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Parliament updated on SOE finances

…..article dated 25 August 2020……

DPE presents bleak picture…. 

As part of a portfolio committee meeting covering the status of the seven SOEs under the umbrella of the Department of Public Enterprises (DPE), new director general,  Khathatso Tlhakudi,  provided a sombre picture of the current financial malaise within the SA public sector.  However. he ended up on a more positive note with regard to Denel and SAA.    On Eskom, he said,  he would make some comment but as they were reporting on a regular basis to Parliament, he said he would not report in great depth.

On Denel, he commented that he had “a good feeling that acting CEO Talib Sadik would hold the situation until a new CEO was appointed”, saying that “we need Denel for strategic reasons”.  He said that Sadik had the necessary enthusiasm and  drive to hold the fort.

As far as SAA was concerned, DPE “had made good progress with a business rescue plan which had now been approved” which fact  he claimed was “a major milestone after what had happened beforehand”. Now it was just a question if support could be found for the plan.

Outside Eskom

Tlhakudi commented that a good deal of the problem at Eskom, other than the specifics of state capture, was that most of the municipalities were not investing adequately in their distribution networks which he said were “falling apart at the nation’s expense”.

On electricity distribution “much of the problem could be put down to bad town planning”, he said.  “As a result of an inability to provide a proper  “pay as you go” service, informal settlements had simply connected themselves to the network, resulting in overloading and continual damage.”

Another issue was that councils should not just collect rates from communities but had to also invest in those communities. Consumer attitudes had to change, Tlhakudi said. Eskom was not in a position to subsidise non-payment in infrastructure, he said. “Responsible management is called for at community level and consumer attitudes have to change”.  He looked to CoGTA to assist in bring such changes about, as well as  the departments of Human Settlements, Water & Sanitation and Public Works to play their roles more purposefully.

Not all bad

DG Tlhakudi said that an infusion of new thinking had started at DPE.  “New ideas are emerging, he said. Great progress had been made with the ports; business was flowing well through the Maputo Corridor with the export of exporting magnetite; and activities around wine and fresh produce were getting some good numbers, ” he listed.  “The story at Transnet is coming right and the Trade and Industry Committee will be impressed, despite the problems of COVID”.

He concluded that DPE was in the process of finding new ways to intervene and assist timeously in SOE and departmental problems and cut short any drift towards malfeasance and corruption with intervention from the top, on an immediate response basis.

Overview of the SOE seven

In an overview of the DPE portfolio, Ms Jacky Molisane of DPE  took MPs through the sorry picture.

In alphabetical order, she recounted that (1) Alexkor, a diamond mining business and which has been attempting to establish a diamond polishing venture down the line, had reported a loss in the 2019/2020 financial year of R63m. This was in part due to low diamond prices, not helped by corruption at management level at its mine. Its cash reserves will be depleted by September and DPE.  Furthermore, its head office is being wound down.

Denel (2), which had been in the newspapers a lot this month with attempts to save the entity for its strategic value, reported a loss of R1.7bn for the 2019/20, its equity being well below the level of R4bn required as a going concern for investors. This, despite a R1.8bn funding in the year under review.  Ms Molisane said that R576m allocated for the 2020/21 has not been passed on by DPE at this stage, since the impact of COVID-19 had resulted in more strain for Denel, the position now being fluid. An acting CEO was currently holding the fort.

Simple facts

As far as Eskom (3) was concerned, Ms Molisane, giving a short picture, saying the simple facts were that any increase in revenue would purely be mainly reflected as due to increases in electricity tariffs.  Although cash from operations might be increasing, Ms Molisane said, earnings before interest, taxes, depreciation, and depreciation were never going to be sufficient to cover increasing costs.  DPE and the taxpayer, as the shareholder, were not receiving a return on investment and the entity was a serious drain on the economy.

South African Forestry Company (4) had reported a loss of R47m for the year under review, mainly as a result of the decline in revenue and high operating expenses. A fair value adjustment saved the company from worse figures and Safcol badly needs re-investment in its equipment and operations.

South African Airways (5) has been under business rescue since December 2019 due to its declining performance and now the inability to pay its debts as they fall due.   A business rescue plan was approved in July 2020 by all creditors. Various options for raising funds were now being carried with the assistance of RMB as transaction advisor, Ms Molisane said. There was every hope that a partner would be found before 17 September.

