“For the sizeable support required, it cannot be business as usual”, Finance Minister Tito Mboweni said about the county’s power utility during his medium-term budget policy statement (MTBPS) delivered in Cape Town, on Wednesday, 30 October.
In addition to low growth, South Africa’s biggest economic risk is Eskom, the MTBPS document revealed. Ongoing problems with the utility’s operations continue to disrupt the supply of electricity to households and businesses.
Government has set aside significant resources for Eskom. With the immediate financial restraints lifted, the focus must be on operational problems and restructuring the utility into three separate entities. “Doing so will mark the beginning of a transition to a competitive, transparent and financially viable electricity sector.”
In February 2019, President Cyril Ramaphosa announced that Eskom would be separated into three entities corresponding with its electricity generation, transmission and distribution functions. The primary objective of this restructuring is to facilitate cost efficiencies, optimal investment in infrastructure, improved operational performance and reliability of supply.
The separation of the entity will begin a far-reaching transition in the electricity sector, from dominance by a vertically integrated and inefficient monopoly to a competitive and financially sustainable sector.
Mboweni said that South Africa’s power utility must run their current plant and equipment better; achieve other operational efficiencies, including much better cash management; and fast track the separation of the utility into three parts as endorsed by the political principals.
“There should be no doubt about the policy decisions in this regard. Going forward, new cash flow support will no longer be equity but will be in the form of loans.”
He added that one he was convinced that Eskom’s board and management has made an irrevocable commitment to implement government’s decisions and there is enough progress, government would negotiate the appropriate size of debt relief.
“Eskom is a business and should be run that way.”
However, the MTBPS stated: “There has been limited progress in implementing the legal separation of the utility. In addition, Eskom faces periodic cash flow crises, necessitating support to the value of R49 billion in 2019/20, of which R13.5 billion has been transferred to date.”
Further, it stated that requests for short-term financial support in the current financial year are limited to the remaining balance of R35.5 billion, which will be transferred in accordance with Eskom’s cash flow requirements, pending the enactment of the appropriation bills.”
The immediate priority is to stabilise Eskom’s financial position. The 2019 budget included provisional government support of R230 billion over 10 years to support Eskom’s balance sheet and restructuring.
“The proposed additions to the amounts identified in the 2019 budget are intended to help Eskom maintain its going-concern status, which requires the utility to meet its financial obligations as they become due.
“If Eskom is unable to issue debt in the financial markets, or the cost of doing so becomes prohibitively expensive, government may be called upon to provide further support to enable financial obligations to be met. The total cost of Eskom’s annual debt and interest payments averages R85 billion over the next three years.”