Question

Article:

How failing power utility is fuelling South Africa’s economic crisis
South Africa’s state power utility Eskom is the biggest challenge facing the country. Mess up
Eskom, and you mess up the country. In addition, it looks as though key players are doing just
that. The past two weeks will be remembered as the start of a cataclysmic economic crisis
caused by the failure of three powerful men to spend enough time in a room to find a
comprehensive solution that would turn the current crisis facing the utility into a great
opportunity for South Africa’s energy and economic future. And to finally break from the
country’s past. By refusing to align their policies and strategies, the three ministers – from
energy, finance and public enterprises – are responsible for triggering a crisis that will be
resolved on the streets.
What we see in Chile, where public anger has spilled out onto the streets, is what can be
expected to emerge as ordinary South Africans experience the true implications of this failure
to decisively resolve the crisis.
What is at stake is not just the short-term crisis and how the country keeps its lights on. At the
core, the crisis is about finally transcending the powerful minerals-energy sector (coal mines
plus Eskom), which is a major pillar of the South African economy – a sector that has survived
the end of apartheid.
The ministers, with decisive leadership from President Cyril Ramaphosa, had a golden
moment to take the first step by releasing South Africa from the stranglehold of a debt-laden
Eskom in an unstoppable death spiral.
Nevertheless, three opportunities were missed. They were: a new energy plan led by the
Minister of Minerals and Energy; a roadmap for the power utility led by the Minister of Public
Enterprises; and the medium term budget led by the Finance Minister.
They failed to combine their respective policies into an integrated framework for transitioning
to renewables, transforming Eskom and managing the utility’s ballooning debt. In the final
instance, the President needs to call his ministers to order. The open question is whether Cyril
Ramaphosa can act decisively to coordinate them to clearly and unambiguously address the
Eskom crisis.
This will require managing competing interests. The assumption in South Africa is that nothing
can be done unless everyone is on board. However, in a crisis of this magnitude, big decisions
need to be made that will make vested interests equally unhappy so that the best can be done
for the nation as a whole.
The breakdown
On October 18, Minister of Minerals and Energy Gwede Mantashe announced a new energy
plan (the Integrated Resource Plan) for the country. This was an opportune moment to set the
country on a new trajectory in terms of energy generation. Nevertheless, that is not what
happened. The lowest cost option – only renewables plus gas – was rejected. In addition to
unlocking renewables and gas, the plan provides for 1500 MW of coal-fired power despite the
fact that nearly all the biggest financial institutions in the world have said over the past 18
months they are divesting from coal.

On Tuesday October 29, the Minister of Public Enterprises, Pravin Gordhan, announced a
new Roadmap for Eskom. Here the focus was on unbundling. The mooted plan is to create a
“transmission entity”. There was also reference to a “just transition” – without saying how it will
be funded – to manage the consequences of decommissioning most coal-fired power stations.
Mostly importantly, there was no reference to how the utility’s R450 billion debt will be
managed. Nevertheless, at least the Roadmap reinforced the notion of lowest cost option,
repeatedly.
Next up was the Minister of Finance, Tito Mboweni, who delivered his medium term budget on
October 30. The expectation was that he would set out how the National Treasury planned to
manage the power utility’s debt. The matter is urgent given that a restructured entity is
expected to handle, at most, R200 billion worth of debt. However, the Eskom debt is north of
R450 billion. That leaves R250 billion worth of unserviceable debt.
Without clarity on how the unserviceable debt will be managed, the Roadmap for the utility
cannot be effectively implemented because of complex cross-guarantees and the burden of
running a utility that cannot service its debt obligations.
Expectations among South Africans, investors, businesses threatened by power cuts and
international funders were high that Mboweni would relieve Eskom of R250 billion worth of
debt so that it could be freed up to restructure. He did not. Mboweni said he wants to see the
restructuring plan implemented before he considers debt relief. It need not have been this
way. There were alternatives.
On the debt front, as recommended by the Eskom Sustainability Task Team appointed by the
President, the R250 billion should have been ring-fenced into a special purpose vehicle with
agreements on funding flows to ensure that it is “ratings neutral”. It was recommended that
the funds for this would come from a number of sources, including the budget, revenues from
the utility itself and carbon finance conditional on accelerated decommissioning. This would
have enabled Eskom to refinance itself. Without this kind of arrangement, Eskom is redirecting
funds for maintenance and operations into servicing debt. If this continues, it will face system
collapse.
On restructuring, the Roadmap recommends a “Transmission Entity” that will be a subsidiary
of Eskom Holdings. This is a good idea, but the unions will suspect it is the first step towards
privatisation and will object.
On the energy plan, the lowest cost option to meet future energy needs should have been
selected. The fact that it was rejected will cost South Africa an extra R100 billion just at the
point when it needs the cheapest energy with maximum security of supply. This includes a
rapid build programme which coal and nuclear cannot provide.
This means that – unlike most other countries which have accepted the inevitability of the
energy transition – accessing climate finance (mainly grant funds, but also concessionary
loans) to finance the transition becomes impossible. Again, this comes exactly when the
country needs the cheapest possible finance.

Broken promises
The misalignment between the three ministers responsible for shaping the country’s response
to the Eskom crisis has produced an outcome that is out of line with the statement that
President Cyril Ramaphosa sent to the UN Climate Summit on September 23, 2019. In it he
made it clear that South Africa takes climate change seriously and that a just transition fund
will be established. In his words:
In shifting to a low-carbon, inclusive, climate change resilient development path and
embracing the global energy transition, we must ensure that we leave no-one behind.
Granted, the Roadmap echoes this by acknowledging that a global energy transition is
underway and that the lowest cost option is preferred. And the energy plan does provide for
23,854 MW of additional renewables (wind and solar) by 2030.
However, the failure of the medium term budget to provide for a ring-fenced facility to manage
the debt Eskom cannot handle effectively reinforces the stalemate.

Question: As a senior economist in your organisation, you have been asked to facilitate a discussion on
how to encourage growth by your CEO after reviewing the above article. In your preparation,
focus on aggregate expenditure components and provide examples of how each can be used
to stimulate growth in South Africa.

Answer 1

Looking at the current challenges of privatisation, lack of collaboration between Cabinet ministers, excessive bureaucracy, ballooning debt all resulting into crisis.

The transition to renewable energetic source requires adsitional influx of capital and time to built infrastructure is considerably higher which cannot be possible right now.

Moreover, the negative cash flow and serious bureaucracy in managing business along with multiple levels kf decisions making can delay the process.

Hence this will cause supply of electricity to fall down and demand to rise exponentially leading to supply shock wherein supply curve shifts leftwards causing price rise or inflation as the demand exceeds supply.

To encourage growth, The organisation needs to raise funds through debt and n equity and also restructuring the hierarchy into flatter ones. Also raising money through an IPO and or Offer for sale can help organisation take faster steps and bring on new capability and competitive prices through capital expenditure.