Old story, old routes

On SAA, DG Khathatso Tlhakudi added the fact said the Department had brought in “some of the best brains, working together linked around the world to help it implement a plan mainly people who understood the airline industry.” Once a strategy was implemented for SAA, he said, DPE would be looking, first for a feeder network to sustain the airline, and then a decision was to be made as to the best way forward to recover routes.    Right now, “effort is being applied to help SAA out of the situation it found itself in”.

SA Express (6) was placed under business rescue in February 2020, Ms Molisane said, but a credible business plan was not found and liquidators called in.   With little likelihood that any expression of interest will be shown, SA Express could be liquidated at the end of September this year.

Ms Molisane then quickly touched on Transnet (7) where revenue had grown marginally by 3% to R75bn for the 2019/20 year under review but decline in demand is expected for the coming year due to COVID-19 and lockdown circumstances. Revenue at an expected figure of R78bn for 2020/21 therefore looked very unlikely. Given that Transnet would eventually get over the COVID setback, Molisane’s figures indicated a possible break-even point in the near future.

Dartboard

For three quarters of an hour, MPs from across party lines criticised DPE for its handling of a situation over the months preceding, a period in which in their view things had been allowed to get totally out of hand.    It was pointed our , however, by the DPE team that it was the system of government that was at fault as the individual boards ran the SOEs and there was a limit to which DPE could interfere.

Point after point was raised, eventually leading to a relatively sensible overview from Ghalib Cachalia (DA) who calculated that the seven SOEs were the major debt trap that had cumulatively led South Africa into its present sad state, whilst also being the home of state capture. Cachalia told DPE that they had to go about things differently, and very soon.

Action now

With a warning that SA was  “falling off the fiscal cliff”, Cachalia remarked that “tinkering around with balance sheets and expenses was getting the country nowhere” and that some new management concepts “were needed and needed urgently”.  The objectives of DPE were “to lead with vision a stable of state entities that led South Africa into new territory and uplifted the poor”. Quite the reverse was happening, he said.

Sibusiso Gumede (ANC) said the quagmire that DPE found itself in was contributed to by the inability state to intervene at any particular point, having to deal with a balance sheet problem well after the event.        He said, “Whilst it is commendable that DPE itself has shown good performance, it had to start running ‘good’ SOEs as well.  He said, “One cannot have an excellent department running ‘bad’ SOEs and we cannot have business as usual any more’.

Eskom starts internal overhaul – ParlyReportSA

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Eskom starts internal overhaul

…..July 7 article…..

De Ruyter keeps his cards close 

When asked by parliamentarians if Eskom would be calling upon retirees and ex-employees to assist with the Eskom recovery plan, CEO André de Ruyter told a joint Public Enterprises meeting called to hear progress on the Eskom unbundling, that at this stage it had not been necessary to rely on consultants.  “For the exercise in hand, money has to be saved.  We have plenty of expertise internally but once things get really complicated, this cannot be ruled out”, he said.

At the moment, he said, things were going well with existing internal sources and Eskom was busy with unbundling, divisionalisation and restructuring, de Ruyter said.   It had re-allocated nearly 9,000 employees to the divisions, of which 6 500 from its head office in Sunnyside, Sandton had moved to ‘hands-on” functions and “moved into operating divisions”.

In place

Most important and in time to meet the human resources plan implementation date, Eskom had appointed its new team of divisional managing directors.  The word “managing” had been incorporated into titles to reflect a clear responsibility in terms of revised job criteria. All had been appointed from existing resources and that had been additional cost in the process. Many existing  employee within the Eskom structure, de Ruyter said, were simply taking on more responsibilities.

MPs from the joint meeting comprised of public enterprises MPs from both the NA and the NCOP were told that critical vacancies were now filled and that all power stations had fully substantiated general manager vacancies. 1,384 learner plant operators had been hired and trained and had filled their positions by April 2020, he said.

Breaking up is hard

In answer to questions from MPs on unbundling  question of divisional unbundling, de Ruyter said that the intention was to divisionalise production into transmission, generation and distribution.    For this it had set up a divisional financial reporting programme design; had already in place power purchasing and electricity supply agreements between divisions; and had commenced the internal trading of energy within Eskom.

De Ruyter reported that a power purchasing and energy supply agreement was in place between a transmission entity named “SA Energy” to handle energy from the 27 different power output stations.    De Ruyter told MPs that it would take some time for the legal separation of all three divisions to take place, the end state being three businesses operating as subsidiaries under Eskom Holdings.

