Supplementary Budget 2020

7 interventions that could prevent Eskom's collapse

Load shedding plunges Johannesburg into darkness (Dudu Zitha, Beeld)
Load shedding plunges Johannesburg into darkness (Dudu Zitha, Beeld)

The South African economy depends on Eskom, and if it collapses it could see pension funds losing trillions, members of Parliament have heard.

The Portfolio Committee on Public Enterprises on was Wednesday briefed by several stakeholders, including energy expert Professor Anton Eberhard, labour federation the Congress of South African Trade Unions, and industry representatives Energy Intensive Users of Southern Africa, on proposals to address governance and operational challenges at Eskom.

Cosatu's Parliamentary Coordinator Matthew Parks lamented the South African economy's fragile position, which is heavily reliant on Eskom's turnaround. On Tuesday Stats SA revealed that the country had entered into a technical recession, having contracted for two consecutive quarters. Growth remained flat at 0.2% during 2019.

"If we do not resolve [the Eskom] crisis, the recession will move into a depression," Parks warned. "If there is no credible, coherent plan to save Eskom, we will be downgraded." he added, in an apparent reference to South Africa's upcoming review by Moody's of its sovereign credit rating.

Parks then expanded on several interventions from Cosatu to help turnaround the power utility – ranging from dealing with Eskom's debt, instituting a skills audit and clamping down on corruption. These proposals were echoed by other stakeholders:

1. Dealing with debt

Eskom's current debt levels are "unaffordable and unmanageable," Parks said. If Eskom were to collapse it would collapse the economy, he added, before suggesting that trillions in pension fund value invested in the stock market could be wiped out if Eskom failed.

Parks called for a social compact of government, business, labour and community coming together to find solutions that would collectively save Eskom. The social compact would be incredibly useful in determining a way to finance Eskom debt.

Cosatu proposes a special purpose finance vehicle to remove R254 billion from Eskom's R454 billion debt book, leaving the power utility with a more manageable R200 billion.

This solution would require a combination of public and private financing, to share the risk of exposure, Parks said.  

So far private pension funds had expressed interest in making contributions, he said. Cosatu also sees government making contributions through the Development Bank of Southern Africa.

There is an option to have the Public Investment Corporation, which invests on behalf of the Government Employee Pension Fund, to increase its exposure to Eskom debt.

The PIC already has R104 billion invested in Eskom bonds, which are government guaranteed. Bonds that have been paid have been a "healthy return on investment," he said. The PIC as an equity partner of Eskom would see it get a seat on the Eskom board and a more powerful voice to enforce reforms at the power utility. Any financial assistance will be conditional, to Eskom improving its operations, Parks said.

Eberhard, who chaired the Eskom Sustainability Task Team appointed by the president in 2018, said that while Cosatu's proposal is welcomed, the PIC and Development Bank of Southern Africa already have high exposure to Eskom debt. The task team had proposed a "blended climate-linked finance facility" at concessionary rates, Eberhard said. This finance would be made available on condition of the decommissioning of coal plants, in favour of new generation.

2. Cleaning up corruption

Parks said it is critical for corruption at the entity to be dealt with. "Those who have stolen from Eskom must go to jail, and their assets be attached," he said. "Management which has broken Eskom, must be held accountable and dismissed if needs be. Their assets should be attached according to auditing amendment act," Parks added.

At a briefing to the Standing Committee on Public Accounts in February, Eskom officials said that so far 40 of its employees had been referred to the Hawks and the Special investigating Unit. There are currently 261 active cases under forensic investigation. There had been 59 dismissals linked to fraud and corruption by December 2019. The power utility is also in a process of recovering monies, paid to suppliers which irregularly scored contracts.

3. Review of contracts

Parks said that some businesses such as coal suppliers, independent power producers and outsourced maintenance providers have overpriced contracts. Cosatu has proposed that these contracts be renegotiated at affordable, market-related rates. Parks said that while businesses might want to defend the "sanctity" of their contracts, they need to be adjusted or Eskom won't exist in a year's time.

4. Revenue adjustments

Eberhard described Eskom as being in a "classic utility death spiral", having to increase tariffs in order to increase revenues but this has the opposite effect of reducing consumption. This then forces the power utility again to make up for lost revenue by increasing tariff. Every time tariffs increase, consumption declines, and the "utility dies".

Cosatu proposed that all consumers move towards using prepaid electricity, to ensure revenue can be collected. Further a debt recovery plan must be set up to recoup funds owed by municipalities, government departments and parastatals. Parks suggested that Treasury deduct allocations to municipalities which owe Eskom – not a as "big bang" approach, but slowly over a few months so as not to sink municipalities. Government should also go on a campaign to encourage payment of bills – especially in Soweto where outstanding debt is approaching R20 billion.

Furthermore, excessive tariff hikes are forcing consumers – and major industry players such as mining and manufacturers - to go off grid because power is becoming unaffordable, Parks noted.

5. Expansion into renewable energy

Parks said Eskom's mandate should be expanded to allow it to move into the renewable energy space. Government should also seize the economic opportunities in the renewable energy space, for example having solar panels manufactured, maintained or repaired locally.

Further regulations should be implemented to support or incentivise use of renewable energy – for example making it a requirement for all buildings have solar panels which are locally made, Parks said. This will allow Eskom to meet climate change objectives and to create a whole new industry.

6. Cutting costs

Eskom's staffing costs have increased 13% year-on-year, over the past 12 years, Eberhard pointed out. Coal costs have also increased excessively at 17% year-on year.

Cosatu proposed that Eskom's bloated management structure of 800 people be addressed, possibly by reducing perks and introducing redeployment where there are skills or staffing gaps in other divisions at the utility or even at electricity departments at municipalities.

Eberhard said that "over time" Eskom's headcount could reduce to efficient numbers through a process of natural attrition. Over the past year, the headcount reduced by 2 000 to 46 000.

7. Successful restructuring

Eberhard said that the restructuring of Eskom into three entities – generation, transmission and distribution – would ensure transparency of the business making it easier to regulate and result in efficiencies as each of the businesses will be more focused.

Eskom is working to establish its transmission entity first – Eberhard said this would create an opportunity for energy users to procure least cost power and this would potentially attract much needed private investment to this space.

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