South Africa: Eskom bailout flickers hope, but recovery is a long way off

The crisis at Eskom, which provides 90% of South Africa’s electicity, has had negative effects for the wider economy, but President Ramapahosa’s plan to “unbundle” the power giant have met a mixed response. Report by Chris Matthews

The troubles facing Eskom, South Africa’s debt ridden state-run utility provider, hit customers hard again in February. South Africans were disconnected and deprived of electricity once more as the besieged national operator implemented a Stage 3 round of “loadshedding” in attempts to stave off an energy shutdown.   

Light-hearted humour is being expressed on social media. “And just like that, power just went off,” one exasperated Twitter user mused. Another quipped: “I heard that stage 5 of #loadshedding they come into your house and blow out your candles.” However, the dark clouds are growing around Eskom.

Shorthand for Electricity Supply Commission, Eskom has long been mired in financial difficulty, corruption allegations and mismanagement, and alongside crippling plant inefficiency, ordinary South Africans are being left in the dark. But the ramifications of the crisis extend far beyond the home.

The near collapse of the energy giant, which provides 90% of South Africa’s electricity but is straddled with R419m ($29.7m) debt, has led to shaky economic confidence, wary investors and growing fissures between government and an Eskom workforce fearful of privatisation. Corruption claims have long stalked the organisation. A November 2018 government report said Eskom “failed dismally” in complying with regulations, that various members of the board had had conflicts of interest and that there had been “abuse of public resources” in its procurements processes. Its losses are forecast to hit R20bn for 2018/19, according to Eskom CFO Calib Cassim.

The re-emergence of electricity blackouts in recent weeks stems partly from the failure of what public enterprise minister Pravin Gordhan called in February two “badly designed and badly constructed” Eskom projects.

The Medupi and Kusile coal power plants were set to be up and running in 2015 but poor project management means the cost of the plants, which will be Africa’s largest once finished, is running at more than twice the original budget.

The failure of the two plants is compounded by units at various other ailing power stations out of action or requiring urgent repairs to prevent a total collapse of the national grid. Such inefficiencies left 38% (17,371MW) of Eskom’s total generating capacity offline in December – higher than the 2015 crisis when more than 15,500MW were obsolete.

The research firm Capital Economics has said “the cuts cause more popular anger than quantifiable economic harm” though, pointing out that manufacturing output dropped 3.6% at the height of the 2015 crisis, a similar percentage to mid-2017 when power output was on the rise.    

“South Africa’s rolling blackouts anger many, but seem to cause little economic damage,” senior emerging markets economist John Ashbourne said. “The big risk is that the government will prolong the crisis by propping up Eskom, rather than seriously reforming it.

“Whether it is higher tariffs, big government investments, or (most controversially) some kind of privatisation, it’s clear that something has to give.”

Ramaphosa takes action

In his State of the Nation Address in February, President Cyril Ramaphosa finally acted and announced plans to “unbundle” Eskom, a process of remodelling whereby the generation, transmission and distribution of energy will be handled by three separate entities but crucially, remain under the Eskom umbrella. “Eskom is in crisis and the risks it poses to South Africa are great,” he said. “We need to take bold and decisive action. The consequences may be painful but they will be even more devastating if we delay.”

Supporters hope the move will create greater transparency, accountability and result in more efficient operations. But while critics think the announcement doesn’t go far enough, unions are growing nervous about the prospect of privatisation. And while the government has agreed to bail out Eskom, no concrete plans as to how have yet been released.

The failure to create fully independent entities, and thus invite greater competition ino the sector, has been described as sub-optimal by some market observers. Intellidex’s head of capital markets research Peter Attard Montalto described Ramaphosa as “high on hope, long on promises and in full election mode” – South Africans returns to the polls on 8 May – and that simply unbundling Eskom will lead to a “much more drawn out and less impactful” turnaround.

“A mindset change is needed in Eskom and it’s not clear this achieves this, whilst still riling the unions,” he said. “Separating within Eskom [means the] incentive issues and monopoly mindset will remain and any upside from internal capital allocation being more transparent between entities may be limited.”

The announcement offered little solace to capital markets. The rand continues to hover around $14 mark, there were 2 billion of rand outflows from the domestic bond market on 13 February, and Moody’s – the only agency still giving the country an investment grade rating – is said to be close to issuing a downgrade.

“The move paves the way for a more transparent group with more clearly allocated revenue and cost between business segments,” said Moody’s following Ramaphosa’s speech. “However, in and of itself it does little to address Eskom’s financial challenges.”

‘Declaration of war’

Uncertainty is growing too among angry Eskom workers who plan to protest the unbundling plans amid fears it is the first steps to privatisation and severe job losses. South African Federation of Trade Unions General Secretary Zwelinzima Vavi told local media the move was a “declaration of war” and that they would protest during finance minister Tito Mboweni’s budget speech.

Such opposition is likely to delay the unbundling process, according to Eurasia Group. The firm believes that Eskom demands’s of government to take on R100bn debt and agree to a 15% tariff increase are unlikely to be met in full, creating greater customer woes and a continuing economic malaise over the coming months as long-term plans for the utility remain uncertain.

“Opposition by labour unions will slow the proposed unbundling process,” Africa analyst Darias Jonker said. “Which will probably get started only in about 12-18 months; meanwhile, the privatisation of key assets remains unlikely. “Despite efforts by President Cyril Ramaphosa, reliable power supply is not likely in the first half of 2019, and state-run utility Eskom is unlikely to recover financially in that time.”

Unfortunately for customers and the South African economy one thing is clear, any agreeable Eskom recovery has a long way to go yet.