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South Africa can’t afford to let Ramaphosa’s Eskom plan fail

By Lauren Hermanus
Posted on Monday, 25 February 2019 10:26, updated on Friday, 8 March 2019 15:03

South African President Cyril Ramaphosa makes his State of the Nation address in parliament, in Cape Town, South Africa, Thursday, Feb. 7, 2019. Rodger Bosch/AP/SIPA

South Africa's President Cyril Ramaphosa has committed to the full vertical unbundling of the country's electric utility, Eskom, in line with reform policy dating back to 1998.

South Africa’s President Cyril Ramaphosa has committed to the full vertical unbundling of the country’s electric utility, Eskom, in line with reform policy dating back to 1998. The plan is to separate generation, transmission and distribution into subsidiary companies under Eskom Holdings, each with their respective boards and executive structures. Full implementation will take at least five years, but some steps can be implemented without delay. There is an urgent need for triage, as well as longer-term planning for a sustainable energy sector that works for all South African households and businesses.

Eskom is in the midst of extreme financial, operational and governance crises, which it will not be able to solve alone, especially within the context of the current complex global energy transition. Recently, the South Africa Department of Public Enterprises announced that the company was just a few months away from insolvency. This information was shared not long after Eskom requested a tariff increase of 17.4% (followed by 15.4% and 15.5% for the next two years). The department subsequently backtracked, but maintained that the state-owned company was having severe liquidity issues. The threat of bankruptcy is certainly real, and the terrible prospect is likely the motivation for this political reframing.

The broader economic impact of bankruptcy would profoundly undermine the country’s plans for development, poverty alleviation, job creation and growth. Scheduled power outages, termed “load shedding” that have resulted from a supply crisis, are estimated to cost the country approximately R2bn ($143m) a day. A national grid collapse would be far more serious.

Eskom’s survival is critical to South Africa’s economy. In the budget speech on 20 February, the finance minister Tito Mboweni said that SOEs (state-owned enterprises) pose very serious risks to the fiscal framework. And indeed, short-term financial support for Eskom, of R23bn a year over the next three years, while it restructures offsets austerity measures and spending cuts in other areas. This is not an easy trade-off in a country with urgent, immediate needs: high levels of structural unemployment, poverty and deep inequality.

Additionally, government assistance to Eskom will strain the country’s deficit, with gross national debt stabilising to about 60% of gross domestic product by 2023. Mboweni made clear that Eskom debt would not be absorbed by the sovereign. But, of course, whether through taxes or electricity tariffs, South African consumers will shoulder the cost of the ailing enterprise. This moment demands bold and decisive leadership from the president, relevant ministers and Eskom’s executives and board. It also requires the support of many sectors of society, from households to various industries, who will carry the cost together.

Implementation of real reform is more likely than ever before for three reasons. First, Eskom’s financial crisis is worse than in the past, with fewer available remedies, and also comes at a time when the country is emerging from revelations of corruption and state capture. South Africa is addressing the institutional damage and financial implications of the last nine years through remarkable legislative and judicial processes. There is little choice but to regain the confidence of lenders, investors and the public through direct and pragmatic action to reform state-owned companies.

Second, the president appears to have a much more detailed and robust plan than his predecessors. Key ministers and other non-state actors are vocally supporting him. The next steps have been identified, with the transmission grid subsidiary prioritised within the current legislative framework. Further detail was revealed in an annex to Mboweni’s budget.

Third, although there is vocal union opposition to reform, there is a growing understanding that South Africa’s presently coal-powered electricity system is not viable. What the unions appear to oppose is not so much restructuring as privatisation, which they see as the unavoidable result of restructuring the sector. It is indeed a valid concern that needs to be addressed, especially because privatisation is not the inevitable outcome of the proposed reforms.

The extent and nature of private sector participation — whether through privatisation, public-private partnerships or concessions — is a policy choice, and one that needs to be defined in a transparent and accountable manner. Open and effective engagement to build consensus on separating and insulating the state-owned national grid, while allowing space for collaborative development of a longer-term sustainable energy transition map for the country, is urgently needed.

There are several reasons that the three Eskom businesses could be more viable as separate units. Functional separation removes conflicts of interest that have led to Eskom favouring its own increasingly uncompetitive and expensive generation, while failing to contract least-cost power from independent producers. This directly contradicts national energy policy. Acknowledging the revenue-related challenges between transmission and the electricity distribution and retail landscape, at the very least, an independent, state-owned grid would be incentivised to act more rationally.

Additionally, the scale and complexity of Eskom creates poor transparency and makes oversight very difficult. Greater transparency and accountability for separate companies could make each one more attractive for lenders.

Avoiding bankruptcy is one of the primary short-term drivers for the plan to unbundle Eskom, by separating the generally well-run transmission network from distribution, and crucially, from generation, where most of the challenges lie. The thinking behind this is that a transmission-focused subsidiary could make a return to investment grade and access finance more easily and affordably if unencumbered by generation.

Addressing these issues has been a focal point for Ramaphosa in the period leading up to national elections in May. Protecting the transmission grid, which should remain state-owned, is a clear priority, as noted in the budget. Failure is not an option, and the government appears motivated to do whatever is needed to achieve tangible reform. Hopefully, this will happen in an inclusive and adaptive process in which all, but especially vulnerable, stakeholders are protected and their interests fully represented.

Lauren Hermanus is Research Associate at the University of Cape Town, working on the Power Futures South Africa project (powerfutures.org / Twitter: @PowerFuturesZA), and Director at the Adapt sustainable development initiative (howweadapt.com).

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