South Africa issues Eskom rescue scheme, but debt problems linger

New plan will lower fuel costs, use more renewables, allow the utility to sell assets - and open up more competition.

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    South Africa will continue relying on Eskom for base-load power, but will open the market for private generators to supply the national grid [Siphiwe Sibeko/Reuters]
    South Africa will continue relying on Eskom for base-load power, but will open the market for private generators to supply the national grid [Siphiwe Sibeko/Reuters]

    South Africa unveiled a long-awaited plan to save its debt-stricken power utility, including exposing it to greater competition, lowering fuel costs, increasing renewable-energy output and selling non-core assets.

    A policy paper released by Public Enterprises Minister Pravin Gordhan envisions Eskom Holdings SOC Ltd. relinquishing its almost century-old near-monopoly of the electricity industry.

    As a first step, its transmission business will be hived off next year while remaining under the control of a state holding company, a step that will ease the way for private generators to supply the national grid.

    "Taking out the transmission entity first, with its own board, is a pragmatic step," said Anton Eberhardt, a professor at the University of Cape Town Graduate School of Business and the head of a task force that advised the government on ways to fix Eskom.

    "The timeline for having it up and running by March 2020 is extremely achievable and a positive sign."

    But more work lies ahead. The plan didn't deal with Eskom's 450 billion-rand ($31-billion) debt. Nor did it say who will be the utility's next chief executive officer, something the government has promised it would announce by Oct. 31.

    The rand weakened as much as 1% against the dollar after the release of the plan, leading emerging-market currency declines. Yields on South Africa's sovereign dollar bonds due 2028 jumped 10 basis points, the most in five weeks.

    "There was no discussion of Eskom debt restructuring, which is the crux of the problem investors care about," said Simon Harvey, a London-based market analyst at Monex Europe Ltd.

    "The real takeaway is that the lack of decisiveness in today's announcement increases the importance of tomorrow's medium-term budget statement."

    A new CEO is expected to be appointed next week, Gordhan told reporters in Pretoria, the capital. Finance Minister Tito Mboweni will outline broad principles for tackling Eskom's debt when he delivers his mid-term budget on Wednesday, he said.

    Eskom, which supplies about 95% of South Africa's power, is considered the biggest risk to the national economy.

    While the government has allocated the utility 128 billion rand in bailouts over the next three years, that won't be enough to stabilize its finances because it isn't generating enough income to cover interest payments and operating costs.

    New CEO

    In addition to appointing a new CEO, there will also be announcements next week on changes to Eskom's board and the creation of an interim board of three to five members for the transmission unit, according to Gordhan.

    The utility has been without a permanent CEO since Phakamani Hadebe quit in July and the post has been temporarily filled by its chairman, Jabu Mabuza.

    Fixing Eskom "is a long protracted process, which has to be undertaken with discipline," Gordhan said. "What we are clear about is that Eskom can't remain as it is."

    Eskom will look to reduce its cost of coal and diesel, and is trying to renegotiate contracts it concluded with independent suppliers of renewable energy with the aim of getting them to lower their prices, according to the policy paper.

    The utility's power stations will be grouped into three clusters that will compete with each other - a reorganization that international experience shows should encourage them to become more efficient and cut costs, Gordhan said.

    Eskom's transmission unit, which has more than 5,000 employees and oversees about 45,000 kilometers (27,961 miles) of power lines, will be empowered to buy electricity both from Eskom and independent producers.

    The government wants it established as a functionally independent unit by the end of March and for the spinoff process to be completed by the end of December 2020.

    Other Key Points:

    • The country will continue to rely on Eskom for base-load power.
    • Separating Eskom's distribution business into a separate unit requires more detailed planning.
    • The transmission unit will establish a systems operator to manage the security of the power system and coordinate supply and demand, and a market operator to coordinate the daily buying of electricity from generators and its sale to customers.
    • Eskom's generating plants will enter into power-purchase agreements with the transmission unit.
    • The utility plans to sell its finance unit, which Gordhan said is worth as much as 7 billion rand.

    - With assistance from Ana Monteiro and Robert Brand.

    SOURCE: Bloomberg