It seems there has still not been enough of a load-shedding shock to get any action on Eskom.
The economy hasn’t fallen off a cliff in the first quarter and we have seen inherent robustness of the private sector. There appears to have been limited impact on party polling.
So, no problem?
The problem is exactly that this robustness breeds complacency (paralleling complacency on the unemployment and inequality crises) among policymakers.
Yet, it is, I think, worse than that. Energy experts have fully laid out in public in the past month the lack of wider energy policy coherence. Yet, zero action has been taken.
Analysts, investors and many parts of the media seem to think we are dealing with a simple government policy formation, deployment and implementation machine, but this is not the case.
Instead of productive panic, complacency is mixed with internal political factional battles, a blurring of party and state, rent extraction elements clinging on, ideological lead weights, egos and personality clashes, micro-fiddling, a deep fatigue and a strange “Eskom cognitive dissonance syndrome”. This is a toxic mix where policy and optimal strategies come far down the pecking order.
This goes beyond the need for polite discussions with alliance partners. It is important to unpack this mix because the lazy consensus to assume after the elections is that the deep threat of the financial and operational challenges at Eskom will suddenly unblock and magically Eskom will be solved.
How, given all the above, can this be achieved? There are some simple and obvious ways.
The deployment of a massive amount of political capital through effective leadership to unblock, riding over ideological bonds, breaking with cognitive dissonance.
Eskom should be moved from reporting to the department of public enterprises to national treasury directly. The idea (for it is still only that) of having a chief restructuring officer is a halfway house to this endpoint already.
The Nedlac process for consultation on the integrated resource plan (IRP) should be cancelled and a new least-cost version audited by the CSIR should be approved by cabinet, with emergency procurement of unlimited renewables (taking as much as possible at a set price of, say, 60c/kWh) within two months.
The key thing we wait for after the elections is leadership on Eskom and energy policy that is credible and comprehensive, that wraps together credible, conditionality based, de-risking of Eskom with international development finance institution funding of the just jobs transition and a credible least-cost IRP that reduces electricity bills while stimulating growth.
Is this going to happen? It seems unlikely.
First, the financial need will be so pressing in the six weeks after the election to achieve going concern that everything else will be thrown out of the window. Eskom must have a new bailout 2.0 by the time it publishes its 2018/19 results towards the end of June to achieve going concern, which at this rate with the Nersa tariff award, it will not have. Add to that the recent evidence of liquidity problems at the end of March.
Going concern is not the be all and end all for dedicated emerging markets investors who understand the legal blockages in accelerating debt. However, for other creditors and companies and the public using electricity it is a dramatic event to have auditors declare that the entity is unlikely to be functioning in a year’s time. The sentiment shock would be seismic.
Second, the ideological fissures are too deep at too high a level when mixed with personality conflicts. There is a core belief, I believe, in much of policy-making land that as Eskom provided cheap electricity for so long, it can be part of a command-and-control developmental state solution, can solve all social and other problems, including transformation, and as such, while it may need to be unbundled, it is, at a very fundamental level, “okay”. This is what “Eskom cognitive dissonance syndrome” is – trying to change it while not changing anything at all.
Therefore, renewables are still viewed suspiciously, something Eskom should really be doing – a nice-to-have around the outsides of the energy system but not something at its core.
The same circular discussions about bailout 2.0 will still be had after the election, especially if the faces are unchanged, with the ANC’s national executive committee acting as a check on the whole process and rent extraction elements circling.
What we are likely to end up with is a bailout with minimal conditionality, given that any credible conditionality will be politically impossible.
Yet there is a key need for conditionality on a de-leveraged Eskom, more so given that the utility could issue to investors in massive size, unguaranteed at tight spreads, immediately after such de-leveraging. A low-leverage Eskom can be dangerous. Why the need for cost restraint, for not paying more for politically connected coal contracting? Why not offer large wage increases, or become the centre of building renewables?This all becomes more affordable with slashed debt service costs – and is why conditionality is needed to deal with overstaffing, mothballing expensive capacity, cost control and other oversight restrictions. But more clever conditionality would also include ensuring wider energy policy coherence.The urgency of the Eskom financial crisis can arrest the fatigue of policy makers. The fatigue of the operational issues, however, may be more challenging to shift, maybe impossible, and is why a much wider energy policy shift is urgently needed right now that overcomes the complacency and cognitive dissonance.• Attard Montalto is head of Capital Markets Research at Intellidex.