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 TOP INTERVIEWS |
Looking at ESKOM's commitment made in 1994 within the RDP (Reconstruction & Development Programme) framework, would you consider that the electrification process is now over?
We started with the electrification end of 1991, beginning of 1992, and we set - with the changing government in 1994 very stiff targets. Since 1991, we have electrified approximately 2.5 million households. The programme won't stop now but it will probably slow down to about 200.000 houses per year where at the peak, we were electrifying about 300.000 houses a year. The reality is that almost 70% of the people in South Africa now have access to power. When we started, this was only 30%. We are now getting into the deeper rural areas where our capital and operational costs are becoming slightly higher. To overcome that issue, we are looking at alternative sources of power, such as solar for instance. We have actually entered into a joint venture with SHELL, with the immediate aim of electrifying 50.000 households.
A couple of years ago, ESKOM's distribution was not as competitive as its generation and transmission activities. How would you rate today, the performance of this side of the business?
ESKOM traditionally was not really a distributor. Until 1989/1990 we only had approximately 200.000 customers. Traditionally in South Africa, the local authorities would do the electricity distribution in their area, and we took care of the rural areas. Then, with the social context of the early 90's, ESKOM, out of necessity, took over huge areas in the so-called "Black Townships". This, together with our electrification drive, resulted in half of the country's electricity customers today being ESKOM customers. However, because you still have a lot of municipalities distributing electricity themselves, the situation is not ideal. You have thousands of different tariffs, approaches, and electricity revenues being used for different purposes. Therefore, the government decided to rationalise the whole industry. What they are aiming for is to set-up regional electricity distributors, maybe six or seven, which would initially report to one holding company.
Which will be?
That would probably be outside of ESKOM. Whether it is inside or outside, is actually irrelevant as long as you have good management at the top of the organisation. Municipalities that are handling the distribution pretty well, could initially be kept separate from that process, but the end state should be six or seven totally independent distributors in RSA.
When would you allow competitors into your generation business?
Government would like to see competition, and I think this is probably good for the industry and the customer on a long-term basis. In reality, over the past decade or so, ESKOM has reduced the real cost of electricity in RSA by 25%. And, as the current over capacity disappears by 2007, one would like to see the market opening up and with free trade and real competition. Figures of about 30% outside of ESKOM have been mentioned - ESKOM being quite comfortable with that. In line with the rest of the world, we see globalisation as a real alternative, and by giving up generating capability inside RSA, we can establish somewhere else. So, in a way, we welcome competition. Africa would obviously be a logical first choice for us to become involved in, as this would also be in support of our President's vision of an African Renaissance.
Somehow, it would be difficult for competitors to match with your pricing structure, which makes ESKOM the most affordable electricity supplier worldwide?
Initially, yes.
ESKOM is in a good position at the moment with highly efficient mid-life to new large base-load power stations. However, the demand profile is also changing in RSA with more peaking capability being required in future.
Quite a few opportunities for new hydro and gas projects exist in the region that would be ideal for IPP development. In fact, SASOL mentioned that they could see the use of Mozambique gas for that purpose - it probably makes a lot of sense and could be quite competitive.
One of the things that I feel strongly about however, in listening to some of the debates at the conference, is where potential IPPs (Independent Power Producers) are demanding protection in the form of long term PPAs (Power Purchase Agreements) from Eskom. We should be going for the best possible solution, and this is one that makes economic sense and can compete. If somebody wants to create an IPP, which has to be protected, it puts some question marks behind the whole concept!
The government has announced its intention to privatise all public enterprises by the year 2004. How do you feel about that process?
ESKOM will probably be "corporatised" soon. Next step would probably be to separate Generation, Transmission and Distribution into discrete entities. How far and how fast things might move after that is for the shareholder, Government, to decide.
Unbundled?
Eskom Generation, Transmission and Distribution are already totally ring fenced and ESKOM Enterprises is operating quite separate as a (Pty) Ltd company. As far as Generation and Distribution is concerned, I have described the long-term future as we perceive it now. For Transmission, the wires, operating and maintenance businesses can very well stay inside ESKOM. The trading or the commercial side of it has to be further discussed, but one can see a good reason for this to be positioned to the satisfaction of all players in a competitive market.
