Ramaphosa Unveils Rescue Plan for South Africa Power Utility

(Bloomberg) -- South African President Cyril Ramaphosa vowed to rescue the ailing state power utility by providing it with financial support and splitting it into three entities after it suffered massive losses and piled on debt.

Eskom Holdings SOC Ltd. will be split into generation, distribution and transmission businesses under a state holding company, enabling each unit to manage its costs more effectively and making it easier for them to raise funding, Ramaphosa said Thursday. He didn’t specify how much money the government will give the utility, saying details will be provided in the budget later this month.

“Eskom will need to develop a new business model,” Ramaphosa said in his annual State of the Nation address in Parliament in Cape Town. “This we will do without burdening the fiscus with unmanageable debt.”

Ramaphosa Unveils Rescue Plan for South Africa Power Utility

The company is seen by rating companies as a key risk for Africa’s most-industrialized economy, with blackouts and huge debt a drag on growth prospects. It’s struggled to produce enough power with old, unreliable plants even as demand has declined.

“For us what is important is, as the president indicated, if we don’t take these tough decisions, the repercussions of not taking action are more severe,” Eskom Chief Executive Office Phakamani Hadebe said after the speech.

Operational Performance

While breaking up Eskom may make it easier to manage and improve its operational performance, it won’t immediately address its financial woes, with the company sitting with 419 billion rand ($31 billion) of debt.

The reorganization is risky for Ramaphosa. The unions who helped the former labor leader rise to the presidency oppose the move because they say it will lead to job losses and privatization. South Africa is expected to hold elections in May, and the ruling African National Congress will rely heavily on union backing to maintain the political dominance it’s enjoyed since taking power after the end of apartheid in 1994.

“We have made it very clear we don’t want an unbundling,” said Sizwe Pamla, spokesman for the Congress of South African Trade Unions, the country’s biggest labor group. “Our priority is to preserve jobs and livelihoods. Workers are the victims in all of this.”

Union Response

The unions will meet with Eskom’s management next week to discuss the restructuring, said Phillip Vilakazi, deputy president of the National Union of Mineworkers.

The rand pared a decline of as much as 1 percent and was 0.6 percent weaker against the dollar at 9:53 p.m. in Johannesburg.

“The risk is very little will change with an Eskom split within the Eskom Holdings umbrella, rather than three independent companies that report directly to the Department of Public Enterprises,” said Peter Attard Montalto, the London-based head of capital markets research at Intellidex, a research company. “A mindset change is needed and it’s not clear this achieves this, whilst still riling the unions.”

Ramaphosa Unveils Rescue Plan for South Africa Power Utility

Eskom’s current structure isn’t optimal and the breakup makes sense, according to Iraj Abedian, the head of Pan-African Investments and Research Services, who has advised the government on economic policy.

“National transmission has no place in the belly of Eskom,” he said. “It must be a national utility. It’s a natural monopoly. It cannot, should not be privatized.’’

Eskom Chairman Jabu Mabuza said the restructuring was aimed ensuring that its wholly owned units and staff could focus on their core business.

“The big task now starts,” he said. “We need to go and meet all the stakeholders that are going to be affected.”

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