In yet another depressing display of kicking the can down the road, finance minister Tito Mboweni suggested no new measures to help Eskom cope with its paralysing debt load.
That Eskom, in its current configuration, is an inefficient organisation is not in dispute and the government has taken steps to address that issue. But the most pressing problem facing the power utility is the R450bn debt mountain which Eskom is unable to service from cash generated from operations.
There is nothing wrong with Mboweni’s tough love for Eskom, which he thinks could do with better management of cash and improved running of its plants and equipment to save money. Then, only then, will the government start talking about the appropriate size of the debt relief.
From Mboweni’s comments, it is logical to surmise that he thinks Eskom’s requested R250bn debt relief could be lower if the company was run like a business because the money from cost savings will enable it to cover a larger portion of its interest payments.
But it is difficult to envisage Eskom, even with the big brains and billions in bailouts from National Treasury behind it, making meaningful savings to break out of the debt trap.
There are of course things that could be done. Its two largest costs are labour and primary energy, that is, coal and diesel to fire up its turbines.
Unfortunately its attempt to cut labour costs by freezing salaries and retrenching excess staff hit a speed bump before they even took off, with the government stepping in to swiftly tie its hands. Should it be able to get past the unions and its political principals, Eskom could cut at least a third of its workforce and save about R11bn. But that option does not look likely.
Second, it can negotiate with its suppliers to cut their costs on the basis of hardship. Public enterprises minister Pravin Gordhan, who has already inappropriately started this negotiation on Eskom’s behalf, is convinced that several coal suppliers are making super profits. At least one of these suppliers has expressed outrage that the government can even consider asking to renegotiate freely agreed contracts.
It may have more success with independent power producers with whom Gordhan has also entered negotiations. They are eager for more business and are keen to keep the government happy, despite the enormous difficulties of renegotiating contracts that have been sold on as revenue streams into the secondary market.
The Treasury has also moved into Eskom’s finance department to manage cash flow and take a look at procurement which it believes to lack discipline as Eskom is used to paying whatever suppliers ask.
It can fight for higher electricity tariffs, as it has done in recent weeks with a court challenge of a decision by the National Energy Regulator of SA to award tariff increases over the next three years, which did not fully cover the cost of producing power. If Eskom wins the case and gets the 15% hike it initially asked for, it will bring in an additional R102bn in revenue over the next three years.
Unfortunately, there’s no guarantee that it will come out victorious in the case seeking a court order to plug the R102bn revenue shortfall. Furthermore, Eskom’s plan to break up into three separate entities faces challenges from unions, who see it as precursor to large-scale retrenchments and privatisation, and it may be subjected to exhaustive legislation.
While Mboweni has the right idea, Eskom’s fixing could turn out to be at the margins. With the power utility hanging over the economy like a sword of Damocles, bond holders and investors still need an Eskom solution. It is important that it is forthcoming.