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Eskom has 18 months to get its house in order

The era of bailouts is over, warns Gordhan.

Cash-strapped power utility Eskom is running on borrowed time and needs to find long-term solutions to its financial woes as the government bailouts provided to the company will only ensure its going concern status for the next 18 months. 

The power utility announced a record loss of R20.7 billion on Tuesday when it released its integrated financial results for the year ending March 2019. 

Eskom’s chief financial officer Calib Cassim said the criticality of the parastatal’s financials have reached their peak, prompting government to step in with the R23 billion in financial support over the next three years, plus an additional R59 billion over the next two.  

Read: Eskom’s R20.7bn blowout strains SA’s finances

Bailout was necessary 

Cassim said this was not the end, but the start of a journey that would allow the biggest threat to the economy to “keep the lights on” as it moves to find “more sustainable solutions”. 

He explained that Eskom’s finances are likely to remain the same before they improve with the losses seen in 2019 expected to stay materially unchanged in the current financial year at R20 billion in March 2020. 

On top of this, Eskom has debt of R440 billion, with Cassim saying cash from operations was not enough to service the debt, which was R69 billion in the 2018/2019 financial year and will increase to R84 billion in 2019/2020.  

He said that current cash from operations of R25 billion would only decrease the debt servicing costs to R59 billion and this reduction would be eroded by the additional R41 billion costs to the funding of the new build plants Kusile and Medupi. 

But now the R46 billion of funding that Eskom has been able to raise, plus the R49 billion lifeline from National Treasury made up of February’s R23 billion and the latest R26 billion, shows that “it was necessary and required to ensure that [Eskom] can meet its commitments and operate as a going concern for the next 12 to 18 months”. 

Eskom received a qualified audit opinion from its external auditors SNG Grant Thornton, who highlighted concerns to the company’s ability to remain a going concern, citing previous and current losses and the impact of reduced generation and nonpayment from customers.  

Chief restructuring officer

One of the critical conditions of finance minister Tito Mboweni’s release of government support to Eskom in February was the appointment of a chief restructuring officer (CRO), as the company prepares to unbundle its operations into three different entities of generation, distribution, and transmission. 

Public enterprises minister Pravin Gordhan announced the appointment of Freeman Nomvalo, the current CEO at the South African Institute of Chartered Accountants (Saica) as CRO, saying the government had resolved to see the role as an office rather than an individual. 

Nomvalo, a former accountant-general from Treasury, will lead an office of Saica individuals who will, among other things, be tasked with interrogating Eskom’s debt to determine how best to deal with it going forward, assess Eskom’s balance sheet and find ways to make savings, in addition to what the management team has already come up with. 

“In about 18 months to two years we can actually say we [will] have an answer [for] the direction we want to move into,” said Gordhan

The office will report to the ministers of finance and public enterprises as well as the board. 

The Eskom white paper that will provide details on the utility’s restructuring will be completed and made public between the end of August and mid-September, with Gordhan stating that intensive discussions will take place with all stakeholders, especially labour, to ensure that there is “sufficient consensus”. 

Rating agencies have flagged the continued financial support to Eskom as credit negative as it is an additional drain on already constrained government resources. 

Read: Extra bailout won’t end Eskom’s challenges, Moody’s says

Gordhan said it was critical to get Eskom and other state entities back on a firm footing as the era of relying on bailouts “needs to disappear”.  

“I think we are in for a shock pretty soon because there isn’t going to be government money,” he said. 

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Okay, so the government has run out of money. Now what?

Somebody please give me just one example of where the ANC has made a correct decision in the best long term interests of this country and its people. Just one. And I’m not counting stuff like getting rid of Zuma – that’s a decision made in its own best interest.

And now this ANC that has yet to make a single correct call (that I can see) has to fix its mess in Eskom or see the country melt down.

What are the odds?

Ja navigator – there is not one bookie that will give any bets on this actually happening!!! There are no odds for – only certainty against !!!!

Govt run out of money, you say? Not so fast.

There’s R4 trillion in South Africans’ national pension savings cookie jar. (Compulsory products…e.g. Pension/Provident/Preservation/RA Funds)

The size of the jar is TOO BIG for Govt to miss….

🙁

Let us “Navigate” through what may likely happen with (expected) prescribed assets, is that your funds may have nice % returns from govt bonds initially (to compensate for high risk), but govt may not be in a position later to pay out many maturing bonds. So they will issue type of “IOU” paper notes (almost like a Zim currency) which can lose its value fast, if govt starts to add zeros.

