Eskom: Update on the unbundling process

Meeting report

The Chairperson welcomed the Committee members, the Director-General (DG) of the Department of Public Enterprises (DPE) and the team from Eskom. The meeting would deal with the unbundling of Eskom.

A new Member, Mr A De Bruyn (FF+, Free State), joined the Committee.

Apologies were noted from the Minister, who attended Cabinet; the Deputy Ministers, who were attending Portfolio Committee meetings, and Ms M Mokause (EFF, Northern Cape).

Mr Kgathatso Tlhakudi, DG, DPE, said that the Eskom team would be briefing the Committee on the progress that they are making with the restructuring of the business. At the 2019 State of the Nation Address (SONA), the President called for the restructuring of Eskom, for the unbundling of the entity into three wholly owned businesses: Generation, Transmission and Distribution. The first leg of this process has been to set up the Transmission business. In this process, some of the corporate functions and people linked to those centralised functions have been relinked to the separate businesses. It is anticipated that by the end of this financial year, there will be progress with setting up the Transmission business as a wholly owned subsidiary of Eskom. The Transmission business is a very critical component as the entity that links up the generators of electricity with the market, be it residential or business customers. This effort is being made by an Intergovernmental Steering Committee which has the DG’s of the Department of Mineral Resources (DMRE) and National Treasury as part of the committee. For all of these entities to be able to function properly, there are regulatory hurdles that need to be overcome. There is also the issue of the finances of Eskom that needs to be addressed. Government has played a role in terms of guaranteeing the loans that Eskom has taken out, as a result, government is very much linked to those guarantees. So how they get managed going forward is very critical.

Presentation: Briefing on Eskom Unbundling Process
Mr André de Ruyter, CEO, Eskom, said that the critical element of the restructuring is moving towards legal separation. It is crucial that they get this right. One of the elements that they would like to share with the Committee is that they as Eskom are doing everything that they can to expedite this. They are forging ahead with as much speed as they can muster. However, they will point out that they are also heavily dependent on policy makers on the regulatory decisions that are being made. They are reliant on those decisions in order to meet the timelines set by the DPE in their roadmap for a restructured electricity supply industry in South Africa.

· Timelines for the unbundling (see presentation, slides 3-5)
Mr de Ruyter, said that Eskom is currently a vertically integrated utility. It is common cause and widely accepted that this is an outdated business model that Eskom needs to change to enable it to move to a model that is more in keeping with worldwide trends in the utility business. They have therefore commenced a process of functional separation, which is part of the divisionalisation, that was completed more than a year ago with the establishment of divisional boards and managing directors in March 2020. There has been good progress in establishing the functioning of the three divisions, and establishing a good separate culture for each of the divisions with proper accountabilities being attached to them; while observing good governance and ensuring that they abide by the requirements of legislation, including the Public Finance Management Act (PFMA).

Eskom has also completed “Functional Separation”, which has included the relinking of 6 700 employees from various head office functions into the three businesses. This has capacitated the three divisions and has put them in a position where they are able to function relatively independently within the businesses but still within the bounds of the functional leader operating model. This is intended to ensure that they can deliver economies of skill and scale, that the three divisions operate within the bounds of the overall Eskom strategy as approved by the DPE – their shareholder department  – and ensures that there is discipline in the allocation of capital and human resources.

The next step that is being embarked on is to complete the “Legal Separation” that is setting up separate legal entities for each of the three businesses (Generation, Transmission and Distribution). Legal separation of Transmission, has been prioritised and will be completed by December 2021. It is anticipated that Generation and Distribution will be completed by December 2022.

Mr Vuyo Toko, Group Executive: Transformation Management, Eskom, said that part of the process of unbundling has a lot of dependencies across the key government departments that interface with Eskom. [Slide 5 illustrates the context for the Intergovernmental Steering Committee.] It was important to set up a platform as a way of accelerating all of the dependencies that are required as part of achieving legal separation. (slide 6)

· Cost implications and where funding will come from (slide 8)
Mr Calib Cassim, Chief Financial Officer (CFO), Eskom, said that the high-level estimated cost to complete the legal unbundling was R500 million. This is broken down into three main areas:

42% is allocated to Information Technology (not only for Transmission but also for starting the process for Generation and Distribution)

26% is allocated to lender engagements. This requires a significant effort to change contracts to determine where the debt would be allocated [between the three divisions for the future.]. This needs to be done in a manner to avoid any defaults that may occur when restructuring and to avoid leaving the lender in the same position in the post-unbundling environment they were in pre-unbundling.

