Eskom needs at least R200bn more from government – Busa

Its current R100bn request ‘understates the severity of the problem’.

The R100 billion debt support Eskom has requested from government is not nearly enough to return the struggling utility to sustainability, says Business Unity South Africa (Busa).

It should be at least R200 billion, but even that would be pointless unless there is a parallel process to restructure Eskom and re-evaluate the whole energy and electricity sector, according to Busa vice-president Martin Kingston.

Kingston spoke to Moneyweb on Monday, two days before Finance Minister Tito Mboweni will deliver his annual budget speech. Mboweni is expected to announce financial support for Eskom, which is currently over-burdened with R419 billion of debt. On the current trajectory, Eskom’s debt is expected to increase to more than R600 billion in the next few years.

Government has issued guarantees of R350 billion to Eskom, most of which has been utilised. These guarantees are recorded as contingent liabilities in the government books.

Eskom is widely considered to be the biggest threat to the fiscus.

Mboweni has been left with little room to move. Government debt is already high and rating agencies will be watching his every move in this regard.

Strong incentive

Moody’s is currently the only ratings agency that still attaches an investment grade rating to the sovereign debt. It acknowledged in a report last week that the country’s heavy reliance on Eskom’s generation fleet, which represents 88% of installed capacity, provides a strong incentive for government to help improve Eskom’s “very weak financial position”.

Kingston points out that government has made it clear that it is not prepared to see Eskom fail. Busa supports that. Eskom is fundamental to the South African economy.

Busa is, however, not suggesting that Mboweni make a once-off announcement for government to take over R200 billion of Eskom debt, Kingston says.

He says government will have to decide the extent of direct or indirect support it provides, but points out that with its better credit rating, government would be able to borrow at an interest rate several percentage points lower than Eskom gets.

That could be one way of removing costs from Eskom, he says, adding that government could take on the debt directly or through the Development Bank of Southern Africa (DBSA) or another agent.

A signal for the market

Kingston says it is important for Mboweni to give a signal to the market that Eskom is on a path of debt reduction to a sustainable level of gearing under a fit-for-purpose business model.

This means that debt should be at an appropriate level for an organisation of Eskom’s size and structure.

Eskom’s request for R100 billion understates the severity of the problem, he says.

He adds that Eskom’s tariff should be cost-reflective (which Eskom maintains it isn’t), but at the same time affordable. Consumers should however only pay for prudently incurred cost.

It is nevertheless a fact that Eskom has incurred costs that are not prudent –  such as those associated with delays and cost overruns at the Medupi and Kusile power stations – and these must be recovered somehow, Kingston says.

He also points out that Eskom’s municipal debtors and the debt of Soweto residents continues to grow, by between R500 million and R1 billion per month.

These costs must be covered by the shareholder – which means government, through the tax payer. “There are only two sources, the consumer and the tax payer,” he says.

Electricity tariff relief?

Kingston says the maturities of Eskom’s debt must be extended and that measures such as extending the power purchase agreements with Independent Power Producers (IPPs) could relieve pressure on the electricity tariff.

He warns that it will take time to restructure Eskom into a sustainable, fit-for-purpose organisation. It is important to have the different social partners on board to ensure the sustainability of the restructured organisation, he adds. “One shouldn’t underestimate the number of voices that should be heard and accommodated,” he says.

Some stakeholders have called for the cancellation of Eskom’s capital expenditure programme. Kingston says Busa needs to know the true facts before before it could be sure that the cancellation would indeed result in lower costs.

He says that while it has been stated that stopping the construction of Medupi and Kusile would result in costly penalties, there is little detail available about the extent of such penalties. “One should be able to renegotiate that,” he says.

Lack of confidence

Busa does not have confidence that Eskom has the capacity and capability to complete the build process and there is no evidence that the country needs the extra generation capacity over the short to medium term, he says.

If construction proceeds, there must be competent oversight, he adds.

Kingston says the turnaround of Eskom should be viewed holistically and the country as a whole should take responsibility for Eskom’s problems.

“We need to attract resources from business to supplement those in Eskom and government, because the size and complexity of the challenge is unprecedented since 1994,” he says.

“And we should manage expectations. There is no silver bullet and it is not going to happen overnight.”

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