Alea iacta est — the die is cast — declared Julius Caesar in 49BC, as he was about to defy the Roman Senate by marching across the Rubicon river on his way to capturing Rome. Caesar, by breaking the law, knew he’d reached the point of no return and would spark a civil war. In the end, he emerged victorious and was appointed dictator of Rome — then the world’s superpower.
Eskom’s immense debt, R420bn at last count, may just present the proverbial Rubicon moment for Cyril Ramaphosa’s SA.
By announcing an "unbundling" of Eskom into three separate units — one to generate electricity, one to transmit the power over long distances, and one to distribute it into people’s homes — Ramaphosa seems to have reached a similar point of no return, with his leftist allies and trade unions.
The National Union of Metalworkers of SA (Numsa), a breakaway from the Cosatu federation which speaks for 80% of Eskom staff alongside the National Union of Mineworkers (NUM), was the first to reject the move.
Numsa secretary-general Irvin Jim said that only "an Eskom which is completely owned and controlled by the state is the best guarantee for cheap electricity. History has shown us that once the private sector is allowed to step in, prices increase and massive job shedding is inevitable".
This looming clash between Ramaphosa and the unions is important because, just as Caesar was appointed by the Roman Senate, Ramaphosa rose to the head of the ANC, and the government, on the shoulders of Cosatu.
Last week, Ramaphosa sought to downplay the conflict. He told parliament that cost-cutting at Eskom "should be understood not to mean retrenchments — the preferred strategy in reducing human resources costs will be to offer voluntary packages to staff".
But the fact is, taxpayers are paying bailout money to keep a bloated workforce at Eskom. A 2016 World Bank study of utilities in 36 African countries said that Eskom needed a workforce of 14,244 — less than a third of its current 48,628 employees. Over the past decade its staff complement has risen by 50%, though it supplies less power.
So, can Ramaphosa cross Eskom’s restructuring Rubicon? Even if such a move leads to a long-term privatisation of the utility that makes the economy more efficient? Or will he, unlike Caesar, blink and avoid the short-term battles with the unions?
What is clear is that the government has run out of fiscal room to keep bailing out state-owned juggernauts like Eskom. It is one of the central reasons why economic growth has ebbed to under 1% in 2018.
Public enterprises minister Pravin Gordhan told parliament last week: "We are running out of time and the country is running out of patience. You [Ramaphosa] are angry and people are angry — rightfully so. We must get to a point where energy certainty is guaranteed."
Eskom has also run out of money. In March, it has to settle a R70bn bond that is due, yet it has less than R10bn in the bank.
For the year to March, just the interest on its debt will amount to more than R45bn — which is more than the utility generates in cash from its operations. So it’s no surprise that Eskom’s chief financial officer, Calib Cassim, has already warned that the utility will report a record net loss of more than R20bn for its financial year.
This week’s Eskom bailout, announced in finance minister Tito Mboweni’s budget (see the FM’s budget supplement), is the third in democratic SA’s history.
The first was in September 2014 when the National Treasury advanced R23bn in cash and wrote off a R60bn subordinated loan to the utility. That R83bn rescue package was accompanied by threats about performance and governance that the Eskom board members (and their peers at SAA, the SABC and Denel) had heard before.
Second, in February last year, the Public Investment Corp (PIC) gave another R5bn bailout to Eskom, which had run out of cash to pay salaries at that point.
The trick will be how to fund this third bailout. The state really has only two options: either raise electricity tariffs on consumers, or borrow more from the market, thus breaching its own expenditure ceiling — which won’t please the ratings agencies.
"It’s true the market will react very negatively, but we are in a space where we have to do things not many people like and then deal with the consequences," says Michael Sachs, adjunct professor at Wits University’s school of governance.
Until last year, Sachs headed the National Treasury’s budget office, so he knows a thing or two about juggling priorities. Sachs says that while people hate tariff increases (especially when it is funding inefficiency), someone has to pay. "If I were finance minister, I would borrow the money from the market and violate the expenditure ceiling, then clearly acknowledge that we can’t live within our means at present," he says. You’d then have to lay down strict guidelines under which the utility must operate, says Sachs.
Except the market has heard all that before, so it would be unlikely to prevent a credit downgrade.
"If you don’t have a credible turnaround plan for Eskom, it does not matter how you raise the money: if you raise taxes to fund Eskom you still can’t guarantee that you won’t be downgraded," says Sachs.
Of course, a restructuring on its own won’t solve Eskom’s problems, says Anton Eberhard, director of the Managing Infrastructure Investment Reform Regulation in Africa, at the University of Cape Town Graduate School of Business.
Eberhard says the only way for Eskom to survive is to be allowed to increase tariffs above inflation. "And then it must trim costs. You’ve got to deal with the debt," he says.
Raising tariffs much higher today, in an election year, seems a nonstarter.
This time, the bailout will be different. This time, the conditions of the rescue may hit the most vocal stakeholders — labour.
While splitting Eskom into three distinguishable companies isolates the problem areas that can either be fixed or disposed of, the unions see it as a precursor to job cuts.
Martin Kingston, the CEO of investment bank Rothschild in SA, says there are a few ways to restructure Eskom to make it a capable and sustainable energy provider, able to power a growing economy.
