Flailing Eskom out of options
Eskom’s severe financial constraints, outlined in stark detail in court papers, reveal why it has stuck to its 0% wage offer, a rare move for a state-owned entity.
It is asking the courts to compel the National Energy Regulator of South Africa (Nersa) to review its most recent tariff decision of a 5.23% increase for the 2018-2019 financial year.
The plea, served on Nersa on June 7, reveals Eskom’s still-precarious financial position. A key element of the application is the threat a defaulting Eskom poses to the fiscus, as it could trigger a call for the repayment of the more than R760‑billion in international debt held by the government.
The start of legal proceedings has coincided with a collapse in wage talks with the three major unions represented at Eskom, the National Union of Mineworkers (NUM), the National Union of Metalworkers of South Africa (Numsa) and Solidarity.
At a press briefing on Wednesday, Eskom said protests about the wage dispute had affected 10 power stations, threatening the electricity supply.
Eskom chief executive Phakamani Hadebe said the utility’s 0% wage offer had to be seen in the context of the company’s financial constraints. He said it is doing several things to improve its position, including making efforts to increase sales, cut operational and capital expenditure and reduce municipalities’ debt.
On Thursday, matters intensified with Eskom claiming acts of intimidation and sabotage had halted coal deliveries to several power stations.
The utility instituted load shedding on Thursday evening, followed by a fresh round of power cuts on Friday, and warned that it could continue into the weekend.
The unions, however, have dismissed Eskom’s claims as a self-made crisis and cite, among other reasons, rampant corruption and misspending, although some observers have pointed to its bloated headcount as a reason for its weak financials.
But, according to Eskom’s application, corruption and staff numbers are not the reasons for its cash woes.
Eskom’s acting chief financial officer, Calib Cassim, argued in the utility’s founding affidavit that the failure to secure cost-reflective tariffs is the main culprit.
This was exacerbated when Nersa delayed a decision on three regulatory clearing account (RCA) applications, totalling about R66‑billion. These would allow Eskom to claw back an under-recovery of revenue because of a tariff determination.
Without the RCA increases, the “patently inadequate increase provided for in the Nersa 2018-2019 decision presents a material risk of catastrophic consequences, not only to Eskom but also to the South African national economy”, Cassim said.
The stalled process, which Eskom argued had been delayed by up to 20 months, meant it was forced to borrow the R66.7‑billion, adding to its liquidity pressures.
On Thursday, Nersa announced its decisions on the RCAs but awarded Eskom R33-billion — half of what it sought.
Cassim said that, in the recent credit ratings downgrades by the three major agencies, inadequate tariffs had been cited as a reason for Eskom’s poor rating — and this had followed the appointment of a new board and efforts to address corruption allegations involving former senior managers.
Eskom must repay slightly less than R40‑billion in capital and on interest in 2018-2019, Cassim said, after which it will enter a three-year cycle in which annual debt repayments will be between R50‑billion and R60‑billion.
Eskom’s liquidity problems are widely known and could discourage lenders from providing critical new funding, exacerbating the problem “potentially to breaking point”, he argued.
Because of the way Eskom’s capital funding programme has been structured, cancelling or failing to pay outstanding amounts on certain projects risks triggering existing loan agreements.
Funding committed to Eskom for the coming year, amounting to about R34‑billion, is project-specific — for the Medupi and Kusile power stations and distribution networks.
“Suspension or cancellation of the relevant projects will result in these facilities having to be repaid or can trigger an event of default on the loan agreements,” Cassim said.
Failing to obtain the funding needed to complete existing projects that are already partially funded “can trigger the breach of obligations in terms of existing loan agreements where funds have been drawn to pay for those projects”, he said.
Without the RCA decisions, there could be “catastrophic consequences” for the country, mainly because of the extent of Eskom’s existing debt, now at R362‑billion, the way in which its debt is interlinked and the way in which state debt is interlinked.
A call on Eskom guarantees could trigger the full liability of international debt held by the state.
Cassim said the claim that Eskom has 6 000 employees too many, which was one reason for Nersa’s tariff decision, is flawed.
For instance, Eskom’s customer base had increased over this period by more than 1.8‑million or 44%, he noted. “With the increase in the customer base comes the need to service these customers, as well as further maintenance and support.”
The ongoing construction taking place at Medupi and Kusile is not reflected in increased sales, he said, but it requires substantial numbers of additional employees.
But Eskom’s decision to take Nersa on review has been severely criticised.
“Eskom should focus on addressing internal issues and rather use the courts to address gross mismanagement,” Ronald Chauke, the Organisation Undoing Tax Abuse’s portfolio manager for energy, said in a recent statement.
Nersa’s tariff decision should stand unchallenged, he said, adding that Outa is “seeking legal advice to ensure that prices don’t increase”.
Ted Blom, a partner at Mining and Energy Advisors, said Eskom’s application, made in terms of the Promotion of Administrative Justice Act, may be too late. The Act requires that an appeal must be made within 180 days of an administrative decision.
“As Nersa’s ruling was published on December 15 2017, Eskom’s request should have been made before May 15 2018,” he said.
Nersa said it “is studying the notice of motion and will decide on the way forward within the time allowed by the high court”.
In a joint statement, the NUM and Numsa, which represent about 17 500 and 9 000 workers at the utility respectively, said Eskom’s crisis is self-imposed.
“Not one rand has been recovered and none of the executives fingered in corruption has been arrested. We demand that all monies which were lost through mismanagement or looting be recovered. Until this is done, we will continue to reject their claims of poverty,” it said.
Eskom is deemed an essential service, so its workers may not strike.
In a statement on Thursday, Public Enterprises Minister Pravin Gordhan confirmed a meeting held with trade leaders regarding the wage talks.
He stressed Eskom’s difficult financial position as well as the constraints on the national fiscus.
Gordhan called on all parties to “give the wage negotiation process an opportunity to succeed” and to “desist from violence, intimidation or the disruption of coal deliveries to power stations”.
On Thursday Eskom obtained a court interdict against protesting workers, aimed at preventing the intimidation of employees and contractors not participating in the strike; preventing the hijacking of coal delivery trucks and the sabotage of electricity infrastructure.