February 8, 2019
By Alexander Winning and Joe Brock
JOHANNESBURG (Reuters) – South African President Cyril Ramaphosa’s plan to split struggling state power utility Eskom is a positive show of intent to investors but a lack of detail has raised market concerns that concrete change will take years to deliver.
Eskom, which produces over 90 percent of South Africa’s electricity and employs 48,000 people, is a lynchpin of Africa’s most developed economy but is drowning in $31 billion of debt.
Facing a parliamentary election on May 8, Ramaphosa said on Thursday that to avert an economic crisis, Eskom’s generation, transmission and distribution businesses would become separate entities.
Crucially, Ramaphosa added that the newly created units would remain under an Eskom holding company, meaning its inefficient and unwieldy monopoly would remain.
He also said another Eskom bailout would be laid out in the budget later this month.
What markets were hoping for was the creation of three independent companies that could more easily cut costs, raise finance and be partially privatized in the future.
Most Eskom dollar-denominated bonds eased very slightly on Friday, with the 2028 bond softening 0.1 cent to trade at 103.22 cents in the dollar. However, Eskom’s bonds had chalked up stellar gains in previous weeks, with many issues seeing their best monthly gains on record.
“The risk is very little will change in this structure,” said Peter Attard Montalto, head of capital markets research at Intellidex.
“The intention may well be to have this as a first step and then separate out after that from the umbrella. However, we think the market underestimates how complex this separation process will be,” he added, forecasting it could take two years.
Even if Ramaphosa intends eventually to create independent units that could be partly sold off, he will face fierce resistance from left-wing elements of the ruling African National Congress (ANC) and powerful trade unions.
The ANC is expected to win May’s election but Ramaphosa will need the support of a united ruling party and union allies if he is to deliver the decisive victory that would give him a mandate to push through unpopular, but much-needed, reforms.
The two largest unions at Eskom, who say they account for half of the utility’s workforce, said on Friday they would fight Ramaphosa’s plan, with one calling it a “war”.
In the short term, Ramaphosa will need to raise Eskom’s revenues and cut its debt if he is to delay inevitable job cuts until after the election. That means tariff increases and bailouts that are toxic with voters.
“I agree with Mr. President that we need drastic action, but we can’t be paying for them screwing up all the time,” said Thokozane, a taxi driver in Johannesburg.
“If they have to cut jobs, it is sad, but we can’t go on year after year with these bailouts and tariffs.”
Ramaphosa is also trying to hold together the ANC to avoid the fate of his scandal-plagued predecessor Jacob Zuma, whom he ousted a year ago in a bitter internal battle.
The anti-apartheid liberation movement remains deeply divided between socialist and reformist elements, and Ramaphosa faces resistance from a powerful pro-Zuma faction.
A task team formed by Ramaphosa to create a reform program for Eskom recommended more market-friendly policies than were announced, however a backlash from left-wing members of his cabinet saw the plans diluted, an ANC source said.
“Ramaphosa’s opponents will be obstructing him every step of the way with his plan for Eskom,” said Darias Jonker, director for Africa at Eurasia Group, a political risk consultancy.
“This is yet another proxy war involving entrenched interests linked to the Zuma faction in the ANC.”
It is likely Ramaphosa will avoid major job cuts at Eskom until after the election, while the details of restructuring could be delayed so as not to rile allies, analysts say.
But with Eskom expected to lose more than $1 billion a year this year and next, there is only so long Ramaphosa can delay reforms without risking economic malaise, investor departure and credit rating downgrades.
“The Eskom issue needs a clear resolution, and we did not get that yesterday,” said Jonas David, strategist at Swiss bank UBS.
“Eskom is a big concern for us.”
(Reporting by Alexander Winning and Joe Brock; Additional reporting by Karin Strohecker in London; Editing by Dale Hudson)