Then we all sit with almost worthless paper IOU’s running into say a few billion, while a bread may cost one million.

Agreed MichaelvK, two things WILL happen, the cadres will strip the PIC and they will get hold of the printing presses and make helicopter money. Plan accordingly

What are the odds? Zero … take your money and run because there is only one source of income to bail this mess out again and again – your tax.

Clueless and plan-less. Start Getting off the grid. One Canadian solar panel plus battery plus solar power regulator these days around R8000.

I’d be interested to see how much of the debt servicing cost is interest, I suspect a big chunk of it.

I’d also be interested to see how you can possibly restructure without firing at least 30% of the work force. How does the ANC plan to do that with their union partners?

I’d also be interested to see how they continue to become sustainable. Splitting the company makes sense but If I was them I’d look at privatising what they can on the generation side and using the proceeds to pay down debt. The older plants need to be shut down as well, they never work properly and the maintenance bill must be enormous.

A lot to do in 18 months, kinda wish they had thought about doing anything about this like 5 years ago.

RSG this morning said R70 billion interest on debt payments + blowout was close to R30 billion if tax “refund” taken into account. 100 billion is figure. Clear lying ANC has completely transformed Eskom and our economy into the ground. We are stuffed.

“…Start Getting off the grid. One Canadian solar panel plus battery plus solar power regulator these days around R8000

DA is rubbing its greedy paws to tax it via “Sunlight Levies” to pay for their 18% self-awarded salary increase in their municipalities.

Eskom has 18 months, or what happens? No sweeties?

One does not need two years and ten bean counters to figure Eskom needs to:
1. Cut staff radically
2. Grow a pair and go after the vendors that feasted on Eskom projects. Medupi and Kusile are design failures. Ingula was large scale theft – 400% over budget. Stop the diesel joke even if it means we live with two hours per day of loadshed.
3. Do the right thing and go after the stolen billions or at least be seen to prosecute the criminals.
4. Give up on new generation, the organisation is simply not competent to construct anything. Never has been never will be.

Most importantly collect outstanding debts from neighboring countries, Municipalities and individuals. Cut supply immediately until they pay.

As they say. It is bieljon’s

In eighteen months we will hear the names of the three new units into which Eskom will be divided. That’s it.

doesn’t matter how one look at the eskom – if the government is not willing to get rid of at least +/- 28000 to many cadre staff, stop bee in its tracks, receive payments from debtors including zimbabwe, produce electricity to its full capacity per power station – no angel from heaven will save it financially. It can be split into a 100 new entities – at the end of the day loans still has to be paid back – it is as if eskom’s management could not distinguish between a permanent grant received and a repayable interest bearing loan – everything was seen as a grant- no payback planning / can we actually afford it?????
Eskom can be saved, trimmed down to a lean business entity (not a cadre job creator) and without any political interference – otherwise they have no long term hope in hell to survive.

Come on guys … we need to fix this ! I am risk-taker, and even I am slightly nervous.

an utterly meaningless threat. What exactly will happen in 18m – the government will permit a grid meltdown or a sovereign debt default? Yeah right ….

The offer should be a detailed plan by the end of the year and visible progress by Q1 2020 failing which it is privatised.

(1)Get rid of 60% of your overpaid staff.
(2) Scrap BBEEE requirements.

The ruling party of this country has never understood this concept. (When you promote someone into a position, knowledge and experience DO NOT automatically get bestowed on the promoted). Just in case one of them can actually read and reads this. This means in order to have engineering knowledge, you need to have actually studied and practiced it, you do not get the knowledge with the appointment.

If only our poor could understand that they are the victim of a greedy all consuming self serving few that they elected. Over 1 trillion and counting of wich only a few billion is due to ineptitude, the balance is theft.

Old butt cheeks here has been at it for more than a year now and it has gone from bad to worse. What would it look like in 18 months.

We know his “tough” talk. We heard that also a year ago.

They need to employ someone to be the minister. They don’t have anyone that can fix it!

He bowed to the salary demands of the unions, watch him do it again.
Next will be applying for a 30% tariff hike – they clearly have no concept of running a modern economy

Anyone who hasn’t moved all their liquid cash offshore deserves to be poor.All the signs have been there for years but have been drowned out by the hysterical pseudo-optimists——duly supported by the large asset managers. But the end result has been a dying JSE, a collapsed property market and an impoverished middle class now realizing that they are truly stuffed and doomed.
Reminds me of that famous poem by TS Elliot.”We are the hollow men.We are the stuffed men.”

