Running Eskom in the red zone leaves the funding taps running dry,

Losing the power struggle will result in unemployment hitting 35% by 2025

SOUTH Africa is at the point of no return and it seems that the politicians and the majority of the country’s citizens are hoping for a miracle to fall from the air. Moody’s’ message or warning was undeniably clear.

If you do not come up with a sustainable and credible plan while at the same time cut the fat in government Eskom will take the country down with it as it has done so over the past 6 to 8 years. The malfeasance, looting, poor planning, fat cats and National Energy Regulator of South Africa’s tariff determinations were directly responsible for Eskom and the country’s starvation of fixed investment and poverty. There is a direct relationship between fixed investment through capital expenditure by Eskom and the country’s unemployment rate. Politicians and some economists are surprised unemployment is going through the roof this year, but the trade unions are not.

The stagnation of the economic growth rate is also directly correlated with the starvation of fixed investment by Eskom.

The capital starvation has left Eskom high and dry as far as operational performance is concerned as major maintenance and replacement of crucial components have been not only neglected but also absent and deferred. It manifested in a significant increase in power lost by Eskom and the load shedding.

Lost confidence led to employers cutting staff.

Despite the government making significant inroads to fight corruption, the vultures and leeches are still out there and it is clear that factional infighting and egos are more important than Eskom and the economy.

The parastatals and the country have run out of money. Remember the mantra, Beg, steal and borrow by The New Seekers? We are now past the steal and borrow stages. South Africa has only one last chance and the days are ticking by. Yes, it is on the verge of “begging”, if not already there.

A rating to junk status by Moody’s in February/March is likely to see South Africa’s long-term government bond yields climbing the Africa yield curve. The 10-year government bond yield could therefore increase by up to 200 basis points to 11 percent.

The reverberation will be felt through all South African-related debt be it parastatal, municipal or company bonds and preference shares of listed companies. South Africa’s yield curve will probably steepen as well as higher inflation as a result of downward pressure on the local currency is likely to intensify, specifically through fuel prices and costs of other imports.

A cut to junk status will have a devastating impact on Eskom, the South African economy, its people and neighbouring countries. Austerity measures such as hikes in VAT and tax surcharges will be forced on to business and consumers with devastating impacts on the already frail consumer and business confidence.

The utility has no other option but to complete the already inefficient Medupi and Kusile coal power stations but other than that Eskom will again be pushed to postpone vitally essential maintenance and upgrades to remain viable in the long run. The retrofit of Eskom’s active coal-fired units with emission reduction technologies to fully comply with strict new plant emission standards is estimated at R187 billion.

It is likely to be deferred. Huge amounts are needed for the transmission plant maintenance to mitigate the risk of redundancy and to ensure that licensing requirements are met.

What it means is that Eskom’s generation units will continue to run in the red zone as the coal-fired stations, new and old, will be sweated. It is evident that due to inefficiencies as measured by power lost by Eskom will continue the upward trend that started in 2016. The power lost in 2016 was 6 percent and has steadily increased to 10 percent this year. Due to the lack of funds and will, the power lost may be as high as 16 percent by 2025.

The dark ages will continue as load shedding and possible rolling blackouts may be the order of the day. The economy will be very hard-pressed to maintain a growth rate of 1 percent a year. From a socio-economic point of view, it spells disaster for the people of southern Africa. Economic growth per capita growth will be far below zero percent.

The power lost and the resultant depressed confidence are likely to send unemployment plunging further,

Extrapolated, it is possible that unemployment in South Africa could reach 35 percent or more by 2025 if the trend in power losses continues.

Eskom cannot rely on recovering debt to fund its activities in the short term. Although full arrears debt collection is now a pre-condition by the Treasury for Eskom to receive further funding, the chances of recovering debt of R36bn from municipalities and Soweto residents are remote. According to Eskom’s recent integrated report, “Eskom has been interdicted from interrupting supply to 25 municipalities, including 13 of the top 20 defaulting municipalities, thereby severely limiting our options.” The historical pattern of non-payment is likely to continue as the politicians will not have the stomach to enforce it specifically with the next national elections not that far away.

I am still positive that South Africa may avert a downgrade to junk status by Moody’s. Treasury’s Roadmap for Eskom gives insight of the long-term planning, but I have to agree with Moody’s and the other credit rating agencies that it lacks credibility as no clear financial plan in regard to capital expenditures and the funding thereof – similar to what you would have expected in a pre-listing statement of a company – is available. Hopefully, we will get more information in coming weeks.

Yes, running Eskom in the red zone leaves the funding taps dry.