“We have also established a market operator and a central purchasing agency to allow the transmission business to act as the buying agent for electricity and I hope to see considerable private sector investment in generation”, he said.

Much of the old

He warned that Eskom had to retain certain shared services to maximise cost saving opportunities by “leveraging economies of skill and scale.”  For example, Eskom would still only have one IT system, the extremely expensive but highly effective SAP system, and appropriate segregation of equipment and separation  “programming would be installed to give adequate comfort to investors that their commercial information would be adequately protected.”

He said he had rejected the idea of three IT systems, one for each division, purely on the factor of cost. As a result, Eskom would only have one payroll and would maximise certain scarce resources, for example tax and financial resources.  He concluded that the divisionalisation process was aimed at streamlining and driving down accountability, but this had to be “to the right level within the organisation in order to manage cost, bearing in mind that the final arbiter was the cost of electricity to the consumer.”

Big boss

With Minister Gordon Pravin present as a contributor to the speaker panel but who said very little, the only time that the urbane André de Ruyter looked slightly ruffled was when one MP, asking about future load shedding, said that she was tired of hearing “the same old story of broken-down plant that had not been maintained”.

De Ruyter said that the problem was very real and continued to play the major part in the continuity of power supplied to industry and the SA public.

A winter’s tale

“Whilst the Covid 19 lockdown period, de Ruyter said, has led to a direct decline in electricity usage in the country there has been a clear increase in electricity usage since the move to level 4 lockdown and this will obvious change massively and suddenly as we go in lockdown 3 with winter having arrived”.

“Lockdown also provided Eskom with an opportunity to conduct maintenance on its plants, with the power utility’s new base scenario shifting from a possible 31 days of stage 1 load shedding during the winter period to just 3 days,”, he said adding that the unreliability and unpredictability of the system we have has a built-in risk of load shedding.  “That’s how it is, and the situation remains. This will be the reality until after the 18 months of reliability maintenance, which will last until August 2021.”

Small business again

He concluded that large industrial customers are unlikely to be impacted and that any planned load shedding would likely only be required during the evening peak with load shedding schedules being staggered so that customers were not impacted on consecutive days.

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IEMO Bill proposes separated power purchasing

…. article June 2019….   

   Eskom to become major energy supplier…

Now tabled is the DA’s plan to create an Independent Electricity Market Operator (IEMO) on a phased basis with the responsibility of centralised purchasing of electricity from both Eskom and independent power producers (IPPs).

The proposal is that the IEMO will carry out its operation duties by dispatching all generation plants into the national grid. In addition to operation, the IEMO Bill also confers ownership of the grid on the IEMO, with Eskom retaining ownership of the generation arm.

Starting grid

The responsibility  for consumer distribution will be under the care of this independent regulatory entity which will be responsible as a centralised agency for the purchase of energy and the registration of IPPs to feed the grid, the enormous system that conveys power across the width and breadth of South Africa.

The national grid is, apparently, like the rest of Eskom infrastructure in need of restorative maintenance and upgrading, funds intended for this purpose having been “diverted” by Eskom personalities now being named, one by one, in the Zondo Commission inquiry.

With Parliament closed at this time and the Portfolio Committee on Public Enterprises not formed, it is the Speaker that will gather comment on the DA Bill now circulated, this for later assimilation.

As far as the IPPs still sitting on the side-lines waiting for action, this is not before time.   All now await to hear how the concept of a Regulator’s office is unpacked and how this office is related to the grid.

 Top gun

The IEMO Bill comes under the name of MP Natasha Mazzone, the DA’s shadow minister of public enterprises.  Opposition Leader, Mmusi Maimane, has been indicating such a move for over six months and has been vocal on the fact that decisions must be made urgently in moving the energy distribution sphere forward since investors have been waiting for far too long.

The Bill was tabled quite soon after President Cyril Ramaphosa’s stated requirement that the concept of splitting up Eskom into three parts will be followed, namely power generation, power supply through the grid, and distribution to customers.

A line-up of six successive energy ministers and a recalcitrant president have reduced the Department of Energy to a shambles.  Maybe Mazzone’s Bill is a possible shaft of light after years of Eskom and Public Enterprises Department having done nothing about IPPs, nor encouraged any form energy diversification.

