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Splitting Eskom will protect its most strategic asset

But much will depend on how the three individual assets are valued, and what portion of the utility’s crippling debt each is given.

When African Bank collapsed, there was clear focus on separating the ‘good bank’ from the ‘bad bank’ and salvaging whatever was possible.

Restructuring the debt-ridden Eskom into generation, transmission and distribution might be done in much the same way.

President Cyril Ramaphosa made the decisive announcement during his State of the Nation address last Thursday (February 7), but little detail has yet been made available.

In its tariff application for the next three years, Eskom did distinguish between the three units, which are all different licensees in terms of legislation.

The utility has just had its regulatory asset base revalued, and although the valuation itself was questioned during public hearings about the proposed tariff increase, it does provide an indication of the possible asset allocation once Eskom is split.

Valuations

For 2019/20 the value of Eskom Generation’s asset base is set at about R1 trillion, Eskom Transmission’s at R129 billion and Eskom Distribution’s at R111 billion.

It is clear that Generation is a much bigger business from an asset point of view than the other two.

Less clear is what the allocation of Eskom’s R420 billion debt will be between the three.

It is well known that Eskom’s biggest borrowings were for building the new Ingula Pumped Storage Scheme and Medupi and Kusile power stations, and this debt should, therefore, be allocated to Generation. But Eskom also borrowed to cover its operational expenses when Nersa repeatedly failed to grant it the full revenue it applied for.

What part of that should be allocated to Transmission and Distribution?

PowerX CEO and former Nersa regulator member for electricity Thembani Bukula estimates that 80-90% of Eskom’s mountain of debt should be allocated to Generation.

Generation gap

That would mean that Generation would be left with most of the debt headache, but fewer assets and a smaller income, since some of the revenue would be stripped out and allocated to Transmission and Distribution.

As things stand, the auditors have been worried about Eskom’s ability to continue as a going concern. Generation on its own would look even worse.

It would be a very bad bank.

For Transmission and Distribution, this could, however, be good news.

Bukula says both these businesses are fairly healthy. In fact, Transmission is a truly world-class business, he says.

Granted, Distribution will inherit the consumer debt from non-paying municipalities and Soweto residents, but it might be in a better position to truly focus on collections once it is standing on its own feet.

Strategic function

Transmission is the most strategic asset within the current Eskom framework. Transporting electricity from the generator to the distributor is a strategic function that governments usually retain control of in deregulated energy markets, says Bukula. It is then operated by a neutral system operator who guarantees non-discriminatory access to the grid.

Ramaphosa has indicated that this is the direction in which South Africa is moving. In announcing the restructuring of Eskom, he said: “Of particular and immediate importance is the entity to manage an independent state-owned transmission grid combined with the systems operator and power planning, procurement and buying functions.”

This system operator would buy electricity from Eskom Generation as well as from Independent Power Producers (IPPs) according to a set of rules that apply to each of them equally.

Ramaphosa indicated that Eskom Generation might play a more active role in renewable energy in future.

Liquidity threat

In presenting its Transmission Development plan for 2019-2028 late last year, Eskom Transmission said its capital expenditure for the period would amount to R109 billion. It also stated that the liquidity position of Eskom (in its current form) is a threat to the successful execution of this plan.

By separating the three business, Transmission and Distribution are protected from financial contamination from Generation. It should be able to raise funding against its own assets, and its maintenance and capital spending would not be reallocated to generation projects like Medupi and Kusile, where Eskom Generation seemingly lost control over the budget.

But what to do with the bad bank?

Eskom as an investment prospect

Selling stakes in power stations would be one of the options to reduce debt and improve the performance of the current inefficient Eskom fleet.

If this comes to market with a long-term Power Purchase Agreement (PPA) it could be attractive to, for example, pension funds looking for investment opportunities that offer a consistent and inflation-linked income, Bukula says.

Knowing Eskom’s finances inside out, he believes 12-15 year PPAs would be feasible with inflation-linked returns and won’t put too much upward pressure on tariffs.

Economist Mike Schüssler agrees that pension funds could have an appetite for such investments but taking into account the current bad state of Eskom Generation’s operations, he says they would insist on a controlling stake.

If different power stations are sold to different owners, it would introduce competition, which would promote efficiency, he says.

“Even if the Generation debt is only cut in half, it would be much more manageable,” he says.

Schüssler says this is a workable option. “If we don’t do it, the whole economy is at risk,” he says.

The unions have already promised strong resistance to what they consider to be the first step towards privatisation and job losses.

