Eskom breakup could begin with spin off of transmission unit

South Africa, under pressure to save loss-making power utility Eskom, should quicken the process of spinning off one of its units as a first step toward overhauling its operating structure, according to two people familiar with the options being presented to the government.

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Eskom, which supplies about 95% of South Africa’s electricity, is buckling under R440 billion ($29 billion) of debt and relies on government bailouts to remain solvent. President Cyril Ramaphosa said in February that the utility would be split into transmission, generation and distribution businesses under a state holding company, which would make them easier to manage, but the process stalled while details were ironed out.

The government could set up a shell company to house Eskom’s transmission assets, appoint a board and simultaneously take other legal steps to prepare for its ultimate separation into a new entity, said the people, who spoke on condition of anonymity because they aren’t authorised to comment. The transmission unit is regarded as the utility’s most financially viable, with an ability to charge independent power producers for connecting into the national grid.

Eskom executives last week presented senior managers with a plan that would entail breaking up the company over as long as five years, with the three units being spun off in parallel processes. The transmission unit could be split off first within a year to 18 months, one of the people said.

Any form of breakup is opposed by labour unions that fear it will be the precursor to privatisation and job losses.

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One of the people favoured putting a board and key personnel in place to oversee the transmission unit now, because it would allow Eskom’s management to focus on other operations, and delaying the process could undermine faith in the government’s commitment to reorganise the utility.

A third person, who is also familiar with the reorganisation options and spoke on condition of anonymity, said there would be resistance, even within cabinet, to spinning off Eskom’s transmission unit soon and a phased approach would be considered preferable.

The Department of Public Enterprises is due to publish a policy paper on Eskom’s reorganisation this month and isn’t commenting on the timeline until it has been released. Issues that will have be addressed include how to apportion the utility’s debt between the three units and securing bondholder approval.

Debt reorganisation

The government plans to give Eskom R128 billion in bailouts over the next three years, adding to its own debt and widening the budget deficit. Besides determining how to break up the utility, decisions must also be made about how to reorganise Eskom’s debt.

One option is to transfer some of it onto the state’s own balance sheet, a move that would require backing from all its bondholders, according to one of the people. Another is to request owners of the debt to voluntarily agree to it being transferred into a special purpose vehicle, and then persuade development-finance institutions to refinance it on more favourable terms with the utility agreeing to shift to more environmentally friendly forms of electricity, they said.

The National Treasury last week published a policy paper outlining its own proposals for fixing Eskom, including selling some power plants. It also suggested that the government allow households and businesses to sell excess electricity generated through solar panels back into the grid.

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