PETER ATTARD MONTALTO: Now is the right time for panic

Posted in: i-Blog, SOEs on January 28, 2019


Eskom crisis seems to have triggered some rare momentum

This column was first published in Business Day

Positive signals come in the most surprising ways sometimes. 

I have long held the view that there are several key issues where we need to see policy makers panicking, running around with arms flailing. Controlled panic is good in the political economy.  It can move red lines and allow for deployment of political capital to overcome vested interests.  It can create momentum and accountability. 

This did not happen around the jobs summit in 2018. There was no necessary hysteria about the state of unemployment and resultant inequality. Vested interests kept their perspectives, their red lines were still in place and the result was the underwhelming status quo. 

As such unemployment will slowly grind higher in the next two years even as the economy recovers. However, there has been focused panic on Eskom. And it is good. Surprisingly so. 

The problems at Eskom are not new. It feels like we have been going around in circles before a slow car crash for 15 years.

Yet the ideas for resolution have always been there in countless ANC and government policy documents since 1994 and of course from energy-sector watchers and academics. 

A lack of panic previously meant momentum could never be gained and those ideas couldn’t be deployed. 

Something started to click before Christmas and full panic appears to have set in in the past two weeks, allowing for clarity of thought and momentum to take hold. 

It would appear that a full realisation of the unsustainability of Eskom set in, but also the inability to simply bumble along or kick the can down the road.

We should remember that until the expert voices of the task team came along, there was a serious asymmetric information problem between shareholder and Eskom. No one in the government really had a full understanding of Eskom as a strategic whole — given under-capacity for the scale and complexity of the problem as well as a monopoly mindset in some quarters which believed Eskom always knew best.

Now (old) new thinking can be injected, challenging certainly (splitting a complex beast into three components) and vast in scope (moving more than R100bn of liability risk for instance) — but both necessary and doable.

The problem of course is not one of coming up with policies and plans but of implementation. This is where the panic fades and the harsh reality of vested interests and red lines remerge, momentum fades and reforms die.

The fact that further bouts of loadshedding seem probable in February, Eskom’s energy availability factor is not predicted to turn higher until the quarter, and the period into Eskom’s annual results may be challenging (as a large loss is recorded, towards R20bn) may be conducive to panic lasting a little longer and even tiding over the election period.

The likely specificity (and expertise) of any plan may well also enable momentum to continue — overwhelming opponents.

What is being undertaken here is a forced mindset change from a single Eskom-centric model to a multitude of state-owned companies each with their own models.

This will face strong resistance. Equally relying on taxpayers and tariff payers (the same people) to foot the bill will cause significant disquiet. More so if two stakeholders take no pain —  the government by politically redlining necessary job cuts to rightsize the workforce and handsomely rewarded creditors (who continued to lend to Eskom though evidence of state capture mounted).

Is the mindset around the energy sector changing or are we now just getting three monopolies replacing the one before?

As such even if very good reasons exist for not haircutting creditors and very understandable political reasons exist for redlining job cuts, these two are likely to be wrapped into a noisy pushback by taxpayers and tariff payers.

Therefore some key tests are needed to see if momentum is being maintained or if the resulting counter-reaction bogs progress down.

Is the end product sustainable or has a long term kicking-the-can-down-the-road occurred? This is particularly applicable if there are not major job cuts.

Is the mindset around the energy sector changing or are we now just getting three monopolies replacing the one before?

Does Eskom split into three mean three times the opportunity for future state capture? Futureproofing against a repeat of recent history is crucial.

Is an independent system market operator actually independent and moving away from an Eskom-centric mindset, so allowing a much wider flourishing of the energy sector in SA?

This process is going to be long, given its complexity and so requires the sustained understanding of the threat and the positives of the end goal to be kept in mind. We should not forget we have (partially) been here before.

Transferring R100bn or more debt to the sovereign may well be the easy part. Balance sheet allocation and debt allocation will be a long-term project that is intricately complex. Indeed, debt held at the holdco level may need to remain there, meaning any future set of entities (and the fiscus) have a complex financial interrelation with an Eskom “bad bank” that winds down existing debt and attempts to manage the rapidly ballooning municipal arrears problem — until the new entities can properly be viewed as standalone.

We should not kid ourselves that positive announcements to come shortly, based on the recent leaks from the NEC, are the end of the road — they are just the very beginning of a long journey that will have loadshedding and resistance as potholes along the way.

The lesson here is panic is good for policymaking. Of course, it would be better if the same outcome could be achieved earlier and in a calmer way — but needs must in the South African political economy.

Let’s now also have some panic on the jobs and inequality crisis…

• Attard Montalto is head of Capital Markets Research at Intellidex. 

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