Eskom’s ‘spiral’ imperils economy
NOW SA’S BIGGEST CREDIT RISK – S&P
Bloated by debt, bled by corruption and battered by structurally-declining sales, Eskom is facing a “death spiral”. And it now poses the biggest credit risk to SA, according to S&P Global Ratings.
More than a decade of unreliable supply and surging prices are driving consumers and businesses off the grid as the price of renewable energy drops, leaving Eskom with lower sales and high fixed costs due to the expense of building new power plants.
The company is losing middle-class clients, near-bankrupt municipalities’ arrears are climbing and many customers in impoverished townships don’t pay their bills or steal power through illegal connections.
Rampant corruption and a bloated workforce have pushed total debt to R419 billion, and sales volumes are falling, according to its interim results.
Eskom’s inability to supply electricity and the ever-increasing prices have provided an incentive for users to shift to solar panels, Elena Ilkova at RMB, said. This “will leave Eskom to supply increasingly higher-priced electricity to consumers who can barely afford to pay and many more consumers who either can’t or will not pay”.
On December 1, Minister of Finance Tito Mboweni said government could not afford any more bailouts and urged Eskom to go back to the bond market.
Earlier this year, Minister of Public Enterprises Pravin Gordhan intervened when a management plan not to increase pay sparked protests. Eskom will propose that government absorb R100 billion in debt, Legal & General’s Sanchay Singla said.
“Eskom prices have increased four-fold in nominal terms over the past decade,” said UCT’s Graduate School of Business Professor Anton Eberhard. “And solar prices have fallen 80% since 2011 and 50% for wind.”
“As new technology allows self-generation to become increasingly price competitive for the consumer, a utility’s sales decline,” Eskom said in its 2018 annual report.
The cost of servicing Eskom’s annual debt has risen to R45 billion, while municipality arrears climbed to R17 billion from R13.6 billion in six months. SA has experienced seven consecutive days of rolling blackouts, with Eskom struggling to pay for plant maintenance.
Eskom has been its own worst enemy. Recently, it has urged consumers to switch to more efficient light bulbs and subsidised solar water heater installation.
Rolling blackouts also reduce revenue. It boosted its number of employees 46% over the last decade to about 47 600, without significantly increasing output.
In March, chairperson Jabu Mabuza said the staff numbers needed to be reduced and talks about cutting senior management have started.
“Eskom in its current format is unlikely to exist a decade from now,” Ilkova said. “The business needs to be reconfigured.”
Eurasia Group’s Darias Jonker said: “The only workable solution is to break up Eskom and to selloff certain assets, such as the new mega power plants. This latter option is particularly politically sensitive and is thus unlikely to happen. In short, Eskom is pushing the government toward a fiscal crisis either way.” – Bloomberg