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When Finance Minister Tito Mboweni presents his maiden budget speech on Wednesday, he will have the difficult task of deciding how to help Eskom, which is dangerously close to bankruptcy and has no clear plan to right itself.
Eskom has indicated that, despite increasing power prices by more than 500% since 2006, cash from power generation was insufficient to cover debt servicing and capital expenditure.
The utility is again pushing for three consecutive annual power price hikes of 15% or more.
At the same time, the power utility is forecasting a record R20 billion loss for the year ending March.
At recent hearings held by the National Energy Regulator of SA (Nersa), Eskom CEO Phakamani Hadebe said that the large rise in local tariffs that he was seeking would not be a “silver bullet” that would solve all of Eskom’s problems.
Even if Eskom got the hikes it wanted, it would still have a R50 billion debt hole to plug, he said.
Nersa’s decision regarding what tariffs it will allow Eskom to charge is key to the power utility’s financial position, and its decision will be issued next month.
Alternatively, Mboweni may hold off on indicating what assistance he will give the power utility on Wednesday as he may want to wait for Nersa’s decision.
PwC said it expected Mboweni to comment on President Cyril Ramaphosa’s pledge that the government would support Eskom’s financial position.
Eskom has suggested that National Treasury take on R100 billion in debt to ease its financial woes.
Another option would be a similar cash injection from National Treasury.
Last week City Press interviewed Chris Haffenden, managing editor of Debtwire CEEMEA, which publishes news and financial data on entities that are distressed and face restructuring.
He said that a R100 billion injection of cash into Eskom or a R100 billion takeover of debt by government would help, but Eskom would still be “pretty stretched for a utility in terms of what is sustainable”.
“The difficulty is that, given the current trajectory of Eskom, it will only probably buy you 18 months’ to two years’ worth of time before the leverage is back to the same level. The difficulty is that, without substantive changes to the operating business and how Eskom funds itself, it won’t be a sustainable long-term solution,” Haffenden said.
Eskom’s situation will most likely put major stress on government’s credit rating – something that Mboweni would want to avoid, especially as Moody’s Investors Service is the last major ratings agency that has kept South Africa on “investment” status.
A more likely option, and one that will have a less severe impact on government’s credit rating, is that Mboweni could indicate that government would start to cover Eskom’s interest payments while a plan for the power utility was worked out.
Standard Bank chief economist Goolam Ballim said last week: “Paying the interest charges could be an interim solution that doesn’t overburden the state, and it provides a reasonable lifeline for Eskom over the short term while more substantial and strategic restructuring is considered.”
Haffenden said: “There are no large Eskom debt maturities coming up in the next six months. If South Africa wants to put Eskom into a holding pattern, it could just fund the interest payments and some of the principal payments that come due in 12 months. That would be a much cheaper way for South Africa to provide support.”
Government could also consider increasing its loan guarantees for Eskom. National Treasury has already provided Eskom with R350 billion in loan guarantees, but they are almost used up.
Haffenden said government could provide Eskom with increased guarantees to allow it to continue raising finance from investors, however, he added that, once Eskom used up its government guaranteed debt, it would have to issue unsecured debt, which would be much more expensive.
