Funding woes may lead to Eskom rethink

Power utility Eskom faces an enormous funding hurdle not only because of the global financial market meltdown, but also because its expansion spending has more than doubled to R343-billion.

Eskom had originally planned to spend R150-billion over the next five years to 2013, but an Agence France-Presse report on Monday quoted an Eskom official as saying that the figure was revised upwards “to reflect current realities in the international market”.

“The prices of things we need to procure under the programme are skyrocketing and we need to factor these into our budgetary projections,” the report quoted the official as saying.

Eskom indirectly confirmed the new expansion budget on its website, where it said capacity expansion was still expected to grow to more than R1-trillion by 2026.

Ultimately Eskom will double its capacity to 80 000 megawatts by 2026.

Eskom is building additional power stations and major power lines on a massive scale to meet rising electricity demand in South Africa.

Since the programme started in 2005, an additional 2 582MW has been commissioned and the utility plans to deliver an additional 16 304MW in power-station capacity by 2017.

Projects to generate more electricity account for 73% of Eskom’s massive build budget, with the balance being spent on improving the transmission system to deliver power around the country.

However, the global financial meltdown has raised questions over Eskom’s ability to raise the required funding.

The utility announced last week that it had postponed its plans to sell $500-billion of bonds internationally because the global financial turmoil was pushing up borrowing costs.

Eskom was initially aimed to issue bonds on the international market before the end of 2008.

While Eskom has not provided exact details on its fund-raising plans, the capital was expected to be raised through the issue of bonds, increased tariffs and local and international debt.

But Finance Minister Trevor Manuel warned last week that Eskom’s borrowing plans would probably be affected by the global financial crisis. “It’s going to be a lot tougher and may impact on the cost of infrastructure,” he told Business Day.

Manuel also warned that the crisis would spark a new way of thinking in the financial world.

“The bottom line is that in the next while—and it’s not going to be six months or a year, but probably two years—there will probably be enormous recalibration of what we do and how we finance it,” he said.

Besides its contribution of R60-billion to Eskom’s capital, the government intends to guarantee the power utility’s debt.

South Africa’s National Treasury said in August that it was prepared to guarantee Eskom’s existing debt if necessary. This was after ratings agency Moody’s downgraded its foreign-currency credit rating by three levels to BAA2, the second-lowest investment grade.

Eskom’s announcement that it had submitted an application to the National Treasury for guarantees on all existing and future debt has since resulted in ratings agency Standard & Poor’s revisiting its local currency CreditWatch for Eskom from “negative” to “developing”.

Last month, Treasury Director General Lesetja Kganyago said Eskom was experiencing a cash-flow mismatch.

The guarantees are expected to see Eskom through its funding problems.

In the meantime, government spokesperson Themba Maseko told journalists at a post-Cabinet meeting last Thursday that Eskom would have to see how the global turmoil affected its ability to raise capital internationally.

“They may have to come back to source funding in the local market,” Maseko said, adding that it was ultimately up to Eskom to decide whether to put an alternative plan in place.

It was also up to Eskom to decide whether to delay the build programme.

Eskom has been unusually silent on this front. The utility has yet to release any statement on the likelihood of a funding rethink or even comment on the effects of the financial meltdown.—I-Net Bridge

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