Eskom pleads for aid to escape ‘debt trap’

Utility has R419bn in debt, projected to rise to R600bn as it continues its build programme

Eskom CEO Phakamani Hadebe on Monday made a desperate plea for three years of substantial tariff hikes and a massive government bailout, which he said was necessary to pull the power utility back from the debt cliff and avert disaster.

Hadebe was addressing hearings held by the National Energy Regulator of SA (Nersa) to query Eskom’s application for a 15% tariff increase beginning in 2019/2020, which would result in a total increase of 52% over the three-year period, significantly above the Reserve Bank’s inflation target of 3%-6%.

It also emerged during the hearings that Eskom is unable to raise further funding from the financial markets unless it secures significant government support in the form of a capital injection or debt relief.

It must raise R20bn by the end of March to fund operations or run out of money to pay suppliers for inputs such as coal and employee salaries.

The company has R419bn in debt — projected to rise to R600bn as Eskom continues its build programme — and is unable to pay its debt service costs out of the revenue it generates. The power utility operates thanks to R350bn of government guarantees.

However, Hadebe said banks no longer considered a government guarantee sufficient security in order to lend and needed further reassurance through government support.

Eskom executives gave a brutally frank update on the company’s financial position. A package of substantial tariff increases, cost reductions and significant financial support from the government was necessary to turn Eskom around, Hadebe told the hearings.

In December, Eskom chairman Jabu Mabuza indicated Eskom would approach the government to take R100bn of debt onto its own balance sheet.

But Nersa members lashed Hadebe and CFO Calib Cassim, questioning why the public should bear the burden of Eskom’s inefficiencies, criticising it for funding long-term capital expansion through shortterm debt. Hadebe answered with an impassioned plea to the regulator to consider Eskom’s dire situation, saying that the company faced being cut off

from the financial markets unless it was able to put its finances on a more sustainable footing. “We said we require tariffs of 15%. You asked are we not aware of the effects on the economy? Are we not aware of the effect on the poor? We are. But we need to go through the pain because of what has happened before,” he said.

But other participants at the hearings, which included the SA Local Government Association and various lobby groups, slammed Eskom’s tariff application, saying that tariffs should not be increased due to the burden it would place on the economy.

At the start of the Eskom presentation, Hadebe apologised to SA for the challenges that Eskom had brought upon the country, which he said “could have been avoided”. Hadebe was appointed a year ago along with Mabuza in an effort to turn Eskom around and clean out corruption and mismanagement.

Cassim told the hearings that Eskom was in a debt trap and was doing the equivalent of using one credit card to pay off another. Of the R72bn funding requirement for the year, R52bn had been raised, he said.

“We are confident that we can raise the remainder, but it is not an easy task as it amounts to R1bn a week.”

Cassim said to do that, government support was required.

Eskom would face a loss of R15bn in the 2018/2019 financial year, higher than the R11bn that was forecast two months ago, Cassim said.

Above-inflation electricity tariffs have been consistently flagged by the Bank’s monetary policy committee as a key driver of inflation. A 15% tariff increase will worsen the inflation outlook. Nersa has seldom agreed to Eskom’s tariff requests in recent years, which it determines based on a methodology of allowed-for costs and a return on assets.