As the task team appointed by President Cyril Ramaphosa sweats over solutions for the seemingly intractable problem that is Eskom, the utility’s proposal that the government take R100-billion of the utility’s debt on to its own balance sheet has left some observers scratching their heads and others spitting mad.
The mechanics of the proposal are unclear and experts have argued that it would have implications for the government’s finances. They also say it is unlikely to be a solution without other measures to address the utility’s structural problems, including higher tariffs and cutting costs.
The utility is labouring under a debt burden of about R420-billion and its cash from operations is not enough to service its interest payments. It is currently arguing its case before the National Energy Regulator of South Africa for a 15% increase in electricity prices for the coming three years. All the while, its sales have plateaued in recent years, alongside a rising cost base.
According to Andrew Donaldson, a former treasury deputy director general, if a more moderate, inflation-related price path is taken, then it is likely there will be a need, “over a period of a decade or so, for some form of fiscal assistance”.
The debt-relief proposal may not be as credit negative as perceived, provided it puts Eskom on a sustainable footing and that the government continues on its own path of fiscal consolidation, Donaldson says.
Shifting Eskom debt to the fiscus is essentially shifting the future cost burden from electricity users to taxpayers, he says. The government debt would go up but total public sector and national debt would remain the same.
Eskom could become creditworthy again if the balance sheet shift is large enough and an Eskom turnaround is credible, he said.
“This will allow further debt to be raised over time at lower cost.”
Although the government’s debt ratio would rise, market observers already have to assume that there is an implicit debt liability, given the government guarantees provided to Eskom. Ideally the transition would involve the phasing out of the government guarantee, he says.
“The key thing is that, until there is sufficient growth in electricity demand and Eskom revenue for it [the utility] to begin to carry the debt or reimburse the fiscus … government has to carry the liability.”
But, he says, this proposal is not the only way to proceed; there are other options.
According to calculations by Futuregrowth Asset Management, a R100-billion addition to the government’s balance sheet would increase the state’s net debt-to-gross domestic product (GDP) levels by 1.8% in the 2018-2019 financial year.
This would take the country’s net debt as a percentage of GDP from 46.7% to 48.5%. But these figures however exclude the impact of contingent liabilities. When these are accounted for net debt and contingencies as a percentage of GDP could potentially rise to just over 60%.
It remains to be seen how credit ratings agency Moody’s would weigh up a stabilising of Eskom’s finances against a deterioration of the government’s.
The Eskom task team has submitted its interim report to the president and has reportedly recommended among other things that the utility be split into three separate entities responsible for generation, transmission and distribution.
This has long been debated. Despite the drafting of a Bill to create an independent systems and market operator (ISMO), which would have set this in motion, it never made it out of Parliament’s portfolio committee on energy.
The Democratic Alliance launched a private member’s Bill to establish an ISMO in October last year as part of its proposals to fix Eskom. The party’s Natasha Mazzone is extremely critical about a R100-billion shift in Eskom debt. She says in a statement it would amount to the biggest bailout of any state-owned enterprise in our country’s history.