Speech by Hon Zukiswa Rantho, Whip for the Committee on Public Enteprise

27 November 2014

Debate: The escalating crises at Eskom (DA motion)

Contextualising the financial sustainability of Eskom within ANC policy

In debating the financial sustainability of Eskom and its responsibility to provide the nation with electricity that is both affordable and consistent, the ANC government cannot be an uninterested party nor can its role be confined to that of a mere regulator. Various state initiatives, across the globe within the emerging markets sphere, have given credence to the developmental state model and system as the viable alternative to the traditional notion of neo-liberal privatisation and de-regulation.

This is even more plausible when viewed from the angle of the current geographic locations of portfolio and Foreign Direct Investment flows, which are largely flowing as a result of the BRICS countries initiatives. Central features of robust economic growth in China, India, Russia and Brazil are the role State Owned Enterprises such as Eskom.

Globally State Owned Entities like Eskom are used to enhance the self sufficiency of the State and develop in-house capabilities to manage several strategic economic growth drivers.

The contribution of Eskom and other SOEs and their subsidiaries to the GDP is considerable around some 8%.

Globally SOE`s are created by governments to support strategies for economic development and promote public interests.

Some inherent tension between the interests of the public and those of enterprises have developed. The existent level of tension is more conspicuous particularly when there exists a climate in which the socio-political objectives of government are not clearly defined or articulated.

What are the objective conditions?

The past six months have been amongst the most challenging ones for Eskom and perhaps the country at large. This was not only in relation to ensuring electricity security given the tight system, but also the positioning of the rating agencies; Standard and Poors. It is they who have placed the entity on credit watch in June in light of the financial challenges that the entity was facing.

It was in this context and the need to place Eskom on a sustainable financial path that the Cabinet approved the support package that should pave the way towards Eskom`s long term sustainability.

Unlike what we have heard from the neo-liberal camp, falsely claiming that this is a bail out, the package seeked to address the funding gap that was as a result of the tariff determination which was lower than anticipated. The details of the package have been communicated by the Minister of Finance in his Medium Term Budget Policy Statement and included the fact that at least R23 billion will be allocated to Eskom to strengthen its balance sheet as it rolls out the massive capital programme.

Furthermore, Government will consider converting the existing R60 billion loan into equity whilst Eskom will be raising additional debt of R50 billion over and above the R200 billion approved. The overall objective is really to ensure that Eskom is financially sustainable, and in the process, reduce Eskom`s dependence on government balanced with affordability of both consumers and the broader economy.

Eskom remains a state-owned entity and one of the largest utilities globally with internationally recognised expertise and technology capabilities.

The lowest cost option of adding new capacity is to restore the performance of the existing Eskom fleet as compared to the cost of new build (including transmission), environmental and climate change compliance issues and timeframes for the introduction of new capacity.

The recent Energy Regulator`s (NERSA) decision to liquidate the Regulatory Clearing Account (RCA) balance of R7.8 billion in favour of Eskom in the 2015/16 financial year also comes as a positive step towards ensuring long term financial sustainability.

The Regulatory methodology is working, and this this will result in an additional 4.7% tariff increase in the 2015/16 financial year. However this will not negatively affect marginal groups. In this regard, the acceleration of demand management measures to improve energy efficiency and measures to cushion the poor thereby assisting users to decrease their overall electricity consumption and the associated purchases are ready for immediate implementation.

Energy efficiency is the responsibility of every South African and should not be construed as a tool for commerce and industry only.

Financial Performance

Eskom anticipates a profit of half a billion Rands for the full year ending March 2015. This is both due to the seasonal nature of tariffs (the fact that winter tariffs are higher) but also increasing costs.

Engagement with Eskom with a view to ensure cost containment measures and improve on efficiencies is in line with the support package, with minimal impact on the electricity provision process.

The key objective is the balance between short term priorities whilst maintaining long term financial and operational sustainability.

Performance on the Capex Programme

ANC government support will be maintained for Eskom in order to secure adequate funding of the build programme. To date 85% of the required funding to finance the build programme which is in excess of R300 billion over the next 5 years ending in 2017/18 has been secured whilst ensuring a debt-equity ratio and an interest cover ratio in line with the shareholder compact and posting a financial surplus over the past three years;

Funding has been made available for Eskom to increase access to electricity. Eskom has electrified over 4 200 000 homes since 1991, increasing the number of households that had electricity from 32% to well above 85% by 2014;

In conclusion

The ANC and its government has finalised the Medium Term Strategy Framework. It is built around the ANCs Manifesto commitments. The National Development Plan and its implementation programmes through the New Growth Path, IPAP and the National Infrastructure plan inform the Medium Term Strategic Framework.

This is a detailed five year implementation plan, coupled with objectives and time frames.

The period of radical socio-economic transformation has begun.