The Eskom trade-off

Does Eskom need to have a healthy balance sheet at the expense of industry, business, job creation and economic growth?

That’s the question Geordin Hill-Lewis from the Democratic Alliance (DA) asked Eskom’s top management during a parliamentary briefing on the power utility’s application for a 16% tariff increase.

Eskom CEO Brian Dames told members of the portfolio committee on trade and industry this morning the power utility carefully considered the impact electricity price increases would have on different sectors of the economy. “But we believe our application strikes a balance between the possible short-term negative effects of increasing electricity prices, the sustainability of the industry and South Africa’s long term economic and social needs,“ he said.

According to him, it would be crucial for Eskom’s pricing structure to be cost reflective, which means that prices recover the full cost of supply to energy users. “If the prices are lowered and not cost reflective, the shortfall may be paid for by government, which in turn affects the taxpayer through additional taxes,” Dames said.

Eskom is targeting a return on assets of approximately 8% in 2018 — something Hill-Lewis took issue with. “A targeted 8% real return above inflation is exorbitant,” he said. “It’s unnecessary for this kind of company. In this case, the return is funded by ordinary South Africans,  businesses and small entrepreneurs.”

According to Hill-Lewis, Eskom doesn’t need a “model balance sheet” in a country such as South Africa because it has a different social mandate. “You’re trying to build in the next five years a balance sheet that might just sacrifice industry, business and job creation and growth in this country on the altar of the Eskom balance sheet. I don’t think that’s right or fair and I don’t think it’s necessary,” he added.

Paul O’Flaherty, Eskom’s outgoing financial director, defended the entity’s targets, saying Eskom strives to receive funds from its operations to achieve a standalone investment credit rating. The power utility currently has government aid of R350bn, but only intends on using R150bn. “The reason is if government had to step in and finance all the debt of Eskom at R350bn the knock-on effect onto the sovereign [credit rating] would be extreme,” O‘Flaherty said. “So we’re saying, yes, Eskom needs to build a strong balance sheet to be able to support future growth.“

Sue van der Merwe from the ANC said Eskom’s proposed tariff increase is contrary to government’s Industrial Policy Action Plan (IPAP) which aims to speed up industrialisation and grow the industry and manufacturing sector of the economy. “But it’s actually shrinking. Businesses are closing down and they universally hook the blame on the cost of electricity,” she said.

A colloquium will be held at the end of January next year where all stakeholders, including Eskom, municipalities, role players in the manufacturing industry and government will put proposals on the table for Eskom’s proposed tariff increase.

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