Taking charge of a crisis

New board warns that a drop in sales volumes and low electricity tariffs threaten the power utility’s survival

Eskom’s new management team delivered an unpalatable message this week: the power utility cannot stay afloat without restructuring its cost base and balance sheet, and without a bigger electricity tariff increase.

“It is not that we think the tariff is the panacea,” chairman Jabu Mabuza said at Tuesday’s results presentation. “It is part of the problem that Eskom relies on tariffs and borrowings. It needs to produce electricity in a cost-effective way so it can defend its pricing.”

Interim group CEO Phakamani Hadebe says Eskom will approach other state-owned entities with the capacity to take equity stakes in the electricity producer to address its liquidity shortfall, as that cannot only be resolved through borrowings and government guarantees. He names the Public Investment Corp, with R2 trillion in assets, the Industrial Development Corp and the Development Bank of Southern Africa, which already has a R15bn exposure in Eskom’s debt.

The idea is that these entities, which fall indirectly under the control of government, would buy or convert to equity some of the utility’s R367bn in outstanding debt, helping to reduce interest liabilities and freeing cash for investment in operations.

This would allow the utility to receive a cash injection while avoiding two politically sensitive, but crucial matters: another cash bailout from the weary taxpayer, and privatisation.

“All options are on the table. We will work out the scenarios and then present them to the shareholder,” says Mabuza.

At a gearing ratio of 72% at the end of September, Eskom’s debt level is unsustainable. It needs to minimise the cost of doing business in order to maximise returns.

But the utility still needs to raise debt to fund infrastructure investments. Eskom raised only R29bn of R55bn targeted for the current year to March, but Hadebe is confident bankers will advance another R20bn, as the utility is addressing their concerns.

In December the National