22% is required for establishment of entities.

· Impact this will have on service delivery to provinces (slide 10-11)
Mr Monde Bala, Managing Director: Distribution Business, Eskom, said that with the Distribution business there has been no notable impact on the functional separation because this has just been an internal realignment within Eskom, so there has been no negative impact on the quality of service.

In terms of legal separation, there are two risks. Firstly, the continuity of the retail services to large industrial customers and municipalities that are directly connected to the Transmission grid and which are currently managed by Distribution. Secondly, the reliability and continuity of supply, mainly related to those networks that would be supplying customers linked to the Transmission system. These risks will have no major impact, as they will be mitigated through continued support in terms of service level agreements (proposed mitigation, slide 10)

· Implications of municipalities sourcing energy from Independent Power Producers (IPPs) on the unbundling process (slide 13-15)
Mr Segomoco Scheppers, Managing Director: Transmission Business, Eskom, said that the policy directions are moving away from the vertical integrated monopoly and single buyer model. (see table, slide 13).

Considering the impact on Eskom and the Transmission subsidiary to be established, it is clear that there will be impacts based on the policies that have been pronounced regarding municipalities. These allow other parties to contract directly with each other and an increase in self-generation is anticipated. [If municipalities generate electricity themselves, or buy from independent power producers, less is bought from Eskom.] It is important to understand the implications of the policy changes and find ways to mitigate potential negative impacts. There are a number of areas requiring change, for instance the structures of the current tariffs—because these would no longer be appropriate for how they would be operating as an electricity supply industry. In addition, an appropriate market system would be needed, to ensure that the system is sustainable.

The impact is loss of revenue for Eskom and the potential costs for customers. (slide 14)

The combined policy decisions are well underway to industry reform. (slide 15)

Discussion
Ms W Ngwenya (ANC, Gauteng) said that there had been a number of cases of labour unrest in the country, with different reasons cited by each institution. Most of the time, when the restructuring process gets announced, it has the potential to create labour unrest. She asked if the labour desk or union representative at Eskom has been consulted on the unbundling process. What is the general feeling from the workers? What will the immediate benefits be for them after the unbundling process has taken place? Do they have sound labour relations? In terms of the board members, she asked if Eskom would be appointing a separate board for each entity or if a single board would be in charge of all three entities. How would the board be remunerated once the entities start operating? Would the unbundling process of Eskom accommodate the IPPs and how will that process be managed? In terms of the roadmap of the DPE, she asked if there had been any challenges related to the implementation of the restructuring of Eskom, and what those challenges were.

Mr A Arnolds (EFF, Western Cape) said that the challenges faced by Eskom were well documented. The Commission of inquiry into state capture has revealed how Eskom was captured. The unbundling of Eskom is in no way a solution to Eskom’s challenges. He asked if the Committee can be assured that it is only a breakup and not a planned privatisation, because Eskom must remain state-owned. Any restructuring process impacts the workers, in terms of job losses and the morale of staff. He asked what Eskom was doing in terms of staff morale. In terms of the labour engagement, he asked for an indication on when that will be completed. In terms of the cost estimates for the legal unbundling, he asked if there are any unforeseen costs in those estimates. How will Eskom deal with the impact of lost revenue when municipalities buy directly from IPPs? He further asked for an update on Eskom’s recovery plan on how they would deal with aging equipment, as well as an update on the divisional boards and managers that were appointed.

Ms L Bebee (ANC, KwaZulu Natal) commented that one can see that something is coming out from Eskom’s turnaround strategy. It will not happen overnight but one can see the strides and that something is happening. She asked how the unbundling of Eskom would affect the employees and if they are expected to make adjustments in terms of moving with each of the three divisions. She asked about the position of Eskom’s union representatives regarding the future of Eskom employees. Are they happy with the unbundling process? For clarity, she asked if the two divisions, namely the Transmission and Distribution will still be state-owned or if they will be private sector participants. If they are private sector participants, she asked if such an arrangement would further increase the price of electricity and possibly even do away with the free electricity given monthly to indigent households in the form of rebates. She commended Eskom for the detailed presentation and said that the Department did a good job.