If you had to put a figure on ESKOM's privatisation process, what would that figure be?
I am skipping your question because if you had to sell ESKOM power stations today in an over capacity situation, obviously the value would be different to that if you had to sell it seven years from now when you would be experiencing a shortage of power. Therefore, I would not like to commit myself on that value.
Yes, but somehow government is committed to privatise in a near future and not in seven years from now
Should the government decide to privatise part or all of ESKOM, it would obviously want to get maximum value. In any case, you don't sell power stations overnight. ESKOM might have to start the process of selling its power plants much earlier to be ready for competition seven years from now.
Why privatising ESKOM?
My personal opinion is that it is not so much for the income to government, and certainly not in the case of ESKOM to make it more efficient or get the price of electricity down as ESKOM is in the top quartile world wide in respect of plant availability and performance. It also delivers the lowest priced electricity in the world to its customers. I think it would be more for positioning the company for the future. It will also bring in other stakeholders and ensure a competitive environment in future.
Something to remember is when the electricity demand exceeds the current over-capacity, this will require huge investment and whether you privatise or not, the electricity price will have to go up.
How successful have you been at ESKOM Enterprises in the year 2000, and what are your financial expectations for this year?
Eskom Enterprises group achieved an operating profit of R67.4 million in its first year of operations during 2000. Turnover exceeded R2 billion with the Rotek subsidiary exceeding R1 billion for the first time following its transfer to Eskom Enterprises. The 61% growth in non-Eskom sales - from R353 million to R567 million - in line with the strategic intent to achieve 50% of sales from non-Eskom sources by 2005. The before tax return on equity (excluding exceptional write-offs) of 8.19% is noteworthy considering that the businesses mainly served as internal service providers to Eskom in the past.
The Group expects to double its operating profit in 2001. Turnover is targeted to grow by at least 15%. External non-Eskom sales are targeted at 35% of total sales. The return on equity is expected to increase in excess of 10%. Significant project work is expected to arise from the marketing efforts, especially in Nigeria and the rest of West Africa. The group's 45% investment in Arivia.kom is expected to deliver returns above expectations whilst the investment in Tele-com Lesotho will deliver returns in the medium term.
The investment in the Fiber Optic Network will impact adversely on the Debt:Equity ratio and returns, as the benefits will only flow in the medium term.
Could you elaborate on your major investment plans, and on the commissioning of the Pebble Bed Modular Reactor ( PBMR ) in particular?
Regarding the PBMR, we already have three partners, and are awaiting the fourth one. ESKOM Enterprises itself has 30%, IDC (Industrial Development Corporation) has 25%, British Nuclear Fuel of the UK 22.5% and EXCELON Corporation of the United-States 12.5% and we reserve 10% for Black Empowerment. We are busy at the moment with feasibility studies that are almost completed. The figures look good. We are also busy with the environmental impact assessment and with the licensing process. Should all of these be positive, we would go back to our government towards the end of this year to ask for approval to start construction of a demonstration plant next year. That should take us about three years, and you could add a year for commissioning, testing and improving before we are ready for export. Right now, the figures we are seeing in USD cents per kWh are still extremely competitive.
Is this your main emphasis at this stage, or do you have any other projects currently being undertaken?
We are looking at two other areas. We are committed to become involved in the second telecommunications network in RSA - the TELKOM competition for the future and we are seriously positioning primary energy as an opportunity.
This is quite a diversification!
In a way yes, because telecommunications is a different kind of business: higher risks, higher returns, quick turnaround and definitely different from the normal power utility business. However, you have to look at the advantages you can get out of using your electricity infrastructure: One entails putting the fibre optic on transmission lines where you already have the infrastructure and the right of way. This translates into a saving of three to four hundred million Rands over a greenfield approach. We can also do it very fast, we will have a fully developed fibre optic backbone system in place by the time TELKOM's monopoly ends next year. Secondly, there is the advantage that we already have customer service centres, the necessary maintenance and field services teams, we already have a wire into peoples' houses, and are sending them accounts, so we could build on that.