"At this moment Eskom is a hindrance to a growing economy, not an enabler. The current level of gearing at Eskom is unsustainable and disproportionate to the underlying asset base," he says.
While he says the state must slash Eskom’s debt, any support it gives must be accompanied by strict conditions. "The consumer can only pay for the prudently incurred cost of producing power, which is not the case with much of the current debt."
Kingston says that restructuring Eskom’s balance sheet to ensure its debt is proportionate to its assets is the only way to ensure it remains creditworthy.
"We have to design a route map that shows we have a clearly thought-out view of the economy as a whole and the role of the energy sector and electricity supply industry," he says. Such an overhaul would take at least five years, he says.
In such a picture, Eskom would have to compete with private sector companies, and you’d have an independent market operator which could buy the cheapest electricity in the market, and on-sell to consumers.
"SA requires all the three elements of Eskom to be individually fit for purpose and well-capitalised to be competitive, and to provide reliable and predictably priced electricity," says Kingston.
It would mean that any investor in an energy-intensive asset would be able to predict the price of electricity beyond the three years of the multiyear price determination that Eskom currently applies for.
The big trick, though, is whether the unions will agree to take a short-term hit in the interests of creating a sustainable electricity industry.
The early signs indicate this isn’t likely.
Numsa’s Jim declared that the union is "preparing to do battle with the state in defence of our state-owned enterprises and Eskom in particular".
Numsa was, until a few years back, the largest union within the Cosatu federation. But its decision to split, to form its own federation, has freed it from the need to play nice with the ruling ANC.
So Jim didn’t hold back on Ramaphosa: "The working class is in for more suffering because the president is also calling for a tariff increase at Eskom. Last year the same ANC increased general taxes in the form of VAT. This, coupled with increases in the petrol price, will worsen the suffering of the working class majority and the poor."
Jim added that the ANC and "its cronies looted and destroyed Eskom and now they have identified privatisation as a convenient way to cover up for more than two decades of rampant mismanagement, looting and corruption". Splitting Eskom into three is tantamount to the ANC "punishing workers for its failures", he said.
His counterpart at the NUM, David Sipunzi, was predictably more forgiving. Speaking to the FM on his way to meet Ramaphosa, Sipunzi said: "The good and bad of the whole plan is at this point known only to the president. There was no consultation with us who represent labour ahead of the announcement in parliament. So we know nothing about it."
Sipunzi said that Ramaphosa has "assured us" that there would be no job losses from Eskom’s unbundling. Yet, at the same time, Sipunzi admitted that "there is a possibility that Eskom’s [staff count] is bloated. There is room for talks."
Zwelinzima Vavi, the general secretary of the SA Federation of Trade Unions (Saftu), to which Numsa’s 340,000 members now belong, believes restructuring is a precursor to the dreaded privatisation of Eskom.
"That’s a declaration of war, because we suspect they want to privatise Eskom in the future. Eskom is already three divisions, so what will the unbundling bring? What will it change about the debt?" Vavi asks.
Vavi says that "electricity, water, health care and oxygen are non-negotiables that must remain in the hands of the state".
If control of any of these basics of life were to be vested in the private sector, "the capitalists would start by selling the oxygen, and then make electricity unaffordable to the working class and the poor".
Asked if he believes Eskom is in need of fixing, Vavi agrees. But he adds: "It is them [the ANC government] who destroyed Eskom. The real enemy of a developmental state in SA are the thieves in the ANC."
This seems a bit rich from a man who initially fought doggedly to elect Jacob Zuma as president, before reversing his position and apologising for it.
Asked where the unions were when this destruction was wrought on the state-owned enterprises (SOEs), Vavi argued that Saftu embarked on a national strike in 2016 "to protest against the destruction of the SOEs" by corruption and state capture.
Which clearly didn’t change anything.
There is, however, good precedent for a restructuring at state-owned companies: in 2006, Transnet was restructured, and SAA was unbundled into its own entity.
Kingston points out that in the case of Transnet, the government obtained clear visibility into the costs, constraints, strategy and suitable capital structure for each business.
As a result, Transnet sold small, noncore entities such as its airport handling business.
Today Transnet is plodding along without government help, and has since invested in a bigger business — even though it was not spared the state capture corruption that brought Eskom and SAA to their knees.
Sachs believes that fixing Eskom will require Ramaphosa’s government to spend some of its hard-earned political capital.
"There is no way you can make this omelette without breaking an egg. You are going to have to face somebody down at some point," he says.
Sachs says the scope for a win-win situation, where everybody is happy with the result is limited in the short term. "But you have to show people there will be a win-win in the long term."
It’ll be a tough sell for the unions, at least. As Mboweni was presenting his maiden full budget in parliament on Wednesday, union members massed outside in their street campaign to "defend Eskom".
For Caesar, defeat across the Rubicon would have ensured his certain death. Is Ramaphosa’s conciliatory tone a sign of wavering?
Or is it Ramaphosa at his vintage best, slowing down to ensure he takes his wary comrades along, much as he did in the protracted removal of Zuma from the Union Buildings a year ago?
It’s hard to say. But it would be tempting to agree with Sachs, who argues that to fix Eskom, some eggs will have to be broken.
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.