Lightening Eskom’s load

The government will assume R254bn of the power utility’s debt over the next few years but this comes with strict conditions

The National Treasury’s plan to remove a large chunk of debt from Eskom’s balance sheet comes with “strict” conditions

including one that will open the door for private companies to operate and maintain power plants that can still be rejuvenated.

Finance minister Enoch Godongwana said the government will take over R254bn worth of Eskom debt obligations to strengthen the power utility’s financial position and free funding for plant maintenance and investments in power lines.

In exchange, Eskom will have to provide concessions for the running of certain power stations, though the utility will remain the ultimate owner. These agreements with third parties will include clear performance targets.

The “extensive” private sector participation includes the involvement of a consortium of European companies to review the utility’s coal fleet and advise on operational improvements.

The study will likely conclude by the middle of the year, and Eskom will have to implement those recommendations. The assessment will focus partly on which plants can be resuscitated to original standards, “following which Eskom must concession all these power stations”.

Since the 2009 financial year, taxpayers have forked out R263bn for Eskom bailouts, partly to cover enormous cost overruns from the construction of the Medupi and Kusile coal-fired power plants, which were riddled with design flaws and which have failed miserably to alleviate South Africa’s power shortages.

However, this largesse has failed to arrest the utility’s downward spiral as its ageing fleet of generation units grapples with persistent breakdowns, due, in part, to a lack of maintenance. There were 207 days of rolling blackouts in 2022 a nearly threefold increase from the prior year. In the meantime, Eskom’s debt has climbed to R423bn.

The Treasury, which guarantees most of Eskom’s loans anyway and has warned that the utility is at risk of defaulting on them, said it would shift R168bn in capital and R86bn in interest obligations onto the government’s books over the next three years.

That will contribute to the government’s loan debt rising to R5.8-trillion in three years’ time, or 73.6% of GDP.

Olga Constantatos, head of credit at Futuregrowth Asset Management, said ahead of the budget announcement that even if the state took on half of Eskom’s debt, it would not be enough to return the company to financial sustainability.

This is because interest charges would still exceed projected pretax profits in the current financial year.

Constantatos added that debt relief might simply amount to “a temporary band-aid solution” if Eskom’s other problems are not simultaneously addressed.

In particular, the utility also needs cost-reflective electricity tariffs, “significant” cost-efficiency improvements, and a programme to recoup outstanding municipal debt which stood at R56bn at the end of 2022. The municipality that houses Harrismith, Maluti-a-Phofung, for example, owes Eskom as much as R7bn.

The Treasury is now considering a conditional write-off of municipal debt, as well as legal and regulatory changes to help Eskom resolve nonpayment for services, among other interventions.

“To avoid a repeat of debt build-up over time, the relief will attach measures, including the installation of prepaid meters, to correct the underlying behaviour of nonpayment and operational practices in [certain] municipalities,” warned Godongwana.

The conditions also, to some extent, shut down Eskom’s ability to raise future debt in the medium term.

Further, Eskom will be barred from investing in new generation projects itself, and will not be able to push through pay increases that jeopardise its financial position.

The success of the debt-swap programme ultimately rests on the implementation of key reforms “that address the inadequacies of the transmission network and the performance of existing power stations,” said the Treasury.

Johann Els, chief economist at Old Mutual Investment Group, said that relative to recent expectations in the market that the debt relief arrangement could underwhelm, “it was a positive surprise”.