Speculation about Cabinet posts obscures SA’s Achilles Heel — Eskom, which has just received another R12.5bn

In late March 2019, Eskom pushed South Africa to the edge of economic collapse when it ran out of money and could not meet its debt servicing and contractual liabilities. The power utility had banked on a R7-billion disbursement from a R33.4-billon loan by the Chinese Development Bank that did not arrive.

None of that emerged until Mboweni filed the required statutory report with Parliament on the last possible day, just before the Easter long weekend.

Eskom, approached for comment, kept its answers non-committal. With regards to the R8.5-billion second tranche of the Public Finance Management Act emergency allocation, Eskom said on Thursday 16 May:

“Government has announced an allocation of R17.6-billion, therefore Eskom will utilise this as and when required”, adding that it would be used “as required for capital and interest repayment on Eskom debt”.

And a question on whether Eskom would achieve going concern status by the end of its financial year in June 2019 received this response:

“Following the finalisation of the audit and the appropriate approvals, Eskom will announce the date of the release of its annual results.”

But, then, that’s it. And it’s not enough to ensure going concern status after Eskom’s financial year-end in June, giving rise to serious speculation that the power utility would need an additional bailout. Coincidentally, those financials may not look too rosy; in November 2018, at the entity’s interim results presentation, the power utility indicated an expected R11.2-billion loss for the financial year.

Already the government has been embarrassed by Eskom, and had to walk back its Budget pledge that the R23-billion would be used to “financially support Eskom during its reconfiguration”, as Mboweni explained then.

Talk of a debt swap, by which government would take over Eskom debt on to its books, is resurging. Eskom had lobbied strongly for such a R100-billion debt swap in the run-up to February’s Budget, but was ultimately unsuccessful. Asked on 16 May about discussions on a debt swap, Eskom replied:

“The overarching issue for Eskom and government is to find and implement a sustainable financial solution.”

“Without policy response to strong spending pressures, weakening tax performance and slow nominal growth, debt burden will increase to over 70% of GDP (gross domestic product), including guarantees to Eskom Holdings SOC Limited… by fiscal year 2023,” said Moody’s, adding that “highly leveraged state-owned enterprises including Eskom remain a source of risk for South Africa’s fiscal strength”.

But Eskom is not only a financial chasm, it’s also one that is mired in politicking. And the political manoeuvring unfolds not only in the governing ANC and its alliance partners such as Cosatu — in February President Cyril Ramaphosa publicly guaranteed Eskom’s unbundling meant no retrenchments — but also among those looking to leapfrog into the green economy.

The politics could mean a haphazard approach that will not resolve the fundamentals.

Politically, the unbundling of Eskom is unpalatable, even with reassurances of no retrenchments. It’s an acute consideration given unemployment increased to 38% on the broad definition that includes those who have given up even trying to find a job, according to Statistics South Africa earlier in May.

Perhaps that is why no details have emerged on breaking up the power utility into distribution, generation and transmission, of which the first new entity was expected by mid-2019, according to Budget documentation.

Politically also unpalatable is going green. Trade unions across labour federations, including the ANC’s partner Cosatu, are critical of the independent power producers (IPPS) and argue that they represent elite interests while negatively impacting on Eskom, from tariff pricing to capacity.

In May, ANC National Executive Committee (NEC) economic transformation sub-committee chairperson Enoch Godongwana argued for prescribed assets, or regulation to force pension funds to invest in defined areas, such as coal, from which Nedbank and Standard Bank announced their exit.

Eskom needs quality coal to ensure stable electricity supply, but there are insufficient new coal mines and, in perhaps an ironic twist, South African coal is increasingly exported due to better prices abroad.

Meanwhile, it seems the latest Integrated Energy Plan draft update dates back to 2017, while the government has to finalise the August 2018 draft Integrated Resource Plan, which deals with electricity supply and management.

According to Intellidex analyst Peter Attard Montalto’s post-election brief on 16 May, Eskom remains a central ideological battleground.

“There is a huge sense of urgency around Eskom and the need for a second iteration bailout…” he wrote.

“Unbundling and private participation, however, is much more uncertain and will be a longer and more fraught (as well as expensive) process.”

The reality is that Eskom is more than R400-billion in hock, with almost R300-billion of that against government guarantees. The exact numbers, however, depending on who gives them. Mboweni, in his report to Parliament in April 2019, says Eskom is R419-billion in debt, with R281-billion drawn against government guarantees. Eskom, in its Friday 17 May Sens announcements, talks of R440-billion debt of which “R273-billion nominal value is government guaranteed”.

Regardless of numbers, if Eskom at any stage defaults on any of its loan repayments, it will lead to the immediate repayment of billions leveraged against government guarantees. That kind of money is not available in the public purse. Nor are the additional tens of billions should the repayment of Eskom debt trigger a complex cross-default call-in of government-guaranteed debt across state-owned enterprises (SoEs).

Ramaphosa, in what could be seen as a post-election opening move on Eskom, on Wednesday 15 May attended the Goldman Sachs conference. Saying the power utility was too large to be allowed to fail, he said the government had a “credible” business plan for the power utility — without actually providing details.

But Ramaphosa’s comments are neither new nor indicative of a policy change, even if a big-bang Eskom announcement may be reserved for his State of the Nation Address scheduled for 20 June 2019 to set the tone of his new administration. Eskom’s threat to South Africa emerged more than 18 months ago under then finance minister Malusi Gigaba, reiterated by Mboweni as recently as February 2019.

The devil, as always, is in the detail.

The speculation over Cabinet positions and factional ANC jockeying is distracting and obscures what is central — not who holds what position, but a determination by Cabinet to put shoulders to the wheel, and all shoulders to the same wheel.

The first signal as to how the factional chips will fall is expected on Tuesday at the special ANC caucus in Parliament following Monday’s special ANC National Executive Committee (NEC) and Sunday’s meeting of the Top Six officials. But only when Cabinet is actually announced will it be clear whether Ramaphosa has had the political backbone to act in line with his message of heading a clean-up — in both party and state.