The execution will depend on strong leadership that is able to stick to the agreed-upon plan irrespective of union pressure, he says.

And that is the crux of the matter.

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Taking the car apart , proclaiming it is now a better car and nothing works !!!!!!

Splits is OK when you have multiple generation companies using the same grid.

This is NOT so in SA so it is all about being seen to be doing something and actually worsening the situation !!!!

For the conspiracy theorists and then I’ll stop with eskom:

So Brian Dames is the CEO of African Rainbow Energy and Power (Pty) Ltd (AREP). He is the former Group CEO of Eskom. AREP is owned by Patrice Motsepe (he founded AREP). In December 2018, Brain Dames resigned from the Eskom Sustainability Task Team due to conflict of interest. AREP investment or business strategy is on Generation, Transmission and Distribution. Eskom according to President Ramaphosa SONA 2019 will be broken down into Generation, Transmission and Distribution. President Ramaphosa is married to Patrice Motsepe’s other sister. Minister of Energy Jeff Radebe is married to Patrice Motsepe’s older sister.

Breaking Eskom into 3 entities exactly matching to AREP’s strategy raises eyebrows. AREP is ran by a former Group CEO of Eskom who was initially in the Eskom Sustainability Task Team raises more eyebrows. The fact that all these decision makers are related is mind-blowing. The fact that Energy Minister Jeff Radebe has refused to release the names of the owners of 27 Independent Power Producers (IPPs) who have entered into multi-billion-rand agreements with government is unscrupulous.

Judge for yourself.

Breaking up Eskom was not thought up by Dames, he might have promoted it but the break up of Eskom has been on the cards for decades. Most modern energy utilities have been broken up into parts so the conspiracy sounds like nonsense to me.

Breaking electricity monopolies up is a worldwide trend.

Generation will blame Distribution,
Distribution will blame Generation,
Transmission will blame Distribution,
Distribution will blame Transmission,
Transmission will blame Generation ,
Generation will blame Transmission ….

And they’ll all eventually blame it on apartheid, like good little cadres.

For a moment I thought you were going to tell us that its most important or strategic asset were its people, but as we know Eskom is overladen with people by at least three fold.

So whatever restructure it does it has to reduce the head count by at least times in each entity.

“we know Eskom is overladen with people by at least three fold”

And how exactly do we know that? I always wondered how this narrative transpired. Probably a Dawie Roodt article or an OUTA statement.

Let’s look at one comparison:

1. Eskom – 48,628 employees for 45,561 MW; 0.93 MW per employee.

2. Engie (French Utility) – 151,667 employees for 115,300 MW; 0.76 MW per employee.

All the power utilities differ in function, therefore it is difficult to draw a direct comparison. A lot of variables like transmission network length, distribution points, type of power generation, R&D, amount of work contracted out, etc. must be considered.

The amount of generation employees + support function employees of Eskom is 19,819, which is certainly in-line with most power generation companies.

I’ll admit the equation isn’t as easy as that, but Eskom is not overladen with people by at least three fold.

That is theorized output for Eskom… it’s actually at 30k MW currently… so the efficiency/effectiveness of the employees and management is in question here. What value for money are we getting?

You’ve given a like for like comparason to indicate a correlation between number of empoyees vs generation capacity.

What is missing is a data point that sees if this holds for all electricity utilities such as Eskom.

I mean, with power outages… whose is to blame? Government, management (which are employees). So even though the data point may be indicative of sufficiently staffed utility, the reality is diffraction between these two (power outages and huge debt)

Good to see that at least someone has given us the numbers to compare because sometimes we want to rant because of our fear and greed

I know nothing about the the provision of electricity but good to see somebody actually backing his argument up with proper numbers rather than just shooting from the hip and making these broad sweeping statements

@CoenraadJacobs Please do not compare apples and oranges. Engie in France is totally different from Eskom. According to their own website:
1. Engie France has only 10GW capacity, they are the third largest in France. The 115.3GW you are referring to is their total, international generating capacity.
2. They are the biggest gas supplier in France and internationally also one of the biggest.
3. They have a large number of employees whose job is to advise companies, municipalities and individuals about energy efficient solutions and designs.
4. The number of employees are their total number internationally and they generated 65 billion Euro turnover.

World bank, Africa Check and others have run the numbers and found to be Eskom over staffed and their staff over paid. These are independent organizations and their research seems deeper than arbitrarily comparing a dinosaur like Eskom to a progressive utility like Engie…

Now compare the cost of electricity in both countries.

