eskom debt-swap

Sunrise over power lines in the Free State. Eskom announced this week that load shedding might come in to effect again this winter. Photo: Herman Verwey / City Press

Budget Speech 2019: This is how much it will cost to unbundle Eskom

This financial support, according to Mboweni, will only be granted and maintained under strict conditions.

eskom debt-swap

Sunrise over power lines in the Free State. Eskom announced this week that load shedding might come in to effect again this winter. Photo: Herman Verwey / City Press

As part of his maiden budget speech, Finance Minister Tito Mboweni spoke on the issues facing Eskom, including the utility’s looming unbundling strategy.

On Wednesday afternoon, Mboweni approached the parliamentary podium. Outward appearances depicted a calm and collected Minister, prepared to spell out the nation’s financial prospects.

Mboweni’s Budget Speech

The dire predicament facing the South African economy – as a result of burgeoning national debt and flailing state owned enterprises – encompass a sense of unease and angst. Straddling the line between rationale and hysteria, Mboweni put his best foot forward, encumbered by a socio-political minefield, populist demands and leaky fiscus.

Looming dark and sullen over the future of South Africa’s economy, Eskom presents the greatest danger to the nation’s financial and operational stability. Debt-stricken, unable to turn a profit and embattled by a long list of operational ineptitudes, the national power supplier is on a swift descent into insolvency.

The unbundling of Eskom

In an attempt to mitigate disaster, President Cyril Ramaphosa, following prolonged consultation with inter-ministerial task teams, announced an unbundling strategy, which would effectively see Eskom split into three separate semi-independent entities. Under Eskom Holdings, subsidiaries will include Generation, Transmission and Distribution.

While the noble attempt may hold the antidote to Eskom’s grievous failings – by creating a competitive, efficient and accountable business model – concerns regarding the company’s deep-rooted mismanagement and corruption have sparked fierce debate. If Eskom, as it currently stands, is unable to defeat the rot of malfeasance, will splitting it into three entities cure the core issues or merely spread scandal across a greater surface area?

Counting the cost

Another issue which lies at the heart of Eskom’s unbundling, is the cost involved in a restructuring strategy of this magnitude. Mboweni revealed that the strategy, while costly, would not be an unbearable load to carry. Exuding confidence, Mboweni hit back at government detractors who have blamed the National Treasury for pandering to Eskom’s every financial need. Of Eskom’s gargantuan debt of R420 billion, Mboweni said:

“Pouring money directly into Eskom in its current form is like pouring water into a sieve. 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.”

Mboweni did, however, note that government would support Eskom during its restructuring process, explaining:

“We are setting aside R23 billion a year to financially support Eskom during its reconfiguration.”

While government has committed R23 billion a year to the unbundling process – the amount of time it will take to effectively decentralize the utility is still unclear. Conservative estimates put the date of completion around 2023/2024.

This financial support, according to Mboweni, would only be granted and maintained under strict conditions. The main condition relating to the appointment of an independent Chief Reorganisation Officer (CRO). The successful candidate would first have to pass a screening process led by the Ministers of Finance and Public Enterprises.

The Finance Minister noted that this formula would be applied to all state owned enterprises which, in future, requested financial assistance from the National Treasury. Efforts to tighten loan guarantees would also be redoubled. Mboweni explained:

“We must tighten the guarantee rules. If a state-owned enterprise applies for a government guarantee for operational purposes, it will be required to appoint a CRO in concurrence with the National Treasury and its bondholders.

The CRO will undertake a full operational and financial review. When banks need state support, we appoint a curator. When provincial and municipal finances are in disarray, government can take over the running of the administration. These rules should also apply to all SOEs.”