Ms T Modise (ANC, North West) asked how the unbundling process of Eskom will help reduce its debt obligations and whether this process will lead to staff members being given severance packages or being retrenched. Over the past few years, Eskom has been experiencing financial challenges. She asked if there has been any adjustment in the remuneration of its executive directors, with regard to the payment of bonuses, pension or incentives. In other words, do they still continue to enjoy the same benefits that they use to have previously?

The Chairperson referred to the legal unbundling and asked about the progress of the legislative amendments because these would have to be processed through the National Assembly and the National Council of Provinces (NCOP). If the amendment of the Bills is not moving, then it could stall the unbundling process. In relation to the recovery of money lost through state capture and corruption, he asked that Eskom give an update on how far are the cases related to that. He further asked that Eskom provide the Committee with a brief overview on load shedding and the progress related to its maintenance.

Response
Mr de Ruyter said that a number of Members raised questions on labour and consultations with labour. These consultations have been taking place for quite an extended period of time and they have explained the process, where as recently as the previous week, there was a session on the Tuesday evening from 6pm until 9pm informing the unions of various matters relating to Eskom including the restructuring and unbundling. With any restructuring there naturally are concerns from stakeholders that their interests might be impacted. In this particular instance, the Eskom position is very clear. They will not engage in any forced retrenchments. They have taken that stance in order to protect jobs during this transition period and intend to avoid any section 189 retrenchments under the Labour Relations Act. This is an indication of the seriousness with which they approach the interests of those colleagues at Eskom who belong to the three recognised unions. Eskom is in the process of engaging with unions in their collective bargaining forum on potential wage increases. Those negotiations are ongoing. When these negotiations take place, the tensions may become somewhat elevated but at this point in time, Eskom enjoys cordial and good relations with their unions and they engage with them in an open and constructive manner. They are confident that they are able to maintain this relationship going forward.

He referred to the questions on board members and said that at the moment the three divisions are staffed entirely by existing executives in the organisation. These executives do not receive any additional remuneration or emoluments for their duties as board members of the three divisions; so there has been no increase in cost whatsoever. Moving forward, because of the requirements for the Transmission company, in particular, to be able to demonstrate its independence, there is a possibility that the Transmission board may be populated by externally appointed board members.One would anticipate that those appointments would be made by the relevant Minister and could have a modest cost implication. It is important to achieve the objective of demonstrating the independence of the Transmission business. The independent transmission market and system operator [would need to prove] to stakeholders that governance is obviously independent. Should that decision be taken, it would be in keeping with the generally accepted principles that apply to state-owned enterprises.

One of the reasons that is articulated in the roadmap for the unbundling and restructuring is to encourage new private investment in the Generation sector through IPPs. This is one of the reasons why it is so crucial to be able to demonstrate independence in the governance of the Transmission business. This is why Eskom is setting itself up to be able to work with their Generation colleagues, so that they can also conclude their purchase agreements and transact with the Transmission business on an arm’s length basis in anticipation of more of these contracts with IPPs being concluded. This is exactly the objective that is anticipated and envisaged by the roadmap as articulated by the DPE. In terms of challenges in the implementation of the roadmap, it is indeed an ambitious ask in terms of the timelines. The typical timeline for restructuring of this magnitude is a number of years and, without indulging in self-praise, it is suggested that, so far, Eskom is moving very expeditiously in concluding the restructuring process along the timelines required by the roadmap. So, Eskom is on schedule. It had, however, highlighted some of the schedule risks, particularly in terms of concluding the necessary legislative amendments. These will be addressed inter alia by the Intergovernmental Steering Committee.