Motives not clear 

In the meanwhile, Ms Mazzone has always been a vociferous critic of Eskom management for a number of years, describing previous Minister of Public Enterprises, Lynne Brown, as public enemy number one.  She has called for Eskom to be unbundled in the public interest and has been untiring in her attacks on the failure of Eskom to provide continuity of power supply thus damaging SA’s investment potential, she says.

What is not clear is whether this tabling is a move from the DA to attempt to seize the initiative ahead of the Department of Energy (DOE), busy at the moment being absorbed back into the Mining portfolio under new Minister Gwede Mantashe, or whether the ANC might have some inkling of what it needs to progress on the issue of power generation and will accept what is tabled.

Whatever is behind closed doors, the DA have taken the initiative by starting the ball rolling and for IPPs sitting on the side-lines, it is not before time.

Badlands

The partnership of the portfolio of energy and mining, which was broken some ten years ago by Jacob Zuma for reasons never really explained, still sits like unallocated baggage that needs sorting out. The suspected reason is that Zuma wanted Eskom under Brian Molefe in DPE under acolyte past minister Lynne Brown.

What currently is confusing to the industry players is that a slow phased-in process designed to protect Eskom has been proposed by the DA.  Their original proposals called for an immediate break-up to reduce the pain and cost of a lengthy separation process.

It may be that reality has crept in and despite chastising past successive ministers of energy for not producing the  previous idea of an ISMO (Independent Supply Management Operator) Bill to meet the need of IPPs perhaps they are now tempered by the fact that Eskom, whilst a currently an over-indebted business failure, the ship should be righted first, and the system restored.

Better times

Previous chairperson of the Energy Portfolio Committee, Thembisile Fikile Majola – a tough critic of Energy Minister Radebe in the failure of Luthuli House to brief Parliament on energy policy matters – is now Deputy Minister of Mining and Energy.

This appointment by President Ramaphosa, presumably in the light of Majola’s union background, gives further credence to the belief that both he and Mantashe would be a good team to handle coal mining issues from the unions resulting from a breakup and re-sizing and also better equipped to handle the Eskom transformation in terms of integrated energy supplies.

Going ahead

It seems be therefore accepted by the way the Bill is tabled that new IEMO Bill may gain better traction under the aegis of the Portfolio Committee on Public Enterprises, rather than as before under the Portfolio Committee on Energy.   However, Minister Pravin Gordhan has stated on a number of occasions that the Public Enterprises portfolio is only managing SOEs in the interim until all are returned to their appropriate ministries.

The specifics

The Bill came with a notice of intention which states, “This Bill will eliminate Eskom’s effective monopoly on the production of electricity by splitting the entity into two parts. These are Eskom, which will continue to function as an electricity generator and ISMO, which will take ownership and control over the national electricity grid.

The notice states that a Regulator “will serve as the central buyer and distributor of electricity from all electricity generators. It will also seek to allow metropolitan municipalities to purchase electricity directly from IPPs in certain circumstances.”

This is, of course, brings into the frame the critical issue of adopting a business approach to energy distribution.

Business wholesalers

On the subject of independent purchasing of electricity from sources other than Eskom, the proposal further states, “ISMO will be required to purchase power from the generators, including IPPs through power purchase agreements.  IEMO will then sell this power to distributors and large customers at a wholesale tariff.”

The notice concludes, “The IEMO will be expected to include in the wholesale tariff its operational cost in accordance with the approval of the Regulator. The Regulator will regulate the wholesale tariff in terms of the Electricity Regulation Act, 2006 (Act No. 4 of 2006) (ERA).”

Rights to trade

An introduction to the Bill, looking at details of the new structure, states, “The issue of wholesale trading refers to the buying of power from generators at different prices and selling it to large customers and distributors at a wholesale tariff.    The IEMO will also be responsible for the system operation function through dispatch.”

It adds that the IEMO “will undertake dispatch from all generation plants into the national grid except for self-dispatched plants, including but not limited to wind and solar plants”.

Big bang or not

Whatever happens, “big bang” approach or not, a vigorous debate is about to happen.  Many critics, especially the IPPs, have expressed the view that the slow “phasing in” is just another ploy in a drawn-out process to mollify the unions on potential job loss issues by buying time.   Industry players who have dealt with the backlash of the last Eskom strike, say the unions are panicking and creating a problem to be solved in order to be seen by their members at work on their behalf.

But whatever happens, all know that coal will always be, by far, the major contributor to energy with Eskom hopefully learning how to reduce CO2 emissions. The entity will have to pay triple carbon tax rates in the future for failure.  Most industry players also predict that SA’s extensive coal reserves will be switched over in the long term to export led initiatives.