That is a phantasmagorical loss. Eskom had it’s Mr Fix it in the form of Bobby Godsell, but no the politicians (ANC) got involved and the ANC now have put the whole country on the cliff edge.

The sooner this entity is ring fenced from BEE the better.

There is a logical explanation for the ANC’s impotence regarding Eskom. They are like the dog that chased the bus, then caught it, and now does not know what to do with it.

Service delivery and efficiency was never part of the plan, to begin with. The decision was taken at the Polokwane Congress to use Eskom for cadre-deployment, as a host for BEE parasites, as a vehicle for redistribution by taxing the wealthy to give free electricity to their voters. They were very successful in all these parameters. The ANC and all SOE’s are a huge success, according to this chosen strategy.

The problem lies with us, who reason like free-market capitalists. We fail to realize that the concepts of efficiency and profitability do exist in the socialist mindset. These western concepts are only a hindrance for the ANC. They want to “decolonize” these concepts.

The ANC is very successful as a socialist movement, but an utter failure as an efficient, ethical and productive movement. Do not expect them to implement alternative strategies. They are captured by their own narrow-mindedness and stupidity.

Correct! And if I may add: our SOE parastatals have become “PARASITALS” for a better word.

Too true, Sensei. When will the ANC wake up and realise that Socialism is an absolutely, utterly impossible ideology for South Africa. It depends on a large percentage of citizens paying tax – around 60% or more as in Nordic countries. Only then is there enough money to create a safety net for the poor. Now let’s look at South Africa. It has about 58 million people. Of these only 7.6 million are registered taxpayers. And only about half of these actually pay income tax – the rest are under the threshold. Almost 83% of taxes for 2019/2020 will be paid by just 2.1 million taxpayers. Mike Schussler awhile ago calculated that about 3.5 million people paid 95% of ALL taxes – personal, VAT, corporate, CGT and the rest. So how can 3.5 million people – already taxed to death – support 54.5 million people? It’s crazy. Socialism in SA is an utterly ridiculous ideology. Cannot work. And as for Communism, there’s a reason it was kicked out of over 50 countries after ruining them. When will they ever learn….sigh!!!

Good comment Sensei but I think this is the most accurate “The decision was taken at the Polokwane Congress to use Eskom for cadre-deployment, as a host for BEE parasites”.

I do not really believe it was truly about “socialism” more about using the word to provide jobs and tenders for pals from the Gupta’s down.

Also, nothing has changed.

Ok three things !
Why is the average debt cost over 15%? Old loans can be repaid using cheaper debt.
Change the political environment around municipalities paying for power as well as communities that feel entitled and that someone else must pay!
Drop BBBEE . This is nothing else than a corruption feeding scheme. It has NOT produced anything positive, on the contrary it has produced everything negative!

Another :

I would like to see a list of Eskom debt with their coupon and yields. We would be mad having 15% coupon debt when government is guaranteeing debt!

Within 18 Months PG will resign; and the can gets kicked further down the road

Ooooh…you do not threaten Eskom like that, Mr Gordhan.

They will find reasons for a new round of load-shedding!

(…for example Eskom can put forward the “wet coal” story, while we’re in July/August season)

Fetch the beer and the pop corn and sit back.

Was it not 7 years ago that CR was tasked with turning Eskom around?

Sorry forgot he was tasked but told to do nothing, the last attempts to get nuclear through…..so what will happen now?

A CRO plus another team. First order of duty, what are we being paid? Second draw up your contract so that when you get fired you get a raise back dated to your appointment and thirdly before we forget, what must I do.

Ok first and foremost. Fire 20000 staff and warn the others they are next. Ignore the unions but if they start to sabotage which they will issue live ammunition.

Desperate times desperate measures. man up and do it.

…and if the ANC controlled police shoot with live ammo at Eskom protesters, the ANC will have another Marikana-type event, which will cost the ANC support dearly…as govt will be seen killing it’s own people. More support for EFF (and this the ANC fear…that’s what they are to lame to act as you described)

Get the balls to do the right thing. Most people know what needs to be done. This is less difficult than rocket science.

This is the same party that said there would be no job cuts? How can you make the books balance if you are over staffed and over paying the staff? This stuff is not rocket science but political interference in any of the SOE’s means that bailouts will not stop until we are ruled by the IMF.

Agree.

But I recon, long before the IMF enters the (dark) room, our Govt will try to obtain loans from Chinese.

And when govt can’t repay (which the Chinese KNOW will happen), they would be able to pick and choose what strategic asset the ANC can pawn off to settle loans. Durban or Cape Town ports up for grabs. (For example China can inherit Simons Town & Durban navy bases (which are under utilised) and declare it Chinese sovereign soil, ‘purchased’ from SA in return for squaring out loans. Then China have control over trading ports of entry/exit, as their global strategy.

