Eskom bets on improved operations to fund wage deal

Eskom’s three-year wage deal with trade unions was widely welcomed last week as the power utility dodged the risk of violent wild-cat strikes and the accompanying sabotage of power stations that has led to intensified load shedding during wage negotiating deadlocks in recent years.

The utility may however have merely kicked the can down the road as the funds to pay 80% of its workforce a 7% increase annually for three years, as well as a R10 000 once-off cash bonus this year and in 2024, are simply not available.

Eskom would not disclose the annual cost of the deal to Moneyweb, saying it is confidential.

The figures depend on variable components, including the number of employees per period, utilisation of allowances during the period of the deal and so forth, Eskom told Moneyweb.

However, Peter Attard Montalto, Intellidex MD and global lead for capital markets and political economy, estimates it would leave Eskom with a shortfall of about R1.3 billion per year compared to its budget.

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Inflation to decline

Attard Montalto says the 7% increase in the first year is not a surprise, but the inflation rate is expected to drop, which would indicate lower levels of increase in the following two years.

“The total cost here is unclear but of the order of R1.3 billion per year or so. Eskom will say it can cut costs and employment to offset [tis], but this is unclear given they are doing that already to cover the cost of diesel to run its open-cycle gas turbines.

“National Treasury will insist on cuts elsewhere, and maintenance and transmission investment spend will most likely suffer,” he adds.

“Ultimately the tariff will have to pick up the slack given National Treasury’s borrowing ban on Eskom.”

The borrowing ban Attard Montalto is referring to is part of the conditions of government’s extensive debt relief programme to get Eskom back to sustainability.

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Debt relief outlined

In his budget speech in February Finance Minister Enoch Godongwana announced debt relief of R254 billion for the struggling utility.

“This will take the form of advances of R78 billion in 2023/24, R66 billion in 2024/25 and R40 billion in 2025/26,” he said.

Government will lend Eskom the money to settle its debt as it falls due in the three relevant years, provided it complies with strict conditions. Upon compliance, it will be converted to equity, relieving Eskom of the obligation to repay government.

National Treasury, Eskom and the Department of Public Enterprises will meet quarterly “to discuss progress made” in achieving these conditions” according to the 2023 Budget Review.

“A failure by Eskom to achieve and/or adhere to specific conditions will cause the loan amount from that quarter to be repaid to the National Revenue Fund at market rates. Prior to such repayment, government will meet with Eskom to determine the cause of and timing to rectify non-compliance.”

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Conditions set

One of the conditions is that Eskom is not allowed to enter any additional loans as it did in the past when it needed to fill a shortfall in its budget.

Another condition, however, speaks directly to wage increases:

“Eskom may not implement remuneration adjustments that negatively affect its overall financial position and sustainability.”

National Energy Regulator of South Africa (Nersa) allowed an increase of only 4.4% for 2023/24 and 2024/25 and made it clear that, should Eskom decide on a bigger increase, it must find the funds elsewhere to fund it. The consumer is not going to pay for it through higher tariffs.

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Opportunity to confront challenges

The power utility told Moneyweb the wage agreement “will give Eskom an opportunity to address our operational challenges which in turn will give us more revenue that will be used for, amongst other things, to fund the salaries”.

The idea seems to be that better operational performance – thanks to employees having been incentivised by the wage increase – will lead to a decrease in load shedding and an increase in electricity sales, which will pay for the additional payroll.

Eskom’s plant performance has increased over the past few weeks with the energy availability factor edging closer to the target of 60%, originally set for the end of March. Eight weeks ago it was still battling to reach 50%.

While unplanned breakdowns have improved from almost 39% a month ago, the rate was contained to 33.42% in the week ended 11 June according to Eskom’s latest available data.

One of the biggest factors in the improved performance, however, is the drop of about 10 percentage points in planned outages to a mere 5.9%. Eskom does this every winter to compensate for increased demand when the cold weather bites.

This won’t be sustained – maintenance is key to sustaining Eskom’s current performance and improving it – and whether Eskom’s bet on improved plant performance to fund the wage hikes will pay off remains to be seen.

This article originally appeared on Moneyweb and was republished with permission.
Read the original article here.