Eskom Special Appropriation Bill [B16-2015]; Eskom Subordinated Loan Special Appropriation Amendment Bill [B17-2015]: Department of Public Enterprises & Eskom briefing

Standing Committee on Appropriations

12 June 2015
Chairperson: Mr S Mashatile (ANC)
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Meeting Summary

The Committee had asked for presentations by the Department of Public Enterprises and Eskom as part of its preparation for consideration of the Bills under which government would be making special appropriations to Eskom; the Committee had received prior presentations on the Bills themselves. The Department of Public Enterprises firstly explained the government's financial assistance package, noting that a R23 billion equity injection would be provided, subject to approval by Parliament. For its part, over the next 100 days, Eskom management would focus on ensuring its financial viability, improve its operational performance by prioritising critical maintenance, with the aim of doing maintenance without load-shedding, and ensure accountability at all levels of management. The two options that had been considered for building long-term sustainability, were highlighted, and it was noted that in September 2014 the government had approved a tariff increase to be determined by the National Energy Regulator of South Africa, coupled with an equity injection of R23 billion. It had also asked Eskom to raise additional debt of R52 billion, and to make certain operational improvements. In 2008, government had given Eskom a R60 billion subordinated loan for the purposes of debt consolidation, following its credit downgrade by ratings agencies, part of which was equity, and part loan - around R27 million at 31 May 2015. Complete conversion of the loan to equity was critical to improve Eskom's credit rating and free up additional borrowing capacity.

Eskom briefly outlined the progress of the capital expenditure programme of R280 billion over the next five years, at Medupi Unit 1 and Sere Wind Farm. The current load shedding was a result of a maintenance backlog, and its current financial state was a phase in a cycle associated with periods of capital expenditure. Load-shedding had been experienced in the 1980s, before a cash- and supply-positive period lasting until about 2005, and it was anticipated that Eskom's downward trajectory may continue for the next three years. Government should invest in new generating capacity and maintenance in cash-positive peak periods, so that the inevitable troughs did not become crises. e The load-shedding was then explained. Eskom's installed generating capacity currently stood at 43.5 gigawatts (GW). On a typical winter day, demand was around 32 GW and planned maintenance around 6.5 GW, but unplanned maintenance could cause generating capacity to fall below demand, resulting in a need for load-shedding. Ideally, for Eskom to be able to conduct maintenance without load-shedding, Eskom needed spare capacity of around 9.5 GW. Eskom outlined its current balance sheet, noting that its primary operations were cash-positive, but there was a cash shortfall of around R70 billion when loans, interest and capital expenditure were taken into account. When offset, however, by money raised through bonds, and the government's equity injection of R23 billion (in two instalments), this took Eskom back to a positive closing balance of around R15 billion. That equity injection was to be added to its capital expenditure. 40% of the capital expenditure budget was being put to building of new generation capacity, with a focus on Kusile Unit 1 and Medupi Unit 5. At Medupi, 10 000 of the 12 000 striking workers were back at work and the partnership agreement had been reviewed to achieve stability. Majuba was back at 80% capacity and the units of Ingula pumped storage would come online in the current and the following financial years. Pre-payment of electricity was important to Eskom's cash position.

Members asked about the rumour that Eskom had notified the President of the possibility of 24-hour load-shedding shortly, against which hospitals would have to take emergency measures, but this was strongly refuted. Eskom also noted that, contrary to reports, no returning workers had been killed, although two had been injured when ongoing strikers opened fire on them. Most members of the Committee expressed confidence that the new leadership of Eskom would meet the challenges, although they asked when the acting positions were likely to be filled permanently, and wanted clarity on the total debt. One Member questioned if it was fair to pass on the cost of capital expenditure to consumers, questioning whether this was not rather government's responsibility. Members noted that there was no way for Eskom to return immediately to a cash-positive solution, pointed out that load-shedding schedules were not always adhered to, asked for further details on the technicalities and raised the possibility of the public being permitted to purchase shares in Eskom, and questioned the export and import of power from other countries. 

Meeting report

Eskom Special Appropriation Bill [B16-2015] and the Eskom Subordinated Loan Special Appropriation Amendment Bill (2008/2009-2010/2011 financial years) [B17-2015].
The Chairperson noted that the delegations from the Department of Public Enterprises (DPE or the Department) and Eskom had been invited, as recipients of the funding contemplated under the Eskom Special Appropriation Bill [B16-2015] and the Eskom Subordinated Loan Special Appropriation Amendment Bill (2008/2009-2010/2011 financial years) [B17-2015]. The Committee had already been briefed on the Bills themselves. He noted that, despite an invitation, nobody was present from the Portfolio Committee on Public Enterprises.

Department of Public Enterprises Briefing

Ms Matsietsi Mokholo, Acting Director-General, DPE, noted the apologies of the Minister and Deputy Minister. This presentation would cover the support package and the issue of the subordinated loan. Eskom would then present on its financial sustainability and on the unavoidable issue of load shedding. Eskom's financial challenges had been simmering since about 2008, culminating in a request from government, as shareholder, for an equity injection in 2014. This appropriation of funds could only be done through a legislative Parliamentary process (even though it had been approved by Cabinet).