SA exporters/importers will pay China in RMB. China will likely charge Saffas a steep price…and yet SA companies kept quiet and don’t complain…as it is realised the price the Chinese set is LOWER what one previously paid under a grossly inefficient ANC govt *lol*

Gordhan has lost all credibility – we’ve heard his lame promises to stop bailouts so many times before it’s become hollow. And as for the 18 months-bit, or else?
The coming downgrade is hugely Gordhan’s doing no matter how honest he might be! He had NUMEROUS warnings by ratings agents and local economists.

Is it not time to split the generation and transmission functions of Eskom? The transmission part can be listed on the JSE (with the government holding a 50% stake) to raise more capital, and the generation parts can be dissolved but allowing management buy-outs of the individual power stations.
Eskom as it currently stands should be shut down purely on its environmental transgressions.
They can allow independent power producers to sell directly to municipalities so we can boost our renewables.
Spread the risk. Allow municipalities and bulk users take responsibility for building redundancy into their supply. We can sell off Medupi and Kusile for scrap (or any poor soul who wants to try fix that mess)!
Am I the only person who thinks this sounds obvious?

Then:
1. We are going to unbundle into three entities.
2. Before we unbundle we need a Chief Restructuring Officer to tell us how to unbundle.

Now:

3. Wait, the Chief Restructuring Officer is not an individual, it’s an office with a team, so 2. above becomes Chief Restructuring Office.

Problem solved?

Gordhan and CR must rather hope they will still be there in 18 months time?

Clearly Mr. Gordhan expects Eskom to be run on the successful business model he developed in his own pharmacy all those years ago.

He permanently employed 240 people of whom 150 were in management. 30% of all medication and other products were given away for free. 20% of his customers never paid their accounts, but he made no attempt to pursue those debts. To make up for losses he increased prices to paying customers by 500%.

At the end of every month the same four robbers barged into the pharmacy, emptied the cash register and strut away without Mr. Gordhan ever laying a charge or making an effort to prevent the theft.

Mr. Gordhan shunned the usual suppliers, preferring to buy inferior cough syrup and painkillers at double or even triple the price from some guy in a black overcoat who was often seen hanging around the baby diapers.

Many employees were known to dispense medicine stolen from the pharmacy on the side. When caught red handed they were promptly promoted.

If employees did not get an annual salary increase they would go on the rampage and ransack the shop. Mr. Gordhan would then give them whatever they wanted.

Every three months or so Mr. Gordhan would ask his once wealthy uncle for a loan.

This is rich coming from the guy who approved huge salary increases and bonuses. What a joke they are !

Let’s go back to the employment numbers. There seems to be a small error: it’s not overstaffed by 66% as claimed.

From the references below, the analysis seems to emanate from World Bank policy research paper and the Eskom annual report. Eskom claims to have 47,658 employees. WB calculates, benchmarking against other utilities in the World, that Eskom only needed a workforce of 14,244 people.

To my calculations this is overstaffing by 335%.

Further, the WB report shoes that the South African Utility (Eskom) staff costs average US$61,000 per employee. Excluding South Africa, staff costs for the rest of Africa are on average US$13,000 per employee.

https://africacheck.org/reports/eskom-and-the-viral-infographic-do-the-numbers-add-up/ and http://documents.worldbank.org/curated/en/182071470748085038/pdf/WPS7788.pdf#page=50 and http://www.eskom.co.za/IR2017/Documents/Eskom_integrated_report_2017.pdf#page=40 .

We’re in huge poo here, an incapable ANC Government in total denial, a system breaking down, running out of the National Party momentum that has been carrying it this far!!!

Sooo let me get this right, we’r appointing the current CEO of SAICA, who’s going to call on members to review, analyze, and come up with ideas. Some of these members being outstanding individuals like Markus, Anoj (who should hit the ground running based on his previous experience), a whole bunch of KMPG partners, many members of the Steinhoff Board, auditors of VBS, BOSASA etc etc etc. What can go wrong ?

You don’t understand – the ANC is campaigning for the next election, so no drastic cuts.

As Mathews Phosa said, the ANC is always in election mode.

So businesses continue to install solar and other forms of off grid electricity.
If the Eskom mess continues for another 5-10 years, we can simply let if fail and default on the debt as we will all be off the grid anyway.

your children’s children children children are going to pay for this
overpaid,overrated eskom pithole

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