A review of Eskom’s business model has started and will be finalised at Nedlac-level, a National Treasury official told Moneyweb on Wednesday.
The official was responding to questions after an admission in Treasury’s budget review that Eskom will have to change its business model “as part of broader transformation in the electricity sector”.
To this end, Nedlac on Tuesday published a request for proposals (RFP) for the review, the official said.
This is part of the work of the Sovereign Downgrade Task Team that was led by President Cyril Ramaphosa in his former capacity as deputy president. The task team brought together business, labour and government in an effort to prevent further sovereign downgrades by credit ratings agencies.
Previous attempts to change the Eskom business model and structure of the local electricity industry failed as the ISMO Bill, aimed at creating an independent market operator, stalled and plans for regional electricity distributors were scrapped.
Eskom has been accused of resisting the increased introduction of renewable energy through independent power producers as it in fact competes with these producers at a generation level.
Many commentators have called for Eskom to be split up in separate generation, transmission and distribution businesses.
In his budget speech finance minister Malusi Gigaba also said: “Government recognises that the business models of some SOCs are unsustainable, and their capital structures too reliant on debt.”
He said in the coming year government may have to support several SOCs, “which could be done through a combination of disposing of non-core assets, strategic equity partners, or direct capital injections”.
He said that according to the Department of Public Works, government owns up to 195 000 properties, with an estimated value of over R40 billion. “We will work with them on a programme to better utilise or dispose of these properties in the short to medium term.”
Government is further finalising a framework on guarantees aimed at both reducing the exposure and improving the quality of the guarantee portfolio, Gigaba said.
“We can and will ensure that all SOCs are run sustainably and contribute to our national development.”
Treasury in its budget review says that in the face of a recent decision by energy regulator Nersa, Eskom can no longer rely on tariff increases to fund its operations and remain sustainable. It will have to reduce operational cost instead.
The utility will have to change its business model as part of broader transformation in the electricity sector, Treasury says.
On the basis of the private-sector participation framework approved by cabinet, Eskom and other SOCs are considering several privatisation options, according to Treasury. It discloses that Eskom “may invite private participation in various projects”, but doesn’t provide any further detail.
According to a Treasury official, Eskom has indicated in its five-year corporate plan that it will consider privatising some projects, but no detail is available yet.
According to National Treasury, Transnet intends to develop partnerships to build several port terminals. “Such partnerships will enable these companies to deliver infrastructure without straining their balance sheets or requiring support from the fiscus.”
In its discussion of state-owned companies (SOCs), Treasury discloses that the combined profitability of these entities declined from 0.8% in 2015/16 to 0.3% in 2016/17.
National Treasury points out that lenders are concerned about governance failures at SOCs. “Over the past year, the majority of these entities’ bond auctions have either been cancelled or undersubscribed. In several cases, this has led to severe liquidity shortfalls, and calls on government to extend assistance through guarantees or recapitalisation.”
Where SOCs did manage to issue debt in capital markets, it was at an increased cost, Treasury states.
Eskom is one of the SOCs that has seen its cash dry up and had to get an emergency loan from the Public Investment Corporation (PIC) at a premium price.
It ascribes Eskom’s sharp drop in profits, from R5.1 billion in 2015/16 to R888 million in 2016/17 despite an 8% tariff increase, to “a near doubling of finance cost” and a drop in the demand for electricity.
It emphases government’s interventions to improve governance at Eskom and SAA by appointing new, strengthened boards and promises there is more to come.
Read more from the 2018 budget speech