In response to Mr Arnolds’ question on privatisation, Mr de Ruyter said that at this point in time, there is no intention [of privatisation]. This is reflected in the way in which they are approaching the restructuring. It is anticipated that all three of the divisions will be wholly owned entities under Eskom Holdings SOC. There is no provision made in the internal restructuring plans for any private sector participation by means of equity in any of the three divisions. In terms of the cost estimate, as the CFO has said it is  a “high-level”, order of magnitude estimate. There might be variations, but these are not anticipated to be very significant. Therefore Eskom will be able to achieve the necessary restructuring within the estimate indicated. Should there be changes, Eskom will inform the Committee as soon as that becomes apparent. At this point, given that there is limited definition on all of the activities, they are comfortable with the cost estimate that they have put forward. If municipalities buy directly from IPPs, Eskom will lose revenue. One of the elements that needs to be covered would be an appropriate unbundling of the Eskom tariff, so that there is a discreet Generation, Transmission and Distribution charge. This is also an important regulatory intervention that Eskom have engaged on with the National Energy Regulation South Africa (NERSA). Should there be unbundled tariffs, then the Transmission business would be able to recover the cost of wheeling electricity from an IPP to the municipality in question, so the revenue will be appropriate. If a municipality were to rely on Eskom as a backup supply, they would anticipate that they would have a tariff that would allow for a capacity charge as well as an energy usage charge. If Eskom is required to maintain significant amount of infrastructure and generation capacity to act as a virtual battery, in the event that a municipality or any other consumer wishes to access the Eskom grid, then they would want to recover the cost of maintaining this standby capacity from the municipality in question so that they are not disadvantaged by this particular approach to allow municipalities to buy from IPPs. Of course, if municipalities are entirely independent from Eskom and do not require any of Eskom’s generation capacity under any circumstance, then they also do not have to incur the cost to keep the generation system available for them.

In terms of the equipment which also relates to the question of load shedding, Eskom does have aging equipment. The average age of their equipment, excluding Medupi and Kusile, is in excess of 40 years. Eskom plant is in a fairly poor condition. They are doing catch-up maintenance, that is the reliability maintenance recovery programme, which is progressing well. They anticipate that when they have completed the second charge of units that they maintain, by the end of the third quarter of this year, that there will then be a significant reduction in the risk of load shedding but not an entire elimination of that risk. The only way that they can structurally eliminate that risk is by adding new capacity to the grid. Hence Eskom welcomes the continued efforts of the DMRE to add new capacity to the grid, by means of various IPP programmes.

In response to Ms Bebee’s question on the impact of employees in moving to divisions, he said that their terms and conditions of service will not be impacted. Their pay-slip at the end of every month should still say “Eskom”. They do not anticipate a change, even though there may be a move from Eskom Holdings SOC as their employer to, for example, Eskom Generation Pty Ltd as their employer. The conditions and terms of service will not be affected by this. In terms of the long-term strategy with regard to Transmission and Distribution, at this point all the divisions will be wholly owned by Eskom Holdings SOC.

In response to Ms Modise, he said that Eskom do think there might be opportunities for them to optimise their debt. They will portion roughly half of the Eskom debt to their Generation business and the balance in equal transfers to both Transmission and Distribution. The Transmission business, in particular, is a business which is highly regarded by lenders. It has a very stable cash flow and it also has very good assets. They therefore anticipate that the debt capacity of the Transmission business would be very attractive to lenders and would also be of a lower risk than the Generation business. So, as the debt matures and as it gets allocated to the various entities, there might be an opportunity to optimise the cost of their debt and access more concessional debt. This is particularly, with regard to the fact that in order to accommodate all of the IPPs, they are anticipating that they will have to build over the next ten to fifteen years in excess of 8 000km of new transmission line, predominantly to the Northern Cape and Eastern Cape, at a cost of about R120 billion. The Transmission entity will have to approach the markets to fund that. Eskom thinks that, because this will predominantly be used to access low carbon electricity, they will be able to make use of concessional or green financing, in order to support this expansion programme. In terms of the bonuses, incentives and salaries for executives, the managers in Eskom have for the past three years not received an increase, nor have they received bonuses, except for where as part of their salary structure, they have been provided for a thirteenth cheque. But there has been no payment of an incentive bonus. Salaries overall have come down. Mr de Ruyter said that his own salary is 20% lower than that of his predecessor. It is fair to say that Eskom executives are not excessively remunerating themselves. They are subject to their own People and Governance Committee to verify remuneration. They are also subject to oversight by the DPE.