Redeploy the Eskom staff to fix the street lights and traffic lights.

Whatever they do, it all boils down to significantly higher electricity prices and lower future economic growth. The question is whether whatever corrective measures are taken will work partially or make things worse. Your guess is as good as mine. Thanks UBABA – umshini wam!

After the split into 3 divisions each of which will be a SOE of its own, I suppose we will have 3 CEOs’, 3 CFOs’ 3 sets if Directors etc. etc. etc., and a pile more people to pay huge extortionate salaries to all who will be trained to give excuses as to why tariffs will continue to grow. The answer is to Privatise and take the power away from government and place the business in the hands of people who know how to run businesses as apposed to those who only know the gravy train and the feeding trough.

Would you invest in a privatised Eskom? Remember, they would be forced to have 20-30% BEE ownership and would have to employ large number of AA people.

This theory of too big to fail is a pathetic excuse to keep a zombie alive.

Just let it fail and allow the Phoenix to rise.

Everything that these people are doing is delaying the inevitable. A full collapse of the system aka blackout.

Nersa did not fail, they are doing the jobs to prevent people from being over burdened.

True anc policy, create a problem from a working system and then come up with a solution that is costly and ineffective.

[True anc policy, create a problem from a working system and then come up with a solution that is costly and ineffective.]

It’s just an enhanced way of paying a lot of idiots to dig a hole and fill it up again.

The infrastructure did not cause the debt. We cannot blame the inefficiencies, corruption and unaffordable prices on the infrastructure. No, the root cause of the disaster are the people who manage and service the infrastructure. This is not a hardware issue. This is a human capital issue. The lack of human capital bankrupted Eskom, and threatens to bankrupt the country.

What is the use of splitting up Eskom when the same people of low moral, intellectual and ethical value are distributed among the parts? So, there is a fourth option. Eskom can be split into 4 parts of which labour is the 4th. Then investors from all over the world can start a competitive bidding process for all 4 parts. This transparent process will give the market the opportunity to put a value to the Eskom employees and management. This will give the labour unions the opportunity to put their money where their mouths are and buy themselves, if they believe in their own story.

All the debt should be ring-fenced in this fourth part and sold off along with the labour unions and workers for they are responsible for the debt.

The investors themselves will have the opportunity to decide who the “bad bank” part of Eskom actually is. Te elephant in the room is not the heap of debt, but the fact that the bad bank has all the power over Luthuli House.

Honestly dude, whoever you are, please run for president!

So 1 divided by 3 = 3* 1/3=1. ANC that is maths.

What happens now is that the sum is greater than the whole. That is reality.

They are smarter than you think, they are going to split it in three and retain all the staff, that way they pacify the paying public and keep the voting unionized staff happy

How would a South African former electricoty regulator know a “truly world class” transmission business if it hit him in the face?

None of this does one little bit to change the cause of all of this. There are thousands of highly successful conglomerate companies. Why do the idiots in charge all of a sudden believe that separating one half of the SAME business from another will turn it from a dilipated, laughing stock into something able to bear the burden of being the ONLY provider of a coubtry’s electricity?

The problem is, as it always has been, that there are half-wits in charge, and above them more half-wits, and above them scoundrels. Do we really think that 30 years of neglect and pillage will be fixed by waving a magic wand, renaming, rebranding (I’m sure the unveiling will be full of glitz and new pretty logos and colors), while leaving in place the awful corporate culture, lack of leadership, lack of accountabolity, zero institutional prowess or memory, bloated expense budgets, lack of focus, no understanding of corporate finance – basic, basics etc. The only way to fix this is with determination and grit – taking difficult, unpopular decisions, changing the labor laws, firing half the workforce, bringing in Germans or Americans to salvage the company, and not be answerable to the half-wit politicians or their lackey board members who have never successfully built or managed anything. But the politicians obviously have no skill and no will to effect meaningful change, and neither does the board. Did we really think that replacing the board with a new round of anonymous people with zero real corporate, engineering and financial experience will do the trick? Well this is the result – “let’s restructure this pig.”

For the halfwits still reading, restructuring works for good companies with bad balance sheets or inefficient verticals. Bad companies cannot be restructured because nobody wants to own any piece of them. I’ll see you back here in two years time, when
one or more of the new companies is deep in the hole, and a new board of lackeys is paying hundreds of millions to a new group of consultants and bankers for another idea from the private sector that again won’t work in the public sector.

