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Eskom business-model review aimed at lowering utility’s risk to fiscus

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Eskom business-model review aimed at lowering utility’s risk to fiscus

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Public Enterprises Minister Pravin Gordhan

24th May 2018

By: Terence Creamer
Creamer Media Editor


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Public Enterprises Minister Pravin Gordhan has confirmed that the business model of power utility Eskom is up for discussion as government seeks to reduce the fiscal risk currently posed by the utility and to reposition the State-owned enterprise (SoE) for future sustainability.

On his eighty-sixth day in office, Gordhan announced that Cabinet had endorsed sweeping changes to the boards of Eskom, Transnet, Denel and SA Express (SAX). He also confirmed the appointment of Phakamani Hadebe as Eskom’s permanent CEO.


A vocal advocate for the clean up of SoEs since his dramatic late-night removal as Finance Minister by then President Jacob Zuma on March 30 last year, Gordhan recently outlined his plan for the “recapture” of South Africa’s State firms, which have been at the heart of so-called State-capture allegations.

Besides dealing with corruption and stabilising the financial and operational positions of the SoEs, Gordhan wants the new boards to “look to the future” and “position these institutions for the next five to ten years”.


“For example, the energy terrain is changing every day. There are people getting off the grid . . . If you remain static, on the basis of a view developed five years ago, then, like any other business, you will run into trouble.”

Gordhan pointed to companies such as Nokia, Kodak and Motorola as companies that had failed to fully transform with the markets they served.

However, he stressed that Eskom was, in the first instance, an implementer of policy developed by the Department of Energy and adopted by government.

“That policy is articulated in the Integrated Resource Plan (IRP). A new IRP is due sometime soon, as Energy Minister Jeff Radebe has announced. It is in that context that Eskom will assess its role and the board will then determine how Eskom is to implement the decisions made in that regard.”

Nevertheless, when assessing the business model of Eskom and other SoEs, boards would have to review whether “structures actually match strategy and the objectives we have set for ourselves”.

“The overall objective is to reduce Eskom’s risk to the fiscus and that is the work in progress. Perhaps in the next two months the board would have had enough time to look into some of these issues, as would we and government more generally and our aim is certainly to reduce Eskom as a risk and turn Eskom into an asset as far as the fiscus is concerned.”

The repositioning of SoEs as “instruments of economic development” was also the rationale given for Cabinet’s approval of the establishment of a Presidential State-owned Enterprises Council (PSEC) to be chaired by President Cyril Ramaphosa.

The PSEC, Cabinet said, would provide political oversight and strategic management, with a focus on strengthening the governing framework of SoEs and ensuring that specific interventions were implemented to stabilise these companies. The membership of PSEC will comprise relevant Ministers, as well as experts, labour and civil society. 

In a recent presentation, Hadebe said Eskom’s comprehensive long-term strategy should be finalised in September. He said there was mutual agreement between management and the board that “things will have to be done differently, if we are to ensure that this institution is sustainable”.


Hadebe did not offer details, but said that revenue maximisation, the resolution of Eskom’s R13.5-billion municipal debt problem, as well as Eskom’s high costs were receiving attention.

Several energy commentators have cautioned that Eskom is facing a “utility death spiral”, which could only be overcome through radical restructuring, including the vertical separation of Eskom’s generation assets from its transmission and distribution businesses.

However, the National Union of Mineworkers expressed deep scepticism on Thursday about the restructuring proposals, warning that the board was preparing the entity for privatisation.

"Their strategy of saving the precarious balance sheet of Eskom is to sell off government tangible assets worth R638-billion, which constitutes 84% of Eskom’s asset base," the union said, while describing Hadebe's appointment as an entrenchment of a "New Deal agenda which is a vehicle for privatisation paraded as an economic solution for the country".

Gordhan said his department was working with the Eskom board to address the municipal debt issue, as well as some anomalies in the pricing of power to certain municipalities. There were instances where, if municipalities exceeded a certain maximum demand threshold, they were heavily penalised through the tariff.

However, once the pricing and other technical issues were resolved, progress would depend on “political will”, including a willingness to engage with communities to explain Eskom’s pricing and what was required for the utility’s sustainability.

“I think we have a reasonable grasp of the issues and we must now get down to not just the talking, but making some moves to cut, this is an unfortunate pun, the ‘Gordian knot’ so that we can start a process of transformation around municipalities themselves.”

Despite the reputational risks associated with serving on SoE boards, Gordhan said it had not been difficult to find board candidates, adding that there had been a strong response to a recent advertisement calling on potential nonexecutive directors to forward their names for possible inclusion on an overhauled database of potential board candidates.

“We get ‘Thuma Mina’ offers literally every day,” he quipped, referring to the much quoted ‘Send Me’ theme of Ramaphosa’s inaugural State of the Nation Address in February.

However, he also stressed that, as shareholder, government had the power to intervene to change boards should evidence of “malfeasance or impropriety” arise. The mechanism for addressing concerns around board impropriety was Section 71 of the Companies Act, which deals with the removal of directors.

The legislation had been employed during recent changes to the Transnet, Denel and SAX boards. “So, if anything extraordinary arises, there are legal mechanisms, not arbitrary mechanisms, to ensure we can get the right things done.”


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