Gigaba’s scary Eskom dance
BAILOUT PROMISE: IT MEANS GOVT STANDS SECURITY FOR A LOAN, AND A CASH INJECTION Energy utility can now lend money and the lender will at worst get the money back from the taxpayer – you and me.
No bailout is required. Eskom has R150 billion available to it in terms of the government guarantee framework. If we address the governance issues at Eskom, and build confidence with regard to executive and non-executive directors, the company would fall off the list of major concerns Malusi Gigaba Finance minister
Government assistance in the form of a soft loan or bailout is on the cards for Eskom, according to Finance Minister Malusi Gigaba, who last week spoke at the presentation of the “inclusive growth action plan” to stimulate the economy.
Management of state-owned entities featured heavily. One of five interventions listed for energy included “developing the case for Eskom soft support until tariff adjustment in 2018 and submit to Treasury and the Eskom board” with the stated deadline the end of July.
Gigaba said: “…What we are expressing is a deep appreciation of the weakening of the Eskom balance sheet. There is an urgency for us to provide assistance so that it is able to implement the capital build programme and fulfil its mandate. The Department of Energy will unveil what interim mechanisms are required in order to support Eskom until the next tariff application.”
Shaun Nel, Energy Intensive User Group (EIUG) spokesperson, said this could only be a reference to a loan on favourable terms or a cash injection. Other sources close to Eskom agree.
This is a scary reversal on the side of Gigaba.
Barely a month ago, responding to a question on what, if any, bailout would be required for Eskom, Gigaba said: “No bailout is required. Eskom has R150 billion available to it in terms of the government guarantee framework. If we address the governance issues at Eskom, and build confidence with regard to executive and non-executive directors, the company would fall off the list of major concerns.”
A government guarantee like those available to Eskom, means a state-owned entity can approach lenders and borrow money with the lender knowing a default will be honoured by national government.
In most cases, the lender can ask for its money back, and if the SOE doesn’t have the money, government’s obliged to honour the loan (for examples, Standard Chartered Bank and South African Airways). That Eskom doesn’t seem able to secure funding despite the availability of guarantees raises serious concerns, most notably: why are lenders not prepared to extend the company credit? Moneyweb previously highlighted how dependent Eskom has become on the Public Investment Corporation (PIC) for funding. A bailout directly from government would also imply the largest owner of its bonds had no more appetite.
Gigaba’s other energy intervention includes a suggested approach to energy regulator Nersa “regarding Eskom hardship”, also scheduled for July.
When Nersa announced Eskom average tariffs would increase 2.2% this year, the regulator invited Eskom to approach it for a bigger increase on the basis of hardship if necessary. Eskom chose to rather submit a proper tariff ap- plication for 2018/19, which it did on June 9.
Eskom applied for a 19.9% tariff increase for direct customers and 27.3% for bulk municipal customers. It’s unclear whether Gigaba referred to the latter or whether he’s suggesting a further application.
Nel says any hardship Eskom is suffering should be provided for in the June 9 application. If Gigaba is suggesting Eskom submit a further application, it would be open to a legal challenge. He says Nersa doesn’t have the resources to consider another tariff application simultaneously.