/ 29 October 2010

Eskom’s early Xmas gift

Eskom's Early Xmas Gift

Eskom will get additional loan guarantees amounting to R350-billion, Finance Minister Pravin Gordhan confirmed on Thursday.

The power utility warned, however, that even with the additional support from government, South Africa still faces power cuts, especially between now and 2012.

Gordhan made the announcement at a joint meeting of the National Assembly’s standing committees on finance and appropriations and their National Council of Provinces counterparts.

The additional guarantees from government will ensure that Eskom secures funding to complete its massive expansion programme, which includes building the coal-fired Medupi and Kusile power stations.

The future of the 4000MW Kusile plant, in particular, has been in doubt due to concerns that Eskom will not secure the funding to build it.

Doubts about financing
Earlier this year, work on Kusile was suspended for six months due to doubts about its financing.

“This will enable Eskom to continue with its entire build programme to 2017,” Gordhan said.

“Any doubts about Kusile are all removed. It provides the appropriate reassurance that government is standing by Eskom, and that the build programme will reach its end in the near future and South Africa is guaranteed the energy security that it requires.”

The additional guarantees, to the value of R174-billion, are over and above the R176-billion in guarantees government has already committed, along with a R60-billion loan.

The cost of building Medupi and Kusile has risen steeply to more than R120-billion and R140-billion, respectively, since 2008.

Possibility of blackouts
During the recent release of the draft Integrated Resource Plan, it became apparent that until Medupi and Kusile are on stream, South Africa faces power shortages similar to those of 2008, when rolling blackouts crippled the mining sector.

Medupi’s first unit is scheduled to be commissioned in late 2012, while Kusile’s first unit is due to come on line only in December 2017.

It is understood, however, that even with the guarantees Eskom still needs about R20-billion to recapitalise its balance sheet and maintain its investment grade rating.

Last week the public enterprises department noted in a briefing to Parliament that, in addition to an application for an extension of the loan guarantees to R350-billion, it had also requested an additional R20-billion equity injection from Treasury.

Eskom financial director Paul O’Flaherty told the Mail & Guardian that Eskom had indicated for some time that it was working towards recapitalising itself. He declined to reveal the amount in equity that Eskom still required, but said discussions with government was continuing and the company was confident of a positive outcome.

Preferred policy
Treasury’s preferred policy on state-owned entities such as Eskom is for institutions to raise money on the strength of their own balance sheets. According to the budget review, this reduces government’s liabilities, promotes efficiency and discourages wasteful investment.

“But the current circumstances are unique. Following the financial crisis and the recession, conditions in the market are very difficult,” Lungisa Fuzile, the deputy director general of assets and liabilities at the Treasury, told the M&G.

“Eskom’s build programme is very large compared to its balance sheet. Essentially, it has to build something the size of itself again. And we want to make sure that energy security is addressed in its entirety.”

O’Flaherty warned, however, that even with the greater security the guarantee provide, the country still faces tough times. “Over the next two years, it will be very tight in terms of security of supply,” he said.

“Medupi must come on line in the latter part of 2012, but in the interim, we will need solutions from all stakeholders to close the gaps.”

He said Eskom would continue to engage with big business, government and the public to ensure that South Africa did not face crippling blackouts in the next two years.

Criticism
Critics, however, complain that the additional guarantees could hamper government.

Lance Greyling, an Independent Democrats member of Parliament’s energy and public enterprises committee, said the extension of further credit guarantees to the utility involved “serious risk”.

“What impact will this have on government’s ability to extend guarantees to other sectors or institutions?”, Greyling asked, pointing out that the R350-billion represented the maximum limit to which government could extend credit guarantees.