Eskom gets bailout funding. Now it needs a rescue plan

Structural changes needed to turn the utility around, says analyst.
Despite President Ramaphosa saying the indebted utility would be split up, nothing more has been done on that front. Picture: Siyabulela Duda

Six months ago, President Cyril Ramaphosa said the country’s indebted power utility would be split in three, it would get new leadership and its debt wouldn’t become a burden on the nation’s finances.

Instead, an initial bailout has been increased by R59 billion, no plan has been announced to restructure the overstaffed company and the finance minister says government borrowing will surge and taxes may rise. The government has yet to appoint a new chief executive office and a chief restructuring officer, first promised in a national address by Ramaphosa on June 20.

Read: South Africa says Eskom creditors won’t lose out in restructure

“Nothing is happening at any speed,” said Mike Schussler, chief economist at Economists.co.za. “There seem to be too many people pushing back. We have to do structural changes,” such as splitting up the business and privatising assets.

Fixing state-owned Eskom was always going to be difficult. The utility, which has over R440 billion in debt, isn’t selling enough power to cover its costs. Its ageing and inefficient power plants operate on coal and routinely violate emissions standards. The company has been plagued by mismanagement and political manoeuvring, leaving it with a bloated workforce whose shrinkage is bitterly opposed by South Africa’s powerful unions.

Moody’s Investors Service, the only major credit-rating company that still assesses South Africa’s debt as investment-grade, said on Thursday that the additional support without an accompanying plan to make the company more sustainable is “credit negative.”

Read: Moody’s says new Eskom support credit negative for SA

Bond holders and analysts who have met informally with executives from Eskom, officials from the South African Treasury and members of a task team appointed by Ramaphosa to advise on Eskom say they’ve emerged from the meetings confused and with the sense that there is no clear plan. They asked not to be identified as the meetings were private.

The company plans to meet with investors in a non-deal roadshow the week of August 5, said Ksenia Mishankina, a senior credit analyst at Union Bancaire Privee in London.

Eskom said Thursday it had started the process of appointing financial advisors “to assist it with the planning phase of the implementation of the government support package. The company didn’t immediately respond to queries about the roadshow or the plan; the National Treasury declined to comment on the plan.

Many bondholders and analysts do say that the current bailout is enough to keep the wolf from the door for now. That’s reflected in bond prices. So far this year the yield on Eskom’s 2025 dollar bonds has declined 415 basis points to 5.88%.

“The support seems enough to allow Eskom to have a going concern status and to plug the funding gap for now,” said Tarryn Sankar, an investment analyst at Cape Town-based Futuregrowth, which manages R188.5 billion in fixed-income investments. We are “no clearer on where ultimate accountability for returning Eskom to sustainability lies.”

A number of solutions have been floated. These include decommissioning coal-fired plants early and replacing the generating capacity with renewable energy. That could pave the way to tapping as much as R200 billion of climate change mitigation funding from international agencies. Another proposal is to swap the R90 billion of Eskom debt held by Africa’s biggest fund manager for equity.

“First the CRO is needed, then they need to bed in, then they need to appoint advisors, then they need to formulate a plan, then a chosen plan must be presented to government and receive sign off and then it must be executed,” Peter Attard Montalto, head of capital markets research at Intellidex, said in a note to clients this month. “This process could take at least six months but likely a year through to execution. This is all before unbundling to occur.”

Even the governments’ drive for more renewable energy is in chaos. On June 29 trade and industry minister, Ebrahim Patel, said the government is taking steps to have Eskom produce more solar and wind power. On July 15 Gwede Mantashe, the country’s energy minister, said in his budget speech in parliament that additional coal power is back on the table.

On July 22 his department fired Karen Breytenbach, the head of the Independent Power Producer Office. She had been credited with overseeing R209 billion of investment in 112 renewable energy programs in South Africa. She said she wasn’t given a reason and had a contract until April next year. Two days later the department said her contract had expired.

The decision drew a protest from Anton Eberhard, a member of Ramaphosa’s task team on Eskom.

“Zero corruption,” he said in a Twitter post. “President @CyrilRamaphosa’s investment drive needs good institutions and people to succeed.”

Two of South Africa’s biggest unions, the National Union of Mineworkers and the National Union of Metalworkers of South Africa, represent the bulk of Eskom’s more than 48,000 workers, a number that the World Bank has said is 66% too high. Both have threatened to bring Eskom to a halt if jobs are cut and in previous wage disputes their members were accused of sabotaging plants and causing power outages. Ramaphosa is a co-founder of the NUM, a union which remains a key political ally of his, while Numsa is a foe of the ruling African National Congress.

“Eskom is a political minefield with many vested interests at play, complicating any potential restructuring and turnaround plan,” said Mauro Longano, a fixed-income portfolio manager at Coronation Asset Management, in an article on Daily Maverick website on Thursday.

“The market will solve the electricity crisis, and the role of Eskom as the sole provider of electricity will diminish. How much more discomfort South Africans will endure before this happens, however, is a question that ultimately only the government can answer.”

© 2019 Bloomberg L.P.

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There is only one way to truly fix Eskom, which is to fire 50% of its grossly overpaid workforce, an to scrap all racist BEE and AA practices. Of course, none of the above will happen, and therefore Zimbabwe is our future. At present, the power is off 18 hours per day in Zim.

The most this government has ever achieved is to think of making a plan, and then …..doing nothing.

The only action is on self enrichment, or on cash blown on the Zulu king.

Or on parlimentary hot air calling each other the honorable this or that and bemoaning corruption and the rating agencies.

Oh! forgot the new game in town: threatening taxpayers.