Ms Mokholo reported that over the next 100 days, Eskom management would focus on three issues: (i) ensuring its financial viability, (ii) improving operational performance by prioritizing critical maintenance, with the aim of doing maintenance without load-shedding, and (iii) ensuring accountability at all levels of management. In its application for equity in 2014, Eskom had described several financial scenarios for the next three years. Two scenarios in particular, having long-term sustainability, were highlighted: The first imagined an average electricity price increase of 13% per annum, which was considered affordable, and a government equity contribution of R50 billion, resulting in a Return on Assets (ROA) of 4.70% - which was too low. The second imagined an average electricity price increase of 19% per year, which was not affordable, and no government equity contribution, resulting in a Return on Assets of 7.70% which would be acceptable. In response, on 11 September 2014. the government approved a tariff increase to be determined by the National Energy Regulator of South Africa (NERSA), and an equity injection of R23 billion. It then asked Eskom to raise additional debt of R52 billion, and asked it to make certain operational improvements. Ms Mokholo estimated that with these provisions, Eskom's financial situation would reach a favourable status in 2017/18.

Government had also issued to Eskom a R60 billion subordinated loan in 2008 for the purposes of debt consolidation, following its credit downgrade by ratings agencies. Initially, R30.5 billion of this loan was classified as equity, and the remaining R29.5 as loan liability. At 31 May 2015, the loan portion was R27 billion. The complete conversion of the loan to equity was viewed as critical for several reasons, the most important being that in that situation the shareholder effectively “forgives the loan.” It would also help improve Eskom's credit rating and free up additional borrowing capacity.

Eskom Presentation

Mr Brian Molefe, Acting Chief Executive Officer, Eskom, reminded the Committee that Eskom was currently undertaking a capital expenditure programme amounting to R280 billion over the next five years. He announced that Medupi Unit 1 had been synchronised and was currently supplying 500 megawatts (MW) of its total capacity of 800 MW, and Sere Wind Farm was supplying 100 MW. He also reminded the Committee that the current load-shedding regime was a result of a maintenance backlog, and said that even at load-shedding Stage 2, Eskom still supplied 94% of the country's electricity demand. Nevertheless, the plan was to achieve maintenance without load-shedding.

The current financial state of Eskom was not unprecedented, and it was a phase in a cycle associated with periods of capital expenditure. Load-shedding had been experienced before, in the 1980s, before a cash- and supply-positive period lasting until about 2005, when the current crisis began to manifest itself. Eskom would probably remain on a downward trajectory for the next three years. The lesson to be learnt was to invest in new generating capacity and maintenance in cash-positive peak periods, so that the inevitable troughs did not become crises. Mr Molefe asked Eskom's Acting Chief Financial Officer,, to take the committee through the balance sheet for 2015/16.

Ms Nonkululeko Veleti, Acting Chief Financial Officer, Eskom, indicated that the opening balance was about R11 billion. In 2015/16, Eskom's primary operations of electricity generation and sale would be cash-positive (R27 billion). However, when loans (R27 billion), interest payments (R24 billion) and capital expenditure (R61 billion) were taken into account, there was a cash shortfall of approximately R70 billion. Through various sources, such as bonds, Eskom would raise about R66 billion. When the government's equity injection of R23 billion was added (of which R20 billion was expected in this financial year, in two R10 billion instalments), the result was a closing balance of about R15 billion.

Mr Molefe draw attention to the fact that, contrary to some media reports, the R23 billion equity injection would be added to Eskom's capital expenditure.

Mr Abram Masango, Acting Group Executive: Capital Projects, Eskom, said that of the R61 billion capital expenditure budget, 40% would go toward the building of new generating capacity. This year, the focus was on Kusile Unit 1 and Medupi Unit 5. He noted, in regard to the Medupi labour unrest, that 10 000 of the 12 000 strikers were now back at work, with the remainder still going through disciplinary processes. Eskom had reviewed its partnership agreement with the aim of providing the necessary stability.

A gap solution had been put in place at the Majuba power station, where a coal silo had collapsed earlier this year, and it was currently generating at 80% capacity. The first two units of the Ingula pumped-storage facility would come online in this financial year, and the remaining two before June 2016.

Mr Molefe said that electricity pre-payment had an important benefit for Eskom, allowing it to effectively borrow, interest-free, from consumers.

Mr Molefe then discussed the issue of load-shedding. Eskom's installed generating capacity currently stood at 43.5 gigawatts (GW). The total demand on a typical winter day was 32 GW. Planned maintenance usually amounted to about 6.5 GW. Therefore, there was no structural, systemic problem in South Africa's energy situation, just a temporary one. However, unplanned maintenance, which was a result of the maintenance backlog, could cause generating capacity to fall below demand, then resulting in load-shedding. This was the biggest problem at present, with tube leaks being the most frequent cause of unplanned maintenance. Mr Molefe said that if Eskom's aim of “maintenance without load-shedding” was to be achieved, Eskom needed a maintenance “budget”, in GW of idle generating capacity, of about 9.5 GW (allowing 1 GW as a reserve). Load-shedding was expensive, and risked damaging the economy, the reputation of Eskom and even the reputation of the country.

