In February 2019, the president announced the separation of Eskom into three distinct entities: generation, transmission and distribution. The primary objective being to allow each entity to focus on enhancing efficiency, reducing costs and optimising investment on a specific function, rather than trading off efforts amongst all three. In addition, the capital structure will ultimately be amended to end all reliance of Eskom on government support. Functional separation to wholly owned subsidiaries with independent Boards is scheduled to be complete by March 2020, with legal separation of the distribution and generation functions by December 2021.
For the next 3 years, the support to Eskom has been revised as follows:
- 2019/20: R49 billion – an increase of R26 billion from the 2019 budget baseline.
- 2020/21: R56 billion – an increase of R33 billion from the 2019 budget baseline.
- 2021/22: R33 billion – an increase of R10 billion from the 2019 budget baseline.
These amendments represent the amounts set out in the Special Appropriation Bill in July 2019, to stabilise the periodic cash flow crises that it faces in meeting its financial obligations. For the 2018/19 financial year, R13.5 billion has been transferred to date.
Risks for increased government support
The major risks faced which will require increased government support are (i) the ability of Eskom to issue debt on financial markets, and (ii) the cost of doing so becoming prohibitively expensive. The cost of Eskom’s annual debt and interest payments total an average of R85 billion over the next three years.
Preconditions for debt relief
Eskom’s unsustainable R441 billion debt portfolio as at 31 March 2019 requires both government support to reduce the level of debt, as well as in addressing the underlying causes. Key challenges that the Utility continues to grapple with are the failure of municipalities and other entities to pay their bills, as well as tariff determinations from the National Energy Regulator of South Africa that do not allow the utility to cover its costs. It is recognised that debt relief will only provide temporary resolve for the loss-making utility and will therefore only be considered once operational efficiencies have been achieved. The preconditions for the Eskom board are to:
- Demonstrate progress in rigorous and disciplined cash management.
- Show that each business unit’s operations are managed within their means.
- Create the three distinct functional entities, prioritising separation of the transmission function.
- Appoint new Boards and CEOs who are accountable for the independent operation of each entity.