Many more months of hard work lie ahead for Eskom

Since the appointment of Kgosientso Ramokgopa (as the country’s Electricity Minister) and the removal of Eskom from the Department of Mineral Resources oversight, the utility’s turnaround has been nothing short of remarkable. We have not had load shedding for close to 200 days now, and there is no sight of it returning in the immediate future.

But has it all been luck and plain sailing? When somebody mentioned to Gary Player that he had plenty of luck during one of his Major wins, his retort was, “It’s funny how the more I practice, the luckier I get.” Good results are always achieved through hard — often grinding — work.

A recently published article by News24 provides some key insight into some of the more recent struggles of South Africa’s favourite company.

Ambitious move

The unbundling of Eskom is the most ambitious and far-reaching economic reform in decades.

The objective – embodied in amendments to the Electricity Generation Act (ERA) passed earlier this year – is to create a competitive electricity supply market comprising multiple suppliers, ending Eskom’s 100-year monopoly. The motivation is to drive efficiency and better prices.

The News24 article points out that Eskom will be split into three separate businesses: generation, transmission (which is the bulk supply of electricity), and distribution, which includes the poles and wires that deliver electricity to homes and businesses at the end of the line.

But as the process unfolds, it is beginning to look more complex. For the model to work, it is essential that the system operator, which controls the frequency of the grid and balances supply and demand, is independent of those who generate electricity, including Eskom.

This is necessary so that when it buys or curtails electricity from electricity generators, it gets the best deal for the consumer and is not biased towards any one supplier, especially not Eskom. It cannot work if Eskom is both the player and the referee.

The article adds that when it was part of Eskom, the system operator balanced supply and demand from only one generator. Now, under the ERA, its responsibilities have been expanded. It will balance supply and demand and create a market operator or platform to buy and sell electricity. The ERA says that the Transmission System Operator (TSO) must be independent.

Obstacle 1

The first obstacle the unbundling has run into is Eskom’s massive debt pile. This stood at R480 billion a year ago and Treasury has pledged that it will take on some of the debt to reduce it to a manageable quantum of R250 billion.

The first step of the split was the creation of the National Transmission Company SA (NTCSA), a 100% owned subsidiary of Eskom, which began operating on 1 July.

The article points out that, to satisfy lenders – who lent to Eskom on the back of its total assets – the NTCSA has had to take on some of the Eskom debt. Exactly how much has not yet been disclosed by Eskom and will be revealed in the delayed annual financial statements. While the debt sits at the level of Eskom Holdings, the NTSCA has had to provide an upstream guarantee of its portion to Eskom.

NTCSA interim CEO Segomoco Scheppers has bemoaned the fact that this has encumbered its balance sheet, making it difficult for the company to borrow or take on additional liabilities, such as long-term leases with independent transmission projects.

But, a bigger problem is that it raises the question of whether the TSO, which sits inside the NTCSA, can be truly independent. As Eskom’s CEO Dan Marokane told MPs on Wednesday, the NTCSA and Eskom Holdings remain “joined at the hip” by the debt.

The ERA envisages a transition phase with the NTCSA moving from a 100% subsidiary of Eskom to a standalone, fully independent company.

Independence concerns

The News24 article adds that Eskom chairperson Mteto Nyati told MPs that the upstream guarantee will have a bearing on the NTCSA’s independence.

“One thing we all need to know upfront is that in order for us to execute the unbundling, we had to have upstream guarantees. Every operation within Eskom will be signing those guarantees. It is the only way lenders would approve of unbundling. So, no matter what our wishes are for the NTCSA to be independent of Eskom, that can never really be achieved because of this constraint,” he said.

Nyati said that the Eskom board had looked at the various options of how to structure the relationship between Eskom Holdings and the NTCSA.

“The only model that enabled us to comply with the regulatory framework – the Public Finance Management Act, the Companies Act and King IV – is called ‘the active performance model’. Eskom Holdings will no longer run the entities and they will have their own independent boards looking after them, but the entities will still be 100% owned by Eskom,” he said.

The NTCSA would have to be judged not on its ownership structure, but on its behaviour, which must demonstrate that it is truly independent, he added.

The article points out that Marokane said that being “joined at the hip” by the debt was an unfortunate reality.

“Unbundling is not happening in a perfect world. The level of debt in the business necessitated some give and take. The creation of NTSCA would otherwise not have happened if the upstream guarantees had not been in place. This would have further delayed some of the reforms,” he said.

This meant that during the transition phase to a standalone company—which the ERA said must happen within five years—there would need to be “robust engagement” on how best to achieve the unbundling, said Marokane.

“The jury is out on where the TSO should be located and who should be the TSO. We want to engage on that without being presumptuous about the outcome.”

Obstacle 2

A second complication has also arisen with the next phase of the unbundling, which will be the establishment of Eskom’s distribution company.

The article adds that unless the escalating problem of municipal debt is solved, the distribution company will not be financially viable. Existing and future lenders will need to be assured that the new distribution company has a healthy income stream.

Municipal debt to Eskom is escalating faster than ever, reaching R93.78 billion at the end of October. Since 1 April, debt has escalated by another R20 billion as some of the country’s biggest cities – Johannesburg, Tshwane, and Ekhuruleni – joined the non-payment trend.

“At the heart of the distribution business is the issue of its financial viability. Its ability to pass liquidity and solvency tests is influenced by what the long-term solution for municipal debt will look like. So, it is becoming incumbent that we speedily resolve this to give confidence to lenders and be comfortable that an unbundled distribution business will be viable. The priority has doubled to resolve municipal debt issues,” said Marokane.

The article points out that solving the municipal debt problem is not something that Eskom can do alone. It will involve restructuring the way municipalities are run and funded and could even require legislative changes.

This is a 30-year problem to which the government has been reluctant to find a solution. But without one, the splitting of Eskom will be rendered impossible.

Hard work

Hard work never hurts anyone. While South Africans are globally acclaimed for being some of the hardest workers in the world, our politicians and elected officials are placed significantly further down that totem pole.

It is heartening to see that some leaders are taking their jobs seriously and putting the country’s needs before their own. Ramokgopa is a far cry from other modern South African politicians who jump on bandwagons and make populist statements to rile up a crowd. He prefers to stay out of the headlines quietly going about his business. This is the leadership this country deserves.

Addressing its current challenges may require many more months of hard work. But as our beloved Desmond Tutu once said, the only way to eat an elephant is one piece at a time. It seems that Ramokgopa may still see the other end of this tunnel.

We live in interesting times.