Commentary by Zwelakhe Gila, Head of Trade & Commerce, African Energy Chamber 10 June 2019

South Africa is again nearing a technical recession for the second time in two years, however this time it’s the worst we’ve seen. Responsibility for the largest contributor to the lowest GDP growth in 10 years is pointing directly towards the failure of Eskom’s operability and its fast growing debt.

As we look forward following the elections, South Africa and its economy await the government’s response to what is evidently an energy security and economic crisis. The struggles and financial implications of Eskom’s operability have revealed their true impact on the economy, further stressing the precarious relationship between the energy sector and the country’s economy.

South Africa’s economy has been struggling with an alarmingly slow GDP growth since 2009 and has now hit the lowest growth in a decade, projected to be 1.5% for 2019. Comparatively, fellow BRICS countries are projected to average 4.5% GDP growth over the same period due to their increased export of agricultural and industrial goods. In South Africa’s case, exports of both have decreased over the last 5 years. Statistics South Africa (StatsSA) recently noted the main contributors to the decline are manufacturing (-8.8%), mining (-10.8%), and agriculture (-13.2%). These are all energy intensive sectors which have cited the extensive black outs from last year as the catalyst for their regression. Agriculture for example, is heavily reliant on power for irrigation and power cuts have forced farmers to rely on costly generators or suffer stock loss from not irrigating. With over 25% of the country’s food security reliant on energy-intensive industries, the power cuts have increased the cost of production and ultimately the price of food for the consumer. This increased production cost can also be observed in the manufacturing and mining industries with end product for both industries reporting production cost related price increases.

Eskom’s weight on the economy is further highlighted in its prodigious R400 Billion debt reliance on government guarantees and bailouts. Eskom’s debt financing accounted for over half of the R529.4 Billion guarantees the government provided to state companies in 2018. Guarantees that are also intended to stimulate small economic enterprises and economic development. In response to last years rolling black outs and threat of total blackout, the Treasury pledged an additional three-year R69 Billion bailout in February. A few months later in April, the government was forced to pay an additional R5 Billion to Eskom to help the state-entity repay an urgent loan obligation that included a R3 Billion bridging loan from Absa.

Bank loans to Eskom, like the Absa loan, are set to decrease significantly as banks globally are increasing focus on climate-change funding and withdrawing funding on fossil fuels like coal; a primary input for Eskom’s power plants. Nedbank and Standard Bank both withdrew further funding for Eskom’s new coal-fired power plants beyond its existing commitments. However, there is still hope for financing as President of the New Development Bank, K.V Kamath, provided plants to bailout Eskom. As Eskom clearly struggles to finance its current debt, another bailout could stimulate valuable change to the power utility or simply add towards its ballooning debt.

Following one of the worst cases of load shedding in South Africa’s history, costing the economy an estimated R500 Million a day, South Africans were given a national agenda from President Cyril Rhamaphosa during the 2019 State of the Nation to solve the Eskom issue. Namely by way of de-bundling Eskom into three separate entities: generation, transmission and distribution. De-bundling would seek to strengthen the regulators ability to clearly determine the efficient costs of Eskom’s coal fleet, introduce independent generation companies who would compete for efficient operations, and ultimately reduce the too-big-to-fail hazard by separating core responsibilities into independent entities. To the casual onlooker, this would seem as a natural or favourable strategy following years of infrastructure mismanagement, alleged rampant corruption, and a recession-inducing debt vacuum.

In reality, however, the process of de-bundling the largest power producer in the continent holds a valid uncertainty that it can prevail even in a best-case scenario. One of the most concerning aspects of the unbundling is that it would take at least 5 years of coordination to complete if implemented without a single issue. This isn't reassuring for a nation that has had two of its last three presidents since the end of apartheid resign before the end of their terms. Meaning the coordination-demanding plan to de-bundle Eskom risks being futile if President Rhamaposa does not complete his full term. We have seen his predecessors all provide drastically varying promises to fix Eskom in the past, which have evidently been unsuccessful or incomplete.

The time implication of a de-bundling is amplified further by Eskom’s high executive turnover, averaging roughly 1 CEO per year over the last 12 years. With the latest CEO, Phakamane Hadebe, resining last month citing ‘health reasons.’. This high turnover rate is not conducive to the long-term executive management needed to oversee and coordinate the de-bundling from inception to completion. Furthermore, such a turnover introduces other transformation impeding liabilities such as change in leadership strategy and relevant industry knowledge.

However, de-bundling holds numerous benefits, such as increased efficiency from each bundle being managed independently and competitively, increased accountability for each bundle’s operational objectives, and cost efficiency stemming from diversification of players. One of the anticipated benefits on de-bundling would also be the introduction of clean and reliable technologies brought on by a competitive market.

A key stakeholder in overseeing Eskom’s change is the recently restructured Department of Mineral Resources and Energy. Following the elections, Minister of Energy Jeff Radabe was released from his role and the Department of Energy was merged with the Department of Mineral Resources to form the Ministry of Mineral Resources and Energy. Headed by former Minister of Mineral of Resources, Gwede Mantashe. Although government has given various reasons for the restructuring, the economy has not reacted positively to the news with foreign investors noting caution to invest in South Africa’s energy sector as they await comfort on the objectives of the new Ministry. With the restructuring of Eskom requiring a streamlined government effort, changing the entire leadership and structure of the Ministry previously delegated to carrying the change is certainly a call for concern.

As the dust of a tumultuous economic decade settles and we gaze on its causes, South African’s can only hope that the worst is behind us. That the failure of our energy security and its pull on our economy will invigorate the newly elected Cyril Rhamaphosa to carry through with the optimistic changes promised to the nation. The task at hand is daunting, but not impossible. The outcomes, as they have done so this year, will reveal themselves where it matters most.

Zwelakhe Gila is an Energy Originator at DMWA Resources and Head of Trade & Commerce at the Africa Energy Chamber