Mboweni’s amended strategy document on reforms kicks the Eskom debt question down the road

Perhaps the biggest surprise from Tito Mboweni’s medium-term budget policy statement (MTBPS) on Wednesday, 30 October was the lack of decisive action to restructure Eskom’s debt that hangs like an albatross on SA’s finances and economy.

Instead, Mboweni talked tough on Eskom, the power utility that is in a dire financial position with insufficient revenue to service its R460-billion debt load and tariffs that do not allow it to recover all costs.

He said Eskom would have to demonstrate reforms before it approaches the National Treasury, a custodian of the public finances, like a “father Christmas” to get more financial support. And future Eskom financial assistance might be structured like a loan with clear payment terms, instead of the utility having unfettered access to government bailouts.

The government has already put in place a bailout package of R49-billion in 2019/20, R56-billion in 2020/21 and R33-billion in 2021/22. This will have severe consequences for South Africa’s debt profile, raising the debt-to-GDP from 60% in 2019/20 to 71.3% over the next three years.

But measures to relieve Eskom of at least R250-billion debt for it to be sustainable were excluded despite government officials promising for months that all would be unveiled in the MTBPS.

The amended version of Mboweni’s document

The kicking of Eskom big decisions down the road was not only apparent in Mboweni’s MTBPS but a new version of Treasury’s strategic document on growth and wide-ranging structural reforms titled Economic transformation, inclusive growth, and competitiveness: A contribution towards a growth agenda for the South African economy.

Released after Mboweni delivered his MTBPS speech, the new version of the document reads like a watered-down version, especially regarding Eskom’s reliance on coal-fired power stations – a major contributor to both greenhouse gas emissions and toxic air pollution.

An earlier version of the document, which was released by Mboweni on 27 August – without consulting labour and some of his ANC comrades – proposed the sale of coal-fired power stations, possibly by auction.

This would open up private sector participation as the sale of coal-fired power stations would include staff contracts, coal-supply contracts, supplier contracts, environmental obligations, as well as a power purchase agreement at a predetermined tariff.

The new owners would supply a specific amount of electricity annually to Eskom over the remaining lifetime of the power stations, which would limit the fiscal and economic risk Eskom poses, the document said. Depending on tariff assumptions, the sale of Eskom’s coal fleet could raise around R450-billion, enabling the utility to possibly pay off its debt.

However, the new version of the strategic document has dropped the possible sale of Eskom coal-fired stations, which labour has fiercely objected to saying it’s a ruse for privatising SA’s energy network by introducing independent power producers (IPPs). Labour believes IPPs are mainly driven by profits.

Endorsing IPPs, split of Eskom

On Eskom, the new document, which was amended after Treasury received public comments, has endorsed key two energy policies recently revealed by Resources and Energy Minister Gwede Mantashe and Public Enterprises Minister Pravin Gordhan.

The strategy document, which is not a Cabinet document but a policy paper, said the IPP programme “should not be frustrated” as it would provide additional electricity to the grid through a diversified energy mix of renewables, coal, co-generation, and gas from the private sector.

“The IPP programme will also support the provision of electricity at a lower cost. The latest rounds of solar photovoltaic and wind IPPs, once they come online, will be able to generate electricity at a lower cost than Eskom’s Medupi and Kusile (mega coal-fired power stations).”

The Integrated Resource Plan (IRP), which is the long-term energy plan that determines the future energy mix and was approved by the Cabinet on 17 October, was affirmed by Mboweni’s strategy document. The IRP makes provisions for a large increase in renewable energy produced by IPPs from less than 5% of capacity to 33% by 2030 – also making provisions for all technologies, including coal, nuclear, hydro energy and gas. “In energy planning, the base case of the IRP should always be unconstrained so that all policy options can be compared relative to the true least-cost option.”

The strategy document peddled the unbundling of Eskom into three independent units of generation, transmission, and distribution, saying this process needs to be supported with short-term interventions such as strengthening the power utility’s board, improving debt recovery mechanisms and improving maintenance of power plants.

Presenting a document detailing the roadmap for Eskom’s future on Tuesday 29 October, Gordhan said the unbundling of Eskom will start with the establishment of a separate transmission company, which will get its own board and CEO in March 2020.

Transmission, which will be empowered with power transmission infrastructure, will eventually be responsible for buying electricity from several sources including IPPs and sell it to the distribution business of Eskom. Mboweni’s document said this will ensure the sustainability of IPPs going forward.

Like Mboweni’s MTBPS and Gordhan’s document detailing the road map for Eskom’s future, the amended strategy document is silent on Eskom’s debt problem.

Instead, the document is cited extensively by Treasury in the MTBPS as part of South Africa’s reforms to yank the economy out of a low growth trap (0.5% for 2019), boost investor confidence and make a dent on the near 30% jobless rate.

The five themes of the document are still modernising network industries; lowering barriers to entry for new businesses and increasing competition to address distorted patterns in the ownership of the economy; prioritising labour-intensive growth in sectors such as agriculture; implementing flexible industrial and trade policies, and promoting export competitiveness and harnessing regional growth opportunities.

If these interventions are implemented over time, they can raise potential growth by an additional 2,3 percentage points and create more than one million job opportunities. BM