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Eskom to be split into three entities

Res­cue plan: Pres­i­dent Cyril Ramaphosa de­liv­ers the state of the na­tion ad­dress in par­lia­ment in Cape Town on Thurs­day. He pledged to res­cue Eskom by pro­vid­ing it with fi­nan­cial sup­port and split­ting it into three en­ti­ties.

President Cyril Ramaphosa on Thursday announced dramatic steps to remodel Eskom by splitting it into three state-owned entities dealing with generation, transmission and distribution.

He also announced that Eskom would receive financial support from the state, the details of which will be announced in the budget in two weeks’ time.

The privatisation of state assets that were considered “strategic to the wellbeing of the economy and the people” would not be entertained, he said.

Currency markets cheered the announcement.

The rand, which was 0.91% weaker when Ramaphosa started speaking, recouped some of those losses. By the time he finished speaking, it was 0.42% weaker at R13.60/$.

It has gained nearly 6% on the dollar so far in 2019.

Eskom’s dollar-dominated bonds maturing in 2028 yielded 5.92%. The yield, which was at 7.19% in November, has dropped on growing investor confidence that the government was moving towards a viable plan for the utility’s survival. Yields move inversely to the price.

Ramaphosa, who delivered his second state of the nation address to the joint sitting of both houses of parliament, also announced a range of measures to improve the environment for doing business, improve government capacity as well as strong measures to combat corruption.

ELECTION

He also said that the country would hold general elections on May 8.

The announcement on Eskom is the most farreaching economic reform by the ANC government since 1996, when SA’s public finances were reined in and several state entities corporatised with some privatised.

Eskom posed a great risk to SA, Ramaphosa said.

The utility is deep in financial and operational crisis, with a debt burden of R419bn which it is unable to service from the revenue it earns. It is also

straining to keep the lights on, with multiple breakdowns of its old plants due to neglected maintenance.

“Eskom could severely damage our economic and social development ambitions. We need to take bold decisions and decisive action.

“The consequences may be painful, but they will be more devastating if we delay,” Ramaphosa said.

“To ensure the credibility of the turnaround plan and to avoid a similar financial crisis in a few years’ time, Eskom will need to develop a new business model,” he said.

Under the split, the generation company will own and run the power stations, the transmission company will purchase power from producers and own and operate the grid, and the distribution company will own Eskom’s substations. The costs of each function will be isolated into the specific entity.

While no mention was made in the speech on the apportioning of debt, this will be a key part of the split.

The division would have two immediate positive effects. It “will enable Eskom to be able to raise funding for its various operations more easily from funders” and will enable the establishment of an independent state-owned transmission grid.

The president promised that care would be taken to minimise “the adverse economic cost” of Eskom to the consumer and taxpayer, and that there would be “meaningful consultation” and dialogue with all stakeholders.

Ramaphosa promised labour a “just transition” that deals with the needs of all those who are affected.

Trade unions are particularly fearful of a restructuring of Eskom because of its expected effect on jobs and its likely promotion of a growing number of private power producers into the energy market.

Both the National Union of Mineworkers and the National Union of Metalworkers of SA have said they will strike if the split goes ahead.

However, Ramaphosa was firm that Eskom would have to cut costs to become sustainable and would need “an affordable” tariff increase.

To cut costs, Eskom will be forced to cut jobs, especially in managerial positions.

Ramaphosa also dealt with several issues of particular concern to business including a pledge to establish a team in the presidency to deal with regulatory and administrative barriers that frustrate business; studies to examine the reduction in costs of doing business such as electricity, communications and trade; and special economic zones for specific products such as clothing and textiles.