The rationale for getting into primary energy is not altogether different in that we want to exploit our existing coal assets and, gas distribution is quite close to our current electrical distribution ability.
Economies of scale…
Precisely.
What initiatives should be taken to enhance the Southern Africa Power Pool ( SAPP )?
The concept of the SAPP is a very good one and is growing all the time. Regional co-operation is leading to other spin-off developments such as MOTRACO - that is a line built in a joint venture between ESKOM, Swaziland Electricity Board and EDM ( Electricidade de Moçambique ). ESKOM supplies power at a very competitive price to the Aluminium Smelter ( Mozal ) in Mozambique through that line. We are now looking at building on that kind of example where ESKOM Enterprises with EDM and another partner would extend the MOTRACO line now to the so-called "Corridor Sands Project" in Mozambique. There is also a need for a transmission line between Tanzania and Zambia, as well as between Tanzania and Kenya. For any of the utilities to go into that kind of effort alone while being privatised is probably not a wonderful idea. Instead, if you join efforts with private developers, and involve the various governments in the project, things will get done. As more IPPs come in, the SAPP matures further, and transmission and telecommunications interconnections are being established for sound commercial reasons, these elements will have a positive impact on each other.
Because so far, we are under the impression that this process is being handled on a bilateral rather than a multilateral approach…
Yes, very much so. One of the questions raised this morning was: how does an IPP get the Power Purchase Agreement (PPA) forever and a day? Frankly, if we are moving towards an open market the IPP developer will have to bring something to the market which is competitive and self sustaining in a free market environment, but governments will also need some assurance that we don't end up where California is today. There is a huge capability to generate energy in the region from hydro, solar, nuclear, gas, coal etc. I believe we are seeing the beginning of a market structure where eventually somebody in Zimbabwe can buy power from a nuclear generator down in Koeberg or have the choice to buy from Inga on the Congo River at a cheaper price. It is essential for Southern Africa to keep the price of our electricity to industry below 2 US cents per kWh, or we are just not competitive worldwide. Therefore, it is very important that we liberalize the whole power supply to the region in a way that not only keep the price down but also facilitate the development of new generation capacity.
When looking at RSA, in spite of a surprising 3% growth last year, the country is still facing many difficulties in terms of attracting FDI, because of its level of unemployment, its brain drain and so on. How do you feel about these issues?
These issues are of major concern. We are loosing skills at a very high rate and we are not seeing the economic developments we would like to see. I think all in all the concept of President Mbeki of an "African Renaissance" is more than just an excellent vision, it is essential. We need first of all to get the trust re-established in the sense that Southern Africa is a good place to invest. There are some political problems in the region that need to be sorted out. In terms of the brain-drain, what makes it a lot worse is that not only South Africa is loosing a lot of its skills but so is the rest of Africa. As a short-term solution, we at ESKOM Enterprises are bringing in international partners. For instance FLUOR DANIEL is our partner in the transmission business. Bringing in the SHELL's, SIEMENS's and ABB's of this world as partners as well as local Black Business and the various governments is a way of ensuring our future.
A few words on ESKOM's internationalisation: the Uganda electrification process is it something you are looking at?
Absolutely
Mozambique: Cahora Bassa. Any comment?
We are negotiating; and we are obviously interested. We also have a subsidiary company in Mozambique called ELGAS, which is doing power generation and gas distribution. We will be finalizing our deal in Mali to take over the management of MANANTALI. We have also recently established a joint venture in Libya (GESCO). So, we are working right across Africa but always being very careful not to be seen as "Big Brother" wanting to come and take over. We are setting up partnerships. And we have no problem creating joint ventures where we have the minority share. We are not trying to colonize anybody!
Are the strengthening of the transmission system in Angola, and the power via Zambia among your priorities?
I think the route through Zambia to DRC is essential, and indeed would have to be strengthened.
I believe five years from now we could have a total African grid, which means that someone from Morocco could buy power from Cape Town. It is not going to be easy but it is possible! It is my honest opinion that things in Africa are now opening up faster than ever before.
JMC
www.winne.com
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Additional information on ESKOM Enterprises can be obtained at www.eskom.co.za
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