As Eskom emerges from a bruising leadership battle, there will be no pause for breath. It has a bigger, more urgent battle on its books: how to crack its funding crisis. If it doesn't act expeditiously, it will mean lights out for SA.
Nobody is questioning the fact that SA needs new power stations - and fast. Paying for them is the problem. The FM has learnt, for example, that the power utility has delayed construction of its second new power station, Kusile (at Emalahleni ), which is expected to cater for 10% of SA's electricity demand. It's one way of reducing the financial burden. Still, it will take a stroke of genius to find the best solution for SA.
Raymond Parsons
Presently, Eskom draws its cash from four main sources: government support, bond issues, tariffs and borrowings. It has received R232bn from government in loans and guarantees; has tapped the bond market for R21bn over the past two years; has secured US$2bn in loans from the African Development Bank; and it increased tariffs by 31% this year.Eskom estimates it can raise a maximum R40bn/year in debt over the next three years, and a total of R232bn by 2015. For example, it is targeting R12bn/year in bond issues. But it needs a lot more to cover its nearly R400bn expansion plan and rising operating costs, which have been climbing faster than its tariffs.
Eskom can't look to government for any more money or loan guarantees (where it pledges to repay loans if Eskom defaults), national treasury confirmed to the FM this week. And there's a limit to how much it can borrow. So tariff increases and partial privatisation are the only remaining options.
Lesetja Kganyago - Eskom injection already given
After two years of higher than inflation price increases ( see graphic on page 32), Africa's biggest power producer has asked for 45% tariff hikes each year over the next three years, but this would treble the country's electricity costs.
Luckily, this isn't cast in stone. After much outrage from every quarter, Eskom is re-examining its final tariff submission to the National Energy Regulator of SA (Nersa) on November 30.
Last weekend the alliance summit also highlighted the need for lower tariff increases.
And with good reason. The proposed 45% hike could be the final nail in the coffin for some of the country's already struggling industries. The gold mining sector, for example, has lamented that the hikes would be a boot to the solar plexus of employment. In SA's deep-level mines, electricity costs could shoot up from 15% to 30% of total costs.
AngloGold Ashanti CEO Mark Cutifani has stuck his neck out, saying the proposed increases will not fly. The worst-case scenario? Up to 1m jobs are likely to be affected, he predicts.
The clothing & textile industry will also be left threadbare. Further stresses might be too painful for a sector that has already suffered job losses and company closures as a result of illegal and cheap imports from the East, China in particular, and the recession.
Textile Federation director Brian Brink says: "These [tariff] cost increases would be the last straw for many in the industry. Some are going to have to pack it in - they're all battered and bruised." A third of the 40 000 jobs in the sector are on the line.
There's a bigger effect on the wider economy though. Higher electricity tariffs would push up inflation (the 31,3% increase this year added 0,6% to inflation; a 45% hike would add 0,5%-2%). Electricity prices, though, account for less of the new CPI (consumer price index) basket, which masks the true impact on the real economy. Higher inflation means interest rates remain elevated which, in turn, sustains the rand's strength.
This is a double whammy against SA's competitiveness, along with higher input costs. The new Reserve Bank governor Gill Marcus held the repo rate unchanged at 7% this week.
Apart from the dire consequences for various industries and the economy, it is clear that Eskom's financial woes cannot be resolved by higher tariffs alone.
So what is the solution? An overly simple answer would be for government to step in with additional loans or loan guarantees. Business Unity SA (Busa) and the National Union of Mineworkers (NUM) have called on government to rescue Eskom but government is not willing to provide further handouts. It has already channelled a R60bn loan and R176bn in guarantees.
The reason? Finance minister Pravin Gordhan is on a mission to shrink the ballooning budget deficit, and more money for Eskom doesn't fit into this plan. In his first medium-term budget statement in October, Gordhan said SA's budget deficit would reach 7,6% of GDP this year as revenues shrank and spending rose.
NUM general secretary Frans Baleni says there is room to grow this deficit in a developing country such as SA. Comparatively, Brazil's deficit was 43,1% of GDP in June.
Busa makes a pertinent point - that Eskom's funding dilemma should be one of government's main concerns. "It comes down to a question of priorities and trade-offs within the current fiscal framework," says Busa deputy CEO Raymond Parsons, "and accepting, if necessary, that the Eskom challenge is probably on the top of the list of parastatal difficulties requiring additional fiscal intervention."
