ANALYSIS: Time's up for Eskom – unbundling must happen in 2 years

Time is up. That is the message coming from the Department of Public Enterprises, Treasury, and a range of experts who have been advising on how to rescue Eskom from financial ruin the last several months. 

Eskom only has two years to unbundle into three entities, Fin24 understands. An impeccable source close to the developments told Fin24 that the unbundling process would unfold in two phases over the next two years and there are currently three subcommittees at Eskom assigned to the project. 

The unbundling of Eskom into distribution, transmission and generation companies is a solution designed to improve Eskom's performance and provide greater transparency. It is clear now that those plans are moving ahead. Unless anyone has a better idea, that is.

The lack of detail of the unbundling process by President Cyril Ramaphosa in his State of the Nation address last week led to much speculation that the process had stalled. Adding to the sense of inaction on the issue was the fact that Eskom has not commenced negotiations with the unions over the potential restructuring, as Fin24 reported last week.

But Fin24 understands behind the scenes there has been a significant amount of movement. 

Public Enterprises Minister Pravin Gordhan was also adamant, in his SONA reply speech to the National Assembly last week, that the unbundling would go ahead. "There is no deviation from this strategic path – not in Cabinet or in government – contrary to persistent public speculation," he told Parliament. 

The presidential task team on Eskom’s sustainability, appointed in December 2018, recently made a number of recommendations to Ramaphosa.

At a technical level, a broad plan for how the unbundling process will work has been developed, using some of the inputs the utility received from the private sector.

The latter was born out of discussions between Eskom, the Minerals Council of South Africa and the South African Electrical Engineers Institute in the wake of stage four load shedding that took place earlier this year

No more time

Those close to the process say there is simply no more time to waste on fixing Eskom. There is no more time for ideological debates, and the two-year period is not a conservative estimate. "We don’t have three years or five years to do this," a source said. "There is no more time." 

As Eskom told Fin24, there is a project team in place to manage the process of unbundling Eskom into the three separate companies. 

"The first phase of the separation process, which constitutes the relinking of corporate functions back to line divisions, has begun, and is at an advanced stage. Ultimately, the work of structural reorganisation and setting up of subsidiaries will commence, and Eskom will communicate with various stakeholders as the project unfolds," Eskom said.

The first phase of unbundling, expected to be completed in about 18 months, includes issues around the design of the new companies – staffing, new business models, the transfer of contracts, and so on. The second phase will deal with issues such as the reallocation of debt facilities with lenders, after renegotiating Eskom's debt; the transfer of assets to the new entities; and the transfer of employees.

Collateral

It is at this point the talks with lenders and unions will probably kick off in earnest. The restructuring of Eskom's debt will be a huge concern to lenders, Eskom, and Treasury – which guarantees much of Eskom's almost R500bn in debt. 

Energy analyst Ted Blom told Fin24 that Eskom's lenders will be resistant to the idea of diluting their collateral: as it stands, Eskom as a whole is collateral. The plan was for Eskom to remain as a holding company the three new entities underneath it. If those plans change and Eskom as a holding company ceases to exist, lenders will not be happy.

"Eskom has billions of rands worth of bonds in the marketplace as well as loans, and these come with covenants. If Eskom breaks up (into three parts) the loans and covenants will have to be reapportioned, and there's no ways a banker is going to accept less collateral," he said.

Eskom told Fin24 that these conversations with lenders had not yet begun, but that they would be crucial. 

The presidential task team has also made recommendations on how Eskom's debt might be restructured. Business Day reported last week that some of the recommendations include the possibility of an arrangement which would allow Eskom debt to be swapped for government bonds in order to move the debt onto the national government's balance sheet. 

Fin24 also reported that one of the options on the table is a multi-billion dollar climate financing arrangement. But before any of the plans on the table go ahead, Treasury will want to see a Chief Restructuring Officer (CRO) appointed. 

Treasury putting its foot down

In his speech, Gordhan said that the appointment would be announced by the minister of finance "soon". It is significant that this announcement will come from Tito Mboweni himself. Fin24 understands that the CRO position is a condition imposed by National Treasury on Eskom because of the endless bailouts. It is a case of Treasury "putting its foot down" with the troubled power utility, Fin24 was told.

Gordhan said the CRO would focus on Eskom’s "financial distress", its cost structure, and other financial issues. 

In the meantime, Ramaphosa must consider the task team's recommendations, and decisions will need to be taken quickly if Eskom is to release its financial results due in July. 

Time is up.