The Eskom/Nersa dichotomy our lawmakers should look into

Nersa effectively plans the core of Eskom’s financial performance as limitations on turnover and operating profits are set by Nersa.

What it effectively means is that Eskom is not allowed to expand and operate as a sound and independent business as the budgets and operational performance are effectively forced by Nersa’s significant influence.

Through Nersa’s influence Eskom’s future viability can and is severely hamstrung.

According to my analysis, based on Eskom’s own forecasts for the 2019/20 financial year, Eskom’s revenue and therefore earnings before interest, tax and depreciation and amortisation will be around R8billion lower as a result of Nersa’s determination.

Eskom budgets on revenue of 102.4cents per kW/* , while Nersa only allows for around 99c per kW/* .

With long-term borrowings at R450billion it will mean that Eskom’s operating profit for 2019/20 will fall short of the utility’s cost of servicing debt, let alone depreciation and amortisation.

It effectively means that Eskom is subsidising its customers to the tune of R8bn and more.

Interestingly enough, it boils down to that Eskom has to borrow R100bn in order for the utility to subsidise customers annually.

The other direct impact of Nersa and the R8bn subsidy is that the taxman will lose out on R2bn as Eskom’s losses before tax are R8bn more than if Eskom’s budgeted increase was allowed.

Yes, the taxman is contributing to the funding of Eskom.

So, from a fiscal point of view government needs to raise R20bn to subsidise Eskom’s customers annually.

Therefore a total R120bn needs to be set aside by Eskom and government for subsidies.

To me as Joe Soap it is a weird situation to say the least. The country’s economic growth is highly dependent on power supply.

Nersa calls the shots seemingly oblivious of the utility and the country’s financial position.

The Eskom debt holders, including the government, will effectively have to fork out approximately R25bn to subsidise Eskom’s customers over the next 3 years.

In addition, the tax man will be out of pocket by more than R6bn.

It effectively means that the holders of Eskom’s debt and the South African government are subsidising Eskom’s customers to the detriment of Eskom.

You just cannot keep on selling things at a loss – your bankers will say, no more. It also forces management by crisis from a technical and financial point of view and long-term planning goes out the door.

Little wonder that Eskom is currently a lame duck.

Reports emerged this week that for all intents and purposes Eskom is fundamentally insolvent and permanently impaired. Yes, the utility is broken.

A paradigm shift is necessary. The utility should be allowed to be run as a proper company and managed accordingly.

Nersa’s future role in Eskom’s outcome should be overhauled, otherwise the utility’s dark hole will just get deeper.

This vicious circle should and must end and a new dispensation be brought in immediately. It makes more sense that the government and Nersa determine the power price increases.

The shortfall of the market rates (Eskom’s long-term survival tariffs) and what the government and Nersa determine should be recouped from taxpayers in some or other way – energy tax or an increase in VAT.

Thereby all users and specifically the non-payers will contribute to a revival/survival of Eskom and the country’s economy.

The opposition parties’ lack of understanding of Eskom and effectively the country’s position is particularly worrying.

They probably have all the available facts and numbers.

The government has no other option but to stand in for Eskom’s debt to ensure that the utility does not default on its loans or to postpone a possible default.

To starve Eskom from much-needed funds now and punish the utility for what resulted in this woeful position are not only unreasonable but also irresponsible.

What is true, though, is no more hiding of the truths, please.

No more wishful thinking.

Eskom is the economy and the economy is Eskom.

I believe that the government is committed to fix Eskom once and for all. The stakeholders and the country had enough of explanations year after year of what went wrong.

The survival/revival of Eskom will be painful for all, but we have to bite the bullet.

Things must be done differently and Nersa is probably a starting point.

Ryk de Klerk is analyst-at-large. Contact [email protected] His views expressed above are his own. You should consult your broker and/or investment adviser for advice.

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