Comments on media also see the exit of Eskom as a distributor being a contribution to the task of reducing Eskom’s ballooning staff complement.

Bold steps required

The costs of a “big bang” separation would, of course, be bound to put irreconcilable pressure on state coffers, say financiers, but more serious energy investors and industry players say there will always be few short-term visitors waiting in the wings and these are the parties who get disappointed.

Energy investment, they say, is based upon long term results and is viewed as thus by big money companies since geology and resources are finite.  In global terms, the situation can always wait until the conditions suit exploitation. It can take fifteen or twenty years to build a gas field of note and build the appropriate infrastructure, they say.

However, the running of Eskom is the short-term issue right now and keep the lights on.  Its survival is the main critical item on South Africa’s balance sheet at the moment.

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Gas Utilisation Master Plan gets things going

Gas a “game changer” in energy mix…

gas pipelineWith the publication for comment of the Gas Utilisation Master Plan (Gump) by the department of energy (DoE), South Africa came a step further towards the finalisation of its Integrated Energy Plan (IEP), meaning also that the document has received approval by the cabinet.

The document, based on a Green Paper released by DOE some years ago, provides a framework for investment in gas-supporting infrastructure and outlines the role that gas could conceivably play in the electricity, transport, domestic, commercial and industrial sectors.

LNG and gas, offshore -onshore

The Gump outlines, amongst other issues,  the import of liquified natural gas (LNG) and piped gas from Namibia and Mozambique and plans for production of natural and shale gas in South Africa.  A plan to have 67 GW of installed gas generation by 2050 is considered by the paper.
The plan is particularly relevant at the moment with Eskom having to rely, as grid backup during the current winter, on expensive diesel-fueled open-cycle gas turbines. The Gump proposals on electricity generation, talk of conversion to closed-cycle turbine power using gas.

The paper also expands on importing electricity from gas sourced from Mozambique and Namibia with lines to the Eskom system grid including imports from the largest present and mainly undeveloped gas fields in Tanzania neighbouring the northern Mozambique fields.

Learning curve

New minister of energy, Tina Joemat-Pettersson, will have deepen her knowledge base very quickly on such matters as the IEP, energy resources and liquid fuels plans, all urgent and with immediacy.   Such issues as the process of energy integration overall and the issue of the stalled independent power producers (IPP) programme in terms of the held-over Independent System Market Operators (ISMO) Bill, are also waiting for position on the energy starting track.

DoE has also pointed to its intended coal gas programme with an IPP programme for the generation of some 6,500MW of power. The department further states that the Gump takes a 30-year view of the industry. It not only deals, they say, with the regulatory environment and economic predictions but does touch on social issues and environmental matters as well.

The master plan also talks of a gas line from Mozambique to Gauteng via Richards Bay and how gas will be distributed and stored, together with the issue of LNG terminal storage.

As a separate issue to Gump but part of the same overall plan, DOE has also released public comment the issue of investment by private merchants in fuel and gas storage, particularly referring to Saldanha Bay.

Storage, a vexed issue

Fuel storage at the present moment is traditionally undertaken by the major oil companies, in some cases integrated with state facilities and who can more easily absorb some of the more riskier aspects of this sector with their vertical interests both upstream and downstream.

DoE sees a greater contribution from investment by private merchants in storage and is currently attempting to re-structure the system to attract and build the industry to counter present storage problems and for early consideration as part of South Africa’s strategic fuels plan and as part of a licensing and regulation background.

In the short term, DoE says in its Gump programme, such a system is needed in terms of LNG holding reserves, imported as LNG or from state owned PetroSA’s gas-to-liquids plant at Mossel Bay, until more natural gas comes down the envisaged pipelines from the current exploration areas.

At the moment Sasol pipes 188-million gigajoules a year of gas into South Africa from Mozambique.  The possibility of LNG re-gasification plants offshore on the West coast in the near future is also debated in the Gump programme released.

Other articles in this category or as background
//parlyreportsa.co.za//energy/parliament-re-starts-oilsea-gas-debate/
//parlyreportsa.co.za//energy/shale-gas-exploration-gets-underway/
//parlyreportsa.co.za//energy/oil-and-gas-industry-criticizes-minerals-petroleum-bill/
//parlyreportsa.co.za//energy/future-clearer-as-gas-amendment-bill/

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