If Cosatu’s proposal for the Public Investment Corporation (PIC) to take over R250 billion of Eskom’s debt is adopted in its current form, it will send South Africa further down an increasingly steep slippery slope.
Eskom has three core problems and all three must be addressed simultaneously. They cannot be fixed individually. The first problem is its massive debt burden of more than R450 billion, which the utility cannot service. The second is its dreadful operational efficiencies, and the third is the rapid development of new generating technologies which renders Eskom’s current vertically integrated business model obsolete.
Cosatu’s debt proposal only offers some short term relief for the over-indebted utility. However, if the government accepts the conditions Cosatu put on the table, it will delay the desperately needed restructuring required to fix the other two problems. This will ultimately put Eskom and South Africa in a much worse position.
Cosatu demands that not a single Eskom worker loses his or her job and that Eskom not sell or privatise any assets. The government should regard this as a deal-breaker because if Eskom is not structurally restructured, load shedding will continue, and this will lead to significant job losses in all sectors of the economy.
Restructuring is not an unfamiliar occurrence in South Africa. In recent months we have seen several private sector companies undergo aggressive restructuring, where unpopular, but necessary decisions were taken to trim workforces and sell poor-performing and loss-making assets. Recent examples include Edcon, Massmart and ArcelorMittal.
It’s not like the government does not know this. Finance Minister Tito Mboweni proposed such restructuring in his economic growth plan, published in August last year, which eloquently stated that Eskom’s restructuring is critical to its survival.
The document reads: “Eskom needs to restructure and modernise its business in light of international developments as well as its own poor technical and commercial performance. Alternative models are being explored, such as the separation of generation assets — leaving the state-owned transmission company to buy electricity transparently from IPPs (independent power producers) and state-owned power generators.”
The document goes further: “Government could take a decision that Eskom should sell coal-fired power stations, possibly through a series of auctions. Through these auctions, Eskom would sell the power station itself, all its power station-specific obligations together with a power purchase agreement (PPA) at a predefined, power station-specific tariff. The PPA would entail new power station owners to supply a specific amount of electricity annually (an electricity budget) over the remaining lifetime of the power station to the Single Buyer Office at Eskom at a predefined tariff.
“The revenue this could generate depends on the tariff assumptions, but assuming cost-reflective tariffs, the sale of these assets could raise around R450 billion.” (Eskom’s current debt amounts to R450 billion.)
Mboweni’s document also warned that the development of new generation technologies had rendered Eskom’s business model obsolete. “Eskom’s current business model is unsustainable, and its contingent liabilities pose a significant burden on the fiscus. Around the world, large dominant electricity producers have restructured to cope with technological changes such as the rise of smart meters, microgrids, self-generation, and small modular power plants. The old model of a vertically integrated, state-owned monopoly has been challenged, and new institutional models have been explored with different levels of unbundling, competition, and public or private ownership.”
Unfortunately, and probably unsurprisingly, the ANC (and Cosatu) did not accept Mboweni’s proposal. Mboweni went back to the drawing board and published a new version a few months later, where all references to the sale of Eskom assets were removed.
Cosatu’s proposal should be seen in this context. The trade union’s plan is no longer a passive opposition to any meaningful restructuring, but an active attempt to limit Eskom’s restructuring to save jobs at the utility.
It’s almost as if Cosatu says all workers are equal, but Eskom workers are more equal than others.
Eskom faces severe problems, and unpopular decisions need to be made. But haven’t you heard that before?