Government budget plan won’t pull Eskom from crisis

Multiple experts and commentators, including energy expert Chris Yelland, say that government’s budget plans for Eskom have done nothing to fix the fundamental management and operational issues that are keeping the power utility in its current state of crisis.

In his budget tabled on Wednesday (25 February), Finance Minister Nhlanhla Nene said that, in addition to a R23 billion lifeline to Eskom, government may convertthe utility’s subordinated loan to the embattled electricity supplier to equity, the National Treasury said.

“Government could also consider other interventions such as converting its subordinated loan to equity to support Eskom’s budget sheet,” Treasury said in its budget review document.

This would serve free Eskom from its long-term obligation to service its debt to the state and pay interest on the loan that runs until 2038, easing the entity’s balance sheet and enabling it to borrow more capital elsewhere.

Nene confirmed that, as President Jacob Zuma noted in his state-of-the-nation address a fortnight ago, government was braced to give Eskom R23 billion in the coming year to stabilise its operations.

Treasury added that this would in part be achieved through the sale of “non-core assets” to ensure that there was no increase in government debt and “no effect on the fiscal position”.

In his budget speech, Nene said the sum would be paid in three tranches, in accordance with a special appropriations bill to be tabled.

“The fiscal allocation of R23 billion will be paid in three instalments, with the first transfer to be made by June 2015.”

Budget may make things more difficult

Energy analyst, Chris Yelland said that a R23 billion equity injection was already indicated by Nene in October 2014.

Nene said if further equity is required, a R60 billion subordinated load already paid to Eskom some years ago would be converted to equity.

“The conversion of an old R60 billion subordinated loan (quasi-equity) to equity adds no new funding to Eskom,” Yelland said.

Conversion of R60 billion subordinated loan to equity will strengthen the Eskom balance sheet and enable increased borrowing, but at extra cost, he said.

Nene confirmed that government would support a tariff increase application by Eskom seeking to bring the price of electricity in line with generation costs.

Yelland said that the Budget Speech failed to address fundamental structural problems at Eskom.

The minister announced a temporary increase in the electricity levy, from 3.5 cents a kilowatt hour (c/kWh) to 5.5 cents.

“This additional 2c/kWh will be withdrawn when the electricity shortage is over,” Nene said.

“Secondly, an increase is proposed in the energy-efficiency savings incentive from 45c/kWh to 95c/kWh, together with its extension to cogeneration projects.”

“What Nene has indicated now is increased tax on electricity that will reduce demand, reduce Eskom sales volumes, and increase prices,” Yelland said.

He said that the extra 2c/kWh on the environmental levy on non-renewable electricity will increase electricity prices and raise an extra R5 billion for fiscus.

Increased energy efficiency incentives from 45c/kWh to 95c/kWh, meanwhile, would reduce usage and encourage industrial co-generation.

The financial packages offered to the country’s state-owned enterprises did not bode well, said Freedom Front Plus leader Pieter Mulder.

“SAA and Eskom are not forced to be independent, like naughty children getting money every time from their father.”

Koffi Kouakou, a lecturer at the Wits School of Governance said that the minister was in a tight spot regarding Eskom. “Their (the government) hands were tied…if nothing is done now, it has multiple effects long-term,” Kouakou said.

Kouakou said that government needs to address its leadership and governance. He said there was a serious lack of talent management guiding the company.

The DA said on Tuesday in its alternative budget, that it would break the Eskom monopoly by subdividing it into separate generation and transmission units.

Meanwhile, those hoping for a sustainable solution to Eskom’s financial woes, which includes a funding gap north of R200 billion, will have to wait a little longer.

“We are at an advanced stage to complete – leveraging off those resources…that I know you eagerly want to know, which resources those are. We will only be able to come back to you once the sale has been concluded,” said Nene said in an interview with the SABC on Wednesday (25 February).

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Government budget plan won’t pull Eskom from crisis