Eskom split long in pipeline

Decision to unbundle utility first taken in early 2000 but stalled by Enron collapse

10 February 2019 - 07:38 By QAANITAH HUNTER, MUDIWA GAVAZA and ASHA SPECKMAN


Restructuring plans first mooted for ailing power utility Eskom close to two decades ago were brought back onto the table this week after pressure from lenders, who threatened to pull the plug on financing the company that is sitting with debt close to half a trillion rand.
Plans announced by President Cyril Ramaphosa in his state of the nation address to unbundle the parastatal into three units - generation, distribution and transmission - were on the drawing board towards the end of the 90s as the state considered the introduction of private shareholders into various other state-owned enterprises (SOEs).
The new structure could also result in the selling off of assets that are not considered strategic, Eskom chairperson Jabu Mabuza told Business Times on Friday.
"The new plan can and should be done as soon as possible," Mabuza said.
An Eskom task team set up late last year presented the plan to Ramaphosa and told him that lenders were uncomfortable with the sheer size of Eskom and the risk associated with it. As a result, the task team, the board and consultants appointed by Eskom all concluded that unbundling it was the only way to save the paralysed power utility.
With mounting costs and reduced income, Eskom finds itself in a debt trap, a position in which a company is stuck in a cycle of re-borrowing or rolling over its loan payments.
Just over a decade ago, Eskom produced 40,000MW of electricity and had 32,000 employees, with debt sitting at R40bn and employee costs in the region of R9bn. Fast-forward to the present day, production has only risen 20% to 48,000MW but now the company has 47,000 employees, R33bn in employee costs and debt sitting at R440bn.
Costs have increased faster than revenues and it is rumoured that Eskom plans to cut between R25bn and R30bn in costs over the next three years, which feeds into fears held by labour.
Labour unions - the National Union of Mineworkers (NUM) and the National Union of Metalworkers of SA (Numsa) - fear the proposed unbundling will lead to massive job losses, especially in its power generation business.
An insider in the Eskom task team said the only labour union that supported the unbundling was Solidarity.
"NUM came unprepared, they fumbled and did not give us an alternative. You can reject something but you must give an alternative. Numsa just did not show up," the insider said.
Reuel Khoza, who was Eskom's chairperson between 1997 and 2002, led discussions at the utility over the separation of its operations. He said: "To merely say you unbundle into three different companies. is not substantive [and] won't change much unless you know what you are going to do with generation and with distribution."
The plan did not materialise during Khoza's tenure because of the collapse of US energy giant Enron, which raised concerns about private sector abuse.
"Enron was the model of excellence in energy at the time. We didn't know that they had all of these shenanigans. The unbundling to have generation as a different company, transmission as another and distribution as the third, we did recommend at the time," Khoza said.
The breaking up and possible privatisation of Eskom is a decades-old plan. At the time, there were concerns that it could abuse its power in the market to manipulate electricity prices, as seen with Enron - one of the world's largest energy companies - in the 1990s.
In 2001 Enron collapsed, sending shockwaves all through the globe.
Khoza said the break-up of Eskom "... would in fact be worthwhile if they invited private sector investors to make common cause with them in generation".
He added: "What you might like to do is get the private sector to be the dominant shareholder in generation. Either have generation as a whole or have clusters of generation with a number of would-be co-participants. They would then run those operations like you run business, not like you run parastatals, and that would actually extract the necessary efficiencies and render them more efficient and take away a lot of government's headache."
He said the government had achieved success with Telkom, which is not 100% government-owned, and which was "actually working very, very well".
Eskom CEO Phakamani Hadebe says there are three focus areas for the utility - costs, tariff and its balance sheet.
"We can't tell you whether our competitive edge is generation, distribution or transmission, but once you split those, each one has to stand on its own - on its cost and on its profit. It is the only model that has allowed utilities globally to generate sufficient revenues to be sustainable," he says.
The break-up of Eskom won't be the first time a leading state-owned enterprise has been broken up and follows the example of Transnet in the 90s. The company broke up into six units, including SAA, which was subsequently unbundled after a R6bn hedging loss in 2006.
Unions have, however, raised objections to the changes and NUM, Numsa and Cosatu said they would march against the changes.
While corporate restructuring has grabbed headlines, Ramaphosa in his speech this week said the government would support Eskom's balance sheet, with details to be announced at the next budget speech on February 20.
But there are risks for the government if it assumes some of Eskom's debt.
Nick Smith-Saville, global head of credit research at Debtwire in the UK, said the risk of this move was that it may trigger ratings agencies like Moody's and Fitch to look into the government's role in guaranteeing the debt of all state-owned enterprises over time. If the state is found taking on SOE debt beyond simply "guaranteeing", it could have an adverse effect on SA's credit rating.

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