But treasury DG Lesetja Kganyago is adamant. "As far as government is concerned, we have given the injection that we needed to," he tells the FM, adding that the state "doesn't have money lying around" to throw at Eskom's funding gap.
Kganyago points out that a high budget deficit also pushes up inflation (government has to print more money to repay debt, thereby devaluing the currency).
Without government support, where will Eskom find the money? The general expectation is the power utility will ask for lower increases from Nersa.
Public enterprises minister Barbara Hogan, who oversees Eskom, confirms this. "I think we can bring it down from the 45%," she tells the FM.
The problem is, even if Eskom is granted the 45%/year increases for three years, it would still be left with a gaping R30bn hole in its balance sheet by the end of that period.
Acting chairman Mpho Makwana will be the face of Eskom at the tariff application hearings. This is disconcerting. There are questions around his technical knowledge of the issues at Eskom. Admittedly, he's been at Eskom for seven years, but in a non executive role until he was named acting executive chairman last week.
He is effectively playing the role of the chairman and CEO simultaneously for six months, which goes against rules of good governance.
He is already exercising his power, with a communications crackdown. In an interview with the FM, he was quite abrasive at times.
Pushed for comment on whether he would be addressing the 41 outstanding issues former chairman Bobby Godsell had raised, Makwana said: "We're not in an inquiry now... I'm responding to you in your own language, English. It is not up for discussion."
This is not the defensive attitude Eskom should be adopting in a time of crisis.
What else can Eskom do? Raising bonds and loans will help, but these will mainly be stop-gap or supplementary measures. Eskom has knocked on the door of the World Bank's International Monetary Fund for a US$3,75bn loan ($3bn for the Medupi coal-fired power station; $260m for renewable wind and solar energy; and $490m for low-carbon energy efficiency components). Kganyago says Eskom is hopeful it will get the loan next year.
And Eskom's plans to delay work on the Kusile power station (the second of the first two new plants in as many decades, the first being Medupi in Lephalale) should be seen in the context of SA's lower power demand forecast. Rio Tinto has canned the aluminium smelter it was planning at Coega, which would have used 1 200 MW (about a quarter of what Kusile would generate). According to a senior Eskom manager, Eskom will decide at a December 2-4 board meeting how long to delay Kusile.
University of Cape Town's Prof Anton Eberhard says: "The Kusile power station will almost certainly have to be delayed as Eskom will not be able to pay the contractors." Pushing it back by two to three years from its official commissioning date of 2014 will free up a lot of cash flow, he says.
WHAT IT MEANS
 Tariff increases must be lower
Partial privatisation is best solution
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The problem with any delays to Eskom's build programme is it runs the risk of being caught with its pants down later. Experts are already predicting a big power supply shortage by around 2015. Stalling new generation capacity could plunge SA into darkness yet again.
Eskom could mitigate this by accelerating plans to bring in independent power producers (IPPs).
Toronto-listed CIC Energy has its finger on the proverbial button of the Mmamabula power plant it plans to build near Lephalale, across the Botswana border. It is waiting for government to agree to buy its power, and believes the plant could start supplying juice by 2014.
"Government, and not Eskom, is now the decision maker with respect to the Mmamabula project," says the company.
This is seen to be crucial, as it is by far the most advanced IPP. There could be glitches getting the go-ahead (see story on page 34).
To avoid these risks, Eskom could press ahead with Kusile and sell a stake in the plant to a private company. The proceeds could then go towards construction costs, pegged at R100bn-plus. Hogan says this is one of the options Eskom is considering.
It may, however, prove difficult to conclude negotiations around bringing in a private player in the urgent time frames required.
The Left turning red every time the word privatisation is mentioned will also be a stumbling block. But Frost & Sullivan energy analyst Cornelius van der Waal says politics should not get in the way of what needs to happen: "Eskom will have to have private assistance with Kusile. That's the reality."
Selling a 40% stake in the project could, at face value, remove nearly R50bn from what Eskom would have to pay for the construction.
A similar option would be to sell a minority stake in Eskom itself or its subsidiaries - partial privatisation. A private shareholder would improve governance and efficiencies. These are all options that are now on the table, Hogan tells the FM.
All factors taken into account, delaying Kusile comes with too many risks. IPPs have many regulatory hurdles, not to mention overcoming lengthy environmental processes. Though Mmamabula is far advanced, its 1 200 MW will not be enough to plug the supply shortfall.
Eskom needs to break new ground in urgently bringing a private partner into Kusile.
Though this would still require tariffs increases to make it commercially attractive, they won't have to be nearly as steep as what it's asking for now.
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