The Social Compact on Eskom, finalised by stakeholders in the National Economic and Development and Labour Council (NEDLAC) has detailed a set of measures aimed at improving the sustainability of of the company. The debt level referred to is pegged at R488bn.
The true financial position of the utility is however well over the reported R488bn. Karl Miller, a global energy adviser estimates Eskom’s “real” debt at $45bn (more than R760bn at this week’s exchange rate), including off-balance sheet debt and deferred plant maintenance.
Against this background, the compact outlines intervention in three main areas: a strategy to reduce debt levels, to maximise revenue and collect all outstanding debt, and to change and reduce cost structures for all goods and services.
With regard to debt, the compact aims to commit all social partners to mobilise adequate financial resources for Eskom. This is simply a veiled reference to the ongoing attempt to mobilise private savings to bail out the utility. While it says that the investments made must comply with the mandates of financial institutions, their fiduciary duties and the principle of risk adjusted returns, Eskom is embarking on an attempt at financial wizardry to inflate the Eskom Holdings balance sheet using the surplus of around ZAR35bn built up in the (defined benefit) Eskom Pensions and Provident Fund (EPPF) and then cut contributions from Holdings to EPPF for future years. The EPPF and Holdings auditors are reportedly and understandably unhappy.
Even if the R30bn owed by municipalities is settled immediately and stringent measures taken to curtail illegal connections, the debt remains at an economically crippling level. This, while revenue continues to fall in a pre and post-Covid shrinking economy.
For procurement cost structures to be reduced, it would be useful and necessary – given the history of inflated prices – to be transparent about past and future contracts. In the absence of this the tax payer is blindsided while tentacles reach out to pension funds to ameliorate debt.
Eskom’s paper is worth nothing in financial markets and any debt for equity swap would need to come – with ‘the principle of risk adjusted returns’ – from willing private equity players. Of course, this would entail conditions that include a managerial say, an end of political interference and a massive reduction in the bloated E-band and other non-essential staff components.
These requirements are clearly unpalatable to government and so the conundrum remains. The rest is smoke and mirrors, and not much smoke given the parlous state of the fleet of power plants – the new ones mired in faulty design, construction and bloated cost and the older one’s broken by relentless running into the ground with scant maintenance.
Meanwhile, debtholders have been advised that Eskom's 2020 annual financial results has been delayed due to COVID-19 related challenges. “The date of the release of the annual financial results will be communicated as soon as this has been confirmed” – whatever that means. What it does mean is that prospective investors will view this with understandable concern given that in its previous financial Eskom posted a record loss of R20.7bn for the 2018/19 financial year.
As independent energy consultant Doug Kuni remarked in a recent Eskom webinar alongside Eskom spokesperson Sikonathi Mantshantsha, “[Power supply] is what we need to enable economic growth. And if there is economic growth, the additional capacity is required and the investments will be made…If the load shedding issue was addressed, the economy would be able to grow and Eskom would be able to sell more electricity, and their revenue would go up…we will have an unsustainable model if we continue with load shedding and still have the same financial requirements…we are paying double the cost for Kusile and Medupi, yet we get half the generation benefit.”
The sad reality is given the debt levels (and an unwillingness to address these though privatisation or private equity debt for equity swaps), the maintenance backlog and the continued opacity vis á vis contracts, the lights will continue to dim as cost to consumers rises. Electricity in South Africa is neither available nor affordable and the government’s solution to take from Peter to pay Paul will simply not solve the dilemma.
