Eskom bailout jeopardy
State aid shortfall may lead to more debt and hit SA’s credit ratings
● The government will lay the groundwork this week for a hefty bailout for Eskom that could nonetheless leave it needing to borrow more — which could trigger further credit rating downgrades.
A special appropriation bill — to be tabled in parliament this week — will enable the finance minister to allocate R230bn to Eskom. But economists say this will fall far short of the power utility’s requirements.
They forecast that Eskom is likely to require more than the R23bn a year implied by the R230bn appropriation over 10 years.
Azar Jammine, chief economist at Econometrix, says: “We are really talking about R50bn to R60bn needed every year given current tariffs that have been awarded by [national energy regulator] Nersa. They are way too low to put Eskom on a cost-reflective pricing scale.”
Jammine said public debt will have to rise as a percentage of GDP and will “jeopardise our ability to maintain an investment-grade credit rating”.
The bailout is necessary but it comes as little progress has been made on the trumpeted re-organisation of Eskom to minimise the risk of a rescue of this magnitude in future.
The National Treasury could not confirm whether the special appropriation bill would require Eskom to repay the money. Once the bill is passed by parliament, assented to by President Cyril Ramaphosa and published in the Government Gazette, it is an appropriation from the National Revenue Fund.
“Usually, the bill would enable the minister to impose conditions, determine when and how much will be transferred and stop a transfer if conditions are not met. Further money not transferred to the entity by the end of the financial year must be paid into the National Revenue Fund,” said a spokesperson for the National Treasury.
The appropriation bill cannot be a blank cheque.
Lumkile Mondi, senior economics lecturer at Wits University, said: “He can’t get a blank cheque. We have to know where that money is going, how it will be spent, because that’s how the oversight committee holds him accountable.”
The bill will have supporting documents detailing how the funds will be spent and its destination so that the state-owned company can also be held to account in parliament, he said.
The bill comes as Eskom’s group treasurer, Andre Pillay, resigned earlier this week, effective from the end of August. He was responsible for Eskom’s funding programme. CEO Phakamani Hadebe resigned two months ago and leaves at the end of this month.
Asked about a new CEO, Eskom told Bloomberg this week that “arrangements are under way to ensure there will be a credible interim solution” and that the post of CEO will soon be advertised.
Finance minister Tito Mboweni said last week a chief re-organisation officer would be announced soon. This position is contingent to further funding being given to Eskom, according to the plan to restructure the power utility into three separate companies — generation, transmission and distribution.
A separate appropriation bill that is before parliament will give the finance minister access to the contingency reserve — an emergency fund — to assist other ailing SOEs. The minister is expected to provide additional financial support to South African Airways, the SABC and Denel. A green paper will culminate in a white paper outlining the role the government expects SOEs to play.
But the Eskom bailout may inflate the main budget deficit to 6% in this financial year. This exceeds a target of 4.7% for this year and 5.4% for next year.
The question is what expenditure cuts Mboweni may signal in the medium-term budget policy statement in October to accommodate the intervention for Eskom and possibly other struggling SOEs.
With government revenues already falling short, the Treasury has asked national departments and provinces to cut their budgets by 5% for the 2020/2021 financial year that begins in April next year.
Absa economist Peter Worthington said: “There is nothing you can do to raise revenues in the current fiscal year to fill [the budget deficit]. The government will have to borrow. For 2020/2021, about the only revenue measure that will work to fill it would be a VAT hike. A one-percentage-point hike in VAT would raise about 0.4-0.5% of GDP.”
The government will have to borrow more, raising its weekly bond issuance, but how easy that will be depends on the degree to which global monetary policy is accommodative or not, Worthington said.
There is global appetite for SA’s bonds among other emerging-market bonds.
Mondi said the deficit could be financed if there was sufficient economic growth and accompanying improved tax revenue. But, he said, “prospects for growth are very small going forward” — and this means a downgrade could be the result. The Reserve Bank’s forecast for growth this year is 0.6% after a contraction in the first quarter.
In Mboweni’s budget vote on July 11, he said Eskom was the biggest risk to the fiscal framework because of its financial problems and its negative impact on the lives of ordinary South Africans.
In the past decade Eskom’s debt has ballooned from R40bn to more than R440bn. Of the SOEs, it has the largest guarantee at R350bn.
The government, Mboweni said, is “urgently working on stabilising the utility”.
Economists say the R230bn will fall far short of utility’s requirements