So the action on Eskom will be the appointment of another task team tasked with coming up with another plan while unions clock themselves another 10%.

And then Moody’s might come to their senses and hand us a fully deserved downgrade.

Further proof that this man is not in charge and that whatever he say’s turns into a lie.

They don’t grasp the urgency and have no ability to fix ESKOM. It’s just talk. The same man was personally in charge of SOE’s under the lost Zuma years.

People need to see him for what he is.

A well spoken puppet with no B’s that tells everybody what they want to hear even if it is a lie.

No hope whatsoever.

The voters appoint the politicians, who appoint the managers and cadres at the SOEs. It is impossible to turn an SOE, government department or municipality around, if the mindset of the average voter is not turned around first.

Since the situation at these institutions is merely a reflection of the mindset of the average voter, nothing will be turned around unless the attitude of the voter turns around. Now we reach the real challenge – How do we move from the collectivist culture of zero accountability, no respect for property rights, the victim attitude and the slave mentality, to a free market capitalist culture with the protection of property rights, the acceptance of accountability and the personal performance and liberty of the individual?

How do we impose the benefits and efficiencies of western or eastern civilization on the local collectivist mindset when they openly detest these proven solutions? For as long as “the collective” despises the solutions, the problems can only increase, and it will increase exponentially.

So more of the same smoke and mirrors policy & no execution just like the Zuma days.

An IMF bailout would be welcome and force some sanity into this regime. The sooner the better. That’s if an EFF revolution doesn’t beat it to the chase and fully push us over the cliff.

You are right of course. We need the prerequisites of the IMF bailout to insulate the economy, service delivery and SOE’s from the mindset of the average voter. The IMF rules will break the link between the destructive, uninformed and myopic attitude of the voters on the one hand, and the State on the other hand. We need the IMF to protect locals against their own destructive insights. The unpopular truth is that for their own benefit, people from a collectivist culture should never, ever be allowed to determine economic policy. China and Singapore grasped this reality, their economies are booming.

Democracy is a sophisticated concept. When you give collectivists the right to vote, the results will be similar to putting a monkey behind the wheel of a Maserati.

The ANC will not allow the IMF to interfere. That will be political suicide for the ANC. So, the ANC will take the only alternative. They will implement Mugabe’s and Maduro’s strategies. They will print the money and exacerbate all current problems by a factor of 100.

Good points & thanks Sensei..

Agreed, IMF is a last resort for ANC- due to face-loss to the ‘imperialists’ and lost control over ability to loot. Something tells me that 50 odd % of the ANC doesn’t mind running the economy over the fiscal cliff. An economic reset sits well in the minds of Marxists, socialists, freedom fighters.

As for collectivism, well I don’t know here. Botswana is a beacon of light for how economic freedom and a well managed state can work in Africa.

China’s CCP realized in the 1980’s how to download the best apps from western economics while keeping state control- I believe mostly to prevent it’s provinces from attempting independence and they realized democracy’s major flaw- Uneducated voters don’t know what’s good for them. Democracy also slows down execution and policy change every 4 years is volatile.

Democracy after all is just counting heads, not whats in them. And the hard working folk of SA who see their endeavors and taxes turn to naught, will forever have that sinking reality branded on them.

“Would you give your business to a politician to run?”

These guys are sooooo stupid, you cannot fix the problem without fixing the cause.

The cause?? Cadres, BEE, unions, incompetence and Zuma’s great job creation scheme…..

Give eskom away for free to some overseas company.
Maybe they can make it work.

Imagine if ESKOM was listed on the JSE (almost like Telkom). What would the current Eskom share price be today??

Fallen to 0.03c ?

or,

“Trading suspended”….more likely!

You know Micheal – if Eskom was listed, the effect would be visible as a margin call to every citizen, and specifically to each taxpayer. As a country, we have got a geared long position on Eskom. This position is below breakeven, the margin calls are piling up, and we are doubling our exposure.

This is how you go bankrupt quickly.

At this point we can’t be blamed for taking the so-called “restructuring” as nothing but a desperate government grasping at straws and making it up as they go along to pacify the population; since Ramaphosa taking up office as president, it’s been the one press conference and media statement after the other. it came from him and public enterprises minister, Gordhan, every time there’s been black-outs, CEO and management resignations, strikes, limited coal supplies, etc, and every time a solution is around the corner. The latest “solution” is the buzzword “restructure.” Before “restructure” it was “war room,” “special advisory committee,” “engineers dashing to SA from Italy,” “temporary halt to BEE appointments at Eskom” – the list goes on.
All great-sounding solutions one after the other by the ANC…until the inevitable happens that each one of us – but apparently not government or the finance minister – foresaw; a Moody’s public statement saying the fact that there’s a bail-out with no clear plan that immediately pushes the rand to well over R14 against the dollar.
Even IF restructuring improves the situation, it will always be too little too late. The damage is done!

The only solution to the Eskom crisis is to rename all the power stations after struggle heroes.

Attach en electric collar to every ESKOM employee’s neck (elsewhere for directors and senior management) and it shocks for the entire time load shedding is on. Voila! No more load shedding 🙂

Can’t shock with no power……..

Eskom doesn’t need a bailout. All they need to do is cut costs.

Just heard from a friend of mine, whose friend went for a interview at Eskom for a junior position.
Apparently Eskom booked him a plane, hotel gave him lunch money just so he can come for a interview. And they did this for several people applying for this position.

There is a reason Eskom is bankrupt. They are spending money they don’t have.

Now you know why they’re refusing to shut down the bankrupt SAA; for junior position applicants at Eskom. (And of course also for ANC politicians and their families.)

Let the movie continue, it is getting very interesting!

End of comments.

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