At Eskom, slowly — so very slowly — does it

Six months ago, President Cyril Ramaphosa said SA's indebted power utility would be split in three, it would get new leadership and its debt wouldn’t become a burden on the nation’s finances.

Instead, an initial bailout has been increased by R59bn, no plan has been announced to restructure the overstaffed company and the finance minister says government borrowing will surge and taxes may rise. The government has yet to appoint a new CEO and a chief restructuring officer, first promised in a national address by Ramaphosa on June 20.

“Nothing is happening at any speed,” said Mike Schussler, chief economist at Economists.co.za. “There seem to be too many people pushing back. We have to do structural changes,” such as splitting up the business and privatizing assets.

Fixing state-owned Eskom was always going to be difficult. The utility, which has over $30bn in debt, isn’t selling enough power to cover its costs. Its ageing and inefficient power plants operate on coal and routinely violate emissions standards. The company has been plagued by mismanagement and political manoeuvring, leaving it with a bloated workforce whose shrinkage is bitterly opposed by SA’s powerful unions.

Moody’s Investors Service, the only major credit-rating company that still assesses SA’s debt as investment-grade, said on Thursday that the additional support without an accompanying plan to make the company more sustainable is “credit negative”.

Bond holders and analysts who have met informally with executives from Eskom, officials from the Treasury and members of a task team appointed by Ramaphosa to advise on Eskom say they’ve emerged from the meetings confused and with the sense that there is no clear plan. They asked not to be identified as the meetings were private.

The company plans to meet investors in a no-deal roadshow the week of August 5 after the release of its results on July 30, said Ksenia Mishankina, a senior credit analyst at Union Bancaire Privee in London. Given that the ANC won elections in May, she said she would expect the government to make unpopular decisions swiftly as the country’s next elections will only be in 2024.

Eskom said on Thursday that it had started the process of appointing financial advisers “to assist it with the planning phase of the implementation of the government support package.” The company didn’t immediately respond to queries about the roadshow or the plan, and the Treasury declined to comment on the plan.

Many bondholders and analysts do say that the current bailout is enough to keep the wolf from the door for now. That’s reflected in bond prices. So far in 2019, the yield on Eskom’s 2025 dollar bonds has fallen 415 basis points to 5.88%.

“The support seems enough to allow Eskom to have a going concern status and to plug the funding gap for now,” said Tarryn Sankar, an investment analyst at Futuregrowth. We are “no clearer on where ultimate accountability for returning Eskom to sustainability lies”.

Suggestions and solutions

A number of solutions have been floated. These include decommissioning coal-fired plants early and replacing the generating capacity with renewable energy. That could pave the way to tapping as much as R200bn of climate change mitigation funding from international agencies. Another proposal is to swap the R90bn Eskom debt held by Africa’s biggest fund manager for equity.

“First the chief restructuring officer is needed, then they need to bed in, then they need to appoint advisers, then they need to formulate a plan, then a chosen plan must be presented to government and receive sign off and then it must be executed,” Peter Attard Montalto, head of capital markets research at Intellidex, said in a note to clients earlier in July. “This process could take at least six months but likely a year through to execution. This is all before unbundling to occur.”

Even the government’s drive for more renewable energy is in chaos. On June 29, trade and industry minister Ebrahim Patel said the government was taking steps to have Eskom produce more solar and wind power. On July 15, energy minister Gwede Mantashe said in his budget speech in parliament that additional coal power was back on the table.

On July 22, his department fired Karen Breytenbach, the head of the Independent Power Producer Office. She had been credited with overseeing R209bn of investment in 112 renewable energy programmes in SA. She said she wasn’t given a reason and had a contract until April 2020. Two days later, the department said her contract had expired.

The decision drew a protest from Anton Eberhard, a member of Ramaphosa’s task team on Eskom.

“Zero corruption,” he said in a Twitter post. “President @CyrilRamaphosa’s investment drive needs good institutions and people to succeed.”

Vested interests

The National Union of Mineworkers and the National Union of Metalworkers of SA represent the bulk of Eskom’s more than 48,000 workers, a number that the World Bank has said is 66% too high. Both have threatened to bring Eskom to a halt if jobs are cut, and in previous wage disputes, their members were accused of sabotaging plants and causing power outages.

Ramaphosa is a co-founder of the NUM, a union that remains a key political ally of his, while Numsa is a foe of the ANC.

“Eskom is a political minefield with many vested interests at play, complicating any potential restructuring and turnaround plan,”  Mauro Longano, a fixed-income portfolio manager at Coronation Asset Management, said in an article on Daily Maverick on Thursday.

“The market will solve the electricity crisis, and the role of Eskom as the sole provider of electricity will diminish. How much more discomfort South Africans will endure before this happens, however, is a question that ultimately only the government can answer.”

With Selcuk Gokoluk, Gordon Bell and Rene Vollgraaff

Bloomberg