If the government refuses to take effective action in gutting the company and rebuilding only the parts that work, with expert handholding by the Americans or Europeans, then the only real solution will be bankruptcy.
Unfortunately, there is no catalyst to make that happen – classic case of throwing good money after bad. So the government will not stop until Eskom has brought the country to its knees. Eskom would be long bankrupt by now, if it werent for constant bailouts by you and me.

And so the final question is: why are the idiots who are not in charge not calling them out on this? It’s almost as if we’re all pretending that we haven’t seen this movie a hundred times before and don’t want to hear how it ends.

[Why do the idiots in charge all of a sudden believe that separating one half of the SAME business from another will turn it from a dilipated, laughing stock into something able to bear the burden of being the ONLY provider of a coubtry’s electricity?]

Because they’re hoping to persuade us (and themselves) that doing something (anything) will keep the wolves from the door for a little longer – in other words, they’re confusing activity with progress, a common African malady. Changing names of towns, streets, and airports is another example of this sickness – there are plenty more.

It works like this –
The guy goes for debt counseling and realizes that he is bankrupt because of his negative cash flow. So, to remedy the situation, he advertises one room of his house on Airbnd. His position is so bad that eventually he sleeps under the bridge while he rents out every room in his house on Airbnb.

This is the situation the ANC finds itself in. The IMF is the debt counselor and free market capitalism is “Airbnb”. The ANC is preparing Eskom to be advertised on “Airbnb”, while the ANC supporters, the union members, will be sleeping under the bridge.

Please remember that the “load shedding” and massive debt of Eskom has been caused by the ANC government.

Sasol is a similar giant corporation, that functions well and is a major asset to the country.

So, the answer, dear trade unions, is to Privatise Eskom, as Sasol was, unless the unions want to drag the whole country down the drain.

Ships and crew in old times. Wind the propelling force. Many a master was depended on the performance of deckhands doing the hosting or lowering of sails. Tools in his hands where few. Machines, coal first, later oil fired, did make many masters happy people again. The deckhand became a downgraded painter. This was history. Today, old times are relived again, with deckhands in full control, no captain needed, Bounty style.

Stop drinking the coolaide, bra!

Ja nee Bas-send me some of what you smoking to avoid reality. afternoon.

Like having a car with a ceased engine…going nowhere.
Pointless splitting into three if nothing is going to happen about the debt.Convert it into equity maybe…doubt the bondholders will go for that and the state dont have the cash either

I fail to see how splitting up Eskom would make meaningful impact. It’s just an exercise where a large group (of mostly incompetents) gets split up into 3 smaller groups of (same) incompetents?

My simplistic view. (The Eskom-splitting talk is electioneering to show everyone the ANC is doing something about Eskom, and some smoke & mirrors for MOODY’s…so that they don’t downgrade SA just as yet. At least not downgraded before the election…

As other MW commentators mentioned, on other forums, the business structure remains wrong. The whole post-Apartheid social structure was set up to fail (by the ANC, unknowlingly). The rot of corruption & appointment of people based on EE/BEE principles (a forced system where most employees are rewarded more than what they’re worth to the employer) is deep in Eskom, and even worse are the failing local municipalities (for the same reasons) on which Eskom relies to actually collect arrear electricity debt from. The useless relying on the other useless.

Predictions:
Since SA cannot allow (i) Eskom to fail completely (otherwise a western country will cease to exist…no jobs, even for the skilled, widespread looting, empty shop shelves, no water, no farming…millions die; it’s the END)… or (ii) option B…Nersa to give in to Eskom’s 15% tariff increases.
(Yes, it will damage industry & will be inflationary as the costs are passed down, but it way better than SA comes to a complete full-stop as functioning country.)

Next step 3: while the 15% or higher(?) tariffs are granted, private residences & industry use the time to further buy into PV-solar systems or wind if at the coast. The higher elec tariffs goes, the more worthwhile PV-solar will become in future, leading to the well-discussed “death spiral” of Eskom. All the paying & able customers going PV, and most of the non-payers relying on Eskom, adding to fin woes.

Step 4: Eskom will NEVER recover from it’s ongoing operational losses, there will be more outages (i.e. so they earn less income from delivered product), while the debt-servicing cost is already MORE than the operational income. Cannot get out of it.

