Eskom’s debt refinancing and shoring up of its going- concern status are the critical burning platforms for the new board and CEO. The clock is ticking and the consequences of not closing the immediate financial shortfalls will be dire. The good news is that the problem, which looked intractable only a week ago, now appears increasingly manageable.
The new African National Congress leadership has grasped the gravity of the situation and its intervention to restore integrity and credibility at the top of the organisation has been well received externally, which will boost market confidence. Restoring such confidence cannot be overemphasised, as there are few, if any, fiscal resources available to direct the way of the embattled utility.
Therefore, the new Eskom leadership has no choice but to turn to commercial lenders, development finance institutions and, eventually, bond investors to avoid the worst. The appointment of Jabu Mabuza to the position of chairperson offers Eskom immediate access to those in a position to extend emergency funding.
Mabuza’s joint role as chairperson of both Business Unity South Africa and Business Leadership South Africa means he is in close contact with the most powerful business leaders in the country, including the CEOs of the major banks. There will be undoubted nervousness, owing to harrowing evidence of waste, inefficiency and rotten governance, but Mabuza has the added advantage of being able to point to the turnaround of Telkom under his stewardship. Nevertheless, the nature of the Eskom intervention is still vitally important. Indeed, the support package that eventually emerges can take one of two forms: the application of bandages to staunch the visible bleeding, or surgery to tackle the cause of the haemorrhage.
Any Band-Aid-type solution is likely to involve an accounting- based plan that addresses the immediate financial shortfalls and puts in place mechanisms for improved financial and operational performance, without fundamental restructuring. It has arguably reached a point, though, where Eskom needs surgery.
The sustainability of the business is in doubt and its vertically integrated structure is a risk to the future affordability of electricity and the country’s fiscal balance. Internally, the model has already resulted in the inefficient allocation of scarce resources, with over R305-billion (before pending claims and interest during construction) having been directed towards two inflexible coal megaprojects at a time when flexibility is at a premium and when investing in incremental generation has become an economic proposition.
At the same time, too few resources are being directed the way of transmission and system operations, the very core of Eskom’s value proposition. An unencumbered transmission system operator would be in a far better position to make decisions based on the delivery of the lowest-cost electricity possible than is the case currently, where such decisions are heavily influenced by the politics of the day.
Given this background, the warning of Energy Intensive Users Group of Southern Africa past chairperson Piet van Staden should not go unheeded. In a recent opinion piece, he cautioned that cleaning up the company might not be sufficient. “Eskom is facing a perfect storm with both the supply and demand sides of the electricity industry changing, making 20th century answers to today’s challenges irrelevant.”