Discussion

Mr A Shaik-Emam (NFP) thanked the two delegations for their informative presentations. He asked about a frightening rumour he had picked up from some hospitals in the Western Cape that Eskom had written to the President warning that there was a strong possibility of a two-week, 24-hour-a-day period of load-shedding in the near future, with the implication that hospitals would have to take emergency measures.

Mr Molefe strongly denied that a letter had been written to the President. The Chief Executive Officer of Eskom corresponded with the Director-General of the DPE, and the Chairperson corresponded with the Minister, who corresponded with the President in turn. He also denied the contents of the alleged letter and said that Eskom had no such plans.

Mr Shaik-Emam said that in his view the provision of funds by Government to bolster Eskom's generating capacity ought not to be viewed as loans at all, but rather as state funding. He asserted that it was the Government's responsibility to make sure Eskom, as a state-owned entity providing an essential service, was financially viable. He asked how much money was needed and how long it would take to completely resolve the current crisis.

Mr Molefe said that the current plans would result in an increase of total generating capacity to about 50 GW in the next three years

Mr Shaik-Emam questioned whether it was fair to pass on the cost of capital expenditure to consumers. It was Government's responsibility to fund capital expenditure.

Mr Molefe said that South African consumers had developed unrealistic expectations of electricity prices. In the 1980s South Africa had the cheapest electricity in the world and savings had been passed on to consumers instead of funding generating capacity, which was one reason for the current problems. But even today, South African electricity was cheap in comparison to the rest of the world.

Mr N Gcwabaza (ANC) said that the reported absence of a systemic problem was heartening. He asked how much capital would enable an immediate return to a cash-positive situation.

Mr Molefe said that unfortunately there was no way to achieve this immediately.

Mr M Figg (DA) asked whether the conversion of loans to equity was going to become the norm. He wondered whether it was not just a kind of “creative accounting” intended to make Eskom's finances look more favourable than they really were.

Mr Figg said that load-shedding schedules were not adhered to, and asked if there was a way that load-shedding periods could be planned to lessen their impact on daily life.

Mr Molefe said that there was always a degree of uncertainty in electricity supply. For example this weekend there had been cloud cover in the Northern Cape, preventing any power generation at the solar plants. There was very little flexibility in timing load-shedding periods, because it was only at peak demand periods that load-shedding was necessary. There would be no way to store savings made at periods of low demand for use during periods of high demand.

Mr Figg asked about the possibility of allowing the public to purchase shares in Eskom.

The Chairperson said that the question of the privatisation of Eskom was a discussion for another day.

Mr Figg asked whether Eskom exported any power. He also asked if any companies were getting discounted tariffs.

Mr Molefe said that Eskom both imported, for example from Mozambique, and exported. for example, to Zimbabwe - who paid up front - and Botswana.

Mr A McLoughlin (DA) expressed some concern about the management of the R60 billion allocated to capital expenditure in 2015/16. It was a huge amount and a huge responsibility. He noted that almost all the Eskom delegates at the meeting held positions in an acting capacity, which did not inspire great confidence in the stability of the organisation.

Mr Molefe said that in the past he had been responsible for as much as R900 billion, and expressed confidence in Eskom's ability to manage this expenditure well. He said that the appointment of permanent staff was being treated as urgent, and was confident that it would be achieved soon.

Mr McLoughlin asked for a statement of Eskom's total debt.

Ms Veleti said that it totalled roughly R298 billion, seen against Eskom's assets of about R457 billion. In 2005, by comparison, debt stood at roughly R20 billion, relative to assets of about R55 billion. This reflected the financing of asset-building through debt.

Ms S Shope-Sithole (ANC) expressed confidence in the current leadership of Eskom, and noted that its troubles reflected badly on Government as well. Co-operation and mutual support were crucial.

Mr Shaik-Emam asked for some clarity on the technicalities of how load-shedding schedules were determined. He also asked what exactly was a tube leak, and was there any way, in the longer term, that the impact could be minimised by, for example, developing local skills and technology?

Mr Molefe said that Eskom issued load-shedding requirements to municipalities, who were primarily responsible for the precise schedules in the different regions of the municipality. He explained that a tube leak occurred when a pipe in a boiler developed a leak. Fixing the tube itself was simple and quick, but powering down and powering up the boiler took three days. The way to lessen the impact of tube leaks was to install preventative maintenance systems that would give Eskom the ability to predict tube leaks and enable maintenance to be carried out during low-demand periods. The new plants being built had much better preventative maintenance systems.

Ms M Manana (ANC) asked about news reports that people were dying at the Medupi construction site.

Mr Molefe said that there was an illegal strike occurring, and an incident had occurred where returning workers were being intimidated by strikers, who had opened up fire on a group of returning workers who were waiting for transport to work. There had been two injuries, but no deaths. There had also been a bomb threat on Sunday, which had disrupted work, even though it had proven a false scare. He considered these sorts of irresponsible actions treasonous, given the national scale of the electricity crisis.

The meeting was adjourned. 

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