighing on South Africa’s fiscal strength”. In other words they are not convinced that we can fix Eskom. Should we be confident?

On the positive side, President Ramaphosa announced an Eskom Sustainability Task Team, made up of key power sector experts, to advise government on actions to resolve the power utility’s operational, structural and financial problems. He also recently announced a special cabinet task team that is tasked to provide him daily reports on the state of the power grid and what actions need to be taken to ensure power supply. Minister Mboweni also announced that a Chief Reorganisation Officer for Eskom will be jointly appointed by the Ministers of Finance and Public enterprises. He also announced during his budget speech that Treasury is setting aside R23 billion per annum for the next three years to financially support Eskom during its reconfiguration. This allocation is made on condition that the utility accepts the installation of the Chief Reorganisation Officer, effectively a curator, and that it cuts costs to increase its ability of service its debts.

On the negative side, the corporate restructuring of Eskom will be one that is unprecedented in South Africa. If you want to understand the scale of the challenge and why we must meet it, consider that in 2008, Eskom employed 35,404 people, sold 224,366 GWh of electricity, made a net profit of R974m, and carried a total debt of R106.4bn. By 2018, employee numbers had ballooned to 48,628, power sold had only increased over a decade by 5% to 235,486 GWh and its total liabilities had mushroomed to an incredible R568.78bn. These are economy busting numbers. Put as simply as possible, it is simply impossible for any enterprise to increase its workforce by 37% and its debt by 435% while demand for its product is up by only 5%. Hiking tarrifs, Eskom’s only tactic to date will not save the utility. It simply can’t trade its way out of this crisis.

Although the Minister was at pains to allay fears that Eskom is to be privatised, there will also be concerns that the labour unions will contest the restructuring in defence of possible lay-offs. And perhaps most tellingly, Eskom is perhaps the single most pronounced risk to South Africa’s economic outlook. Failure to implement the reconfiguration successfully could lead to a negative market reaction and prompt capital outflows that would further erode already weak levels of investor confidence and place intolerable pressure on the Rand. The risk also exists that increased load shedding and increased electricity prices could seriously undermine efforts to grow our economy. It is by no means guaranteed that we could avoid economic contraction with the heightened political and social tensions that could bring.

With over R350 billion in government guarantees Eskom remains a major risk factor for the South African fiscus. Should we be confident we can fix it? Hopeful yes. Confident? Watch this space!

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