A quick update was given on the recovery of state capture monies: Eskom has recovered: R1.1 billion from McKinsey; R1.577 billion from ABB; R171 million from Deloitte Consulting and they are in the process of recovering about R108 million from PwC. Eskom has launched a claim against 12 former Eskom executives, board members and members of the Gupta family for the recovery of about R3.8 billion of misappropriated money. Eskom has launched a number of claims to recover about R1.2 billion excessively paid for fuel oil. A lot is being done to recover monies lost through corruption. Mr de Ruyter said that he had noticed that there were certain energy commentators who said that Eskom was not doing anything, but the score board reflects a different story. They are really doing their upmost to recover the proceeds misappropriated from Eskom through state capture and corruption. Eskom also laid as many as 110 criminal charges with the law enforcement authorities, where two former Eskom executives have already been arrested and appeared in court. They look forward to more arrests being made. Eskom has also recently suspended a senior executive in their primary energy division, whose bank account, containing about R11 million, was attached by the Asset Forfeiture Unit (AFU).

Mr de Ruyter said that the DG would comment on the policy related matters.

Mr Tlhakudi said that on the policy side, the work that was seen from the organogram that was shared by Eskom [slide 5], has been led by the DMRE. It is very much on the critical path and some of the amendments that they need to put in place is that the energy policy needs to be amended, to enable the Transmission business so that it interfaces with the rest of Eskom. They also need to have the Electricity Regulation Act looked at for that very reason. They have timelines that extend beyond December 2021 going in to the end of the financial year for some of the changes that need to be made. These are very tight timelines. As soon as they are able to get through the restructuring, it will bring some semblance of stability and enable the changes within Eskom for the better. At some point the Eskom team will come back and provide the Committee with much more detailed information in this regard.

Timelines are quite compressed. The President made the call in the 2019 SONA to look at restructuring Eskom. It is two years down the line and looking back they have travelled quite a way. It is critical that they are watching the first milestone of the Transmission company being setup. In response to the question on the privatisation of the unbundled entities, the message is very clear from the President that at this time, these three entities that will be materialised from the unbundling will be 100% owned by Eskom. So, Eskom will be the holding company that will have 100% ownership of these three entities. On the Generation front, there has been an announcement from the DMRE with regards to some of the new capacity required that has been alluded to private players. There has been quite a bit of room in that space for the private sector to play a role. To a certain extent, on the Distribution side, the municipalities are working very closely with private players, which is a logical evolution of the electricity market. Of course, due to the criticality of the Transmission business, government would always want to own it 100%. It also plays a quasi-regulatory type role by virtue of the access that it provides to various players on the grid. Eskom will receive further guidance from its principals as the process unfolds, but for now the message remains very clear that Eskom remains a wholly state-owned business and so will its subsidiaries.

Further Discussion
The Chairperson thanked the CEO and DG for their responses and the clear update in terms of how far the unbundling process is. He asked if the members had any follow up questions.

Mr Arnolds referred to the 8 396 workers and asked if this was the current number of workers who have been relinked to divisions. [slide 4]

Mr de Ruyter replied that, yes, that was the current status.

The Chairperson agreed with the DG that the Committee would need an update on the issues relating to the policy matters. The Committee will also keep on requesting for an update on the unbundling for oversight. On a quarterly basis, the Committee will request Eskom to come back and give an update until the unbundling process of the three entities is finalised. The Committee and NCOP has a role of assisting Eskom, especially in policy and they will be readily available. That is why they request the update so that they are not under pressure with the amendments that need to be completed. He said that the Committee appreciates the work that has been done in the recovery of monies. Eskom needs to continue so that any money lost due to state capture and corruption is recovered. Whatever is recoverable must be recovered. If possible, it is wished that the country can have a winter without any load shedding, and if there is load shedding that it is minimal. He thanked the DG and CEO and said that the Committee would expect to see them for an update on the very important process of unbundling.

The Chairperson referred to the minutes from the previous week, 19 May 2021, and the report on Budget Vote 30 from the previous week’s session with the Department of Communications and Digital Technologies, which needed to be adopted. 

Ms Bebee moved for the adoption of the minutes for 19 May. Ms Modise seconded.

Ms Bebee moved for the adoption of the report on Budget Vote 30. Ms Modise seconded. Ms Ngwenya also seconded the adoption of the report on Budget Vote 30.

The meeting was adjourned