Step 5: Eskom will become even more unaffordable for the state’s finances (actually, it’s the “great AA/BEE experiment” that will become unaffordable). First Govt will continue to find investor buy-in from GEPF/PIC, and once that is not sufficient, the vast potted up reserves of the private retirement/asset management industry will face “prescribed assets” scenario. More funds flee offshore. Roll a few years forward…

Step 6: As Eskom cannot be allowed to fail, it will be upheld at huge cost. Once private pension-fund monies cannot save it anymore (and also count other SOE’s in that has to be bailed out constantly), Govt will also try to use the SA Reserve Bank funds (…the ANC will find a way..) to assist with their AA/BEE experiment’s spiraling cost. (Full junk-status would’ve been given already at this point) Interest rates rise.

Step 7: not sure which event will come first(?) (i) Eskom and other SOE debt will get insurmountable/impossible to service (and effect of full junk status in full swing, SARB prints money like no tomorrow / Rand tanks / and interest rates skyrocket). (ii) SA officially defaults on it’s national debt. International loans/investments dry up. No money left to pay Govt salaries. SA cannot pay for imports. Regime change possible, but no real alternatives. Most skilled and wealthy already left SA.

ESKOM eventually fails completely, never to be resurrected! The country’s (now shrunk & tiny) industries now limp on PV & Wind power, installed years ago when Eskom’s tariffs rose.

Everyone still left goes home, to a place without power or water. Popularity in goats will surge.

“Nkosi Sikeleli iAfrika” …only God remains.

SA will be renamed (fittingly) as Azania, and will be African country in “look and feel” the way it was 300+ years ago 🙂 Pure & beautiful (…there won’t be any plastic littering, as industry would be gone)

50 year view….wait for my book. The book’s title will contain the words “Cry my beloved…” on the front cover.

Revenue increased 4,4 times from 40 billion to 177,4 billion in 11 years.

Debt increased 4,1 times from 84,9 billion to 348,1 billion in 11 years.

Production of electricity decreased from 239 Gwh to 221,9 GWh in 11 years.

With the 15% increase that is being asked, it will only provide 2,2 billion rands per month for 12 months. Do they at Eskom realize that for the last 11 years the electricity output has not increased at all. The increase will not be able to service the debt. At 10% the required amount to be paid is about 3,2 billion a month and the 15% increase will provide 2,2 billion.

With all the increases of the last 11 years, Eskom has not made a dent in the debt. In 3 months Eskom will be bankrupt. The corrupt individuals are roaming free and no action has been taken. If production has not increased then why has there been no cost cutting measures taken. What about the bonuses that were declared throughout the period. The stake holder is totally incompetent and cannot be brought to account. The ANC has still not realized that BEE and Cadre deployment has failed. The corrupt tenders in the build of Kusile and Medupi is also another cause. With Hitachi being linked to Luthuli house and the Gupta’s with there Tegeta deals is also of great concern. There has been no criminal case been brought against Ben Ngubane, Brian Molefe, Anoj Singh and the likes.

Instead of identifying and solving the problem they now want to split the business. Who in his right mind is going to settle for the collection part of the business? What is the total debt owed by the municipalities and Soweto? How much electricity is being stolen ?

Eskom has strategic assets? Maybe its the 40,000 non-experts.

Whatever the State Capture under the former President it is child’s play when compared to the open shameless rape that is about to happen right under our noses for a vital and necessary service for the average South African.

Ramaphosa (South Africa’s President) is married to Patrice Motsepe’s Sister – Tshepo Motsepe.

Jeff Radebe (South Africa’s Renewable Energy Minister is married to Patrice Motsepe’s Sister – Bridgette Motsepe Radebe.

So both the president and Energy Minister
are married to sisters of a Man who owns the biggest and leading Energy Company in the country – African Rainbow Energy & Power (AREP).

Brian Dames is the CEO of African Rainbow Energy and Power (Pty) Ltd (AREP). He is the former Group CEO of Eskom. In December 2018, Brain Dames resigned from the Eskom Sustainability Task Team due to conflict of interest. AREP investment or business strategy is on Generation, Transmission and Distribution. Eskom, according to President Ramaphosa SONA 2019, will be broken down into Generation, Transmission and Distribution. Breaking Eskom into 3 entities exactly matching to AREP’s strategy raises eyebrows. AREP is run by a former Group CEO of Eskom, who was initially in the Eskom Sustainability Task Team, raises more eyebrows. The fact that all these decision makers are related is mind-blowing. The fact that Energy Minister Jeff Radebe has refused to release the names of the owners of 27 Independent Power Producers (IPPs) who have entered into multi-billion-rand agreements with government is unscrupulous.

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