/ 3 May 2019

Eskom: The abyss just gets deeper

Finance Minister Tito Mboweni has to balance the demands of a power utility that is struggling to keep the lights on with the need to stabilise the nation’s debt.
Finance Minister Tito Mboweni has to balance the demands of a power utility that is struggling to keep the lights on with the need to stabilise the nation’s debt. (Waldo Swiegers/Bloomberg/Getty Images)


In late February, the 20th to be precise, Finance Minister Tito Mboweni detailed in his budget how R23-billion would be made available for the next three years so that Eskom could get its financial and operational affairs in order.

The announcement was generally welcomed as what was expected was a huge bailout of say R100-billion to move some of Eskom’s debt on to government’s balance sheet. The R23-billion-a-year is more on a pay-as-you-go basis for the fiscus, which would also supposedly not let Eskom off the hook, in that the rescue was linked to the appointment of a chief restructuring officer to reconfigure the ailing state enterprise.

But within five weeks, at the end of March, the power utility — the 11th largest globally and the country’s biggest enterprise with turnover last year of R177-billion — needed emergency funding to be kept functioning.

Parliament, meanwhile, had voted on the day after the budget, February 21, to dissolve, ahead of the May 8 elections.

We pick up the story from a document, a report to Parliament, dated April 14, by Mboweni, which begins: “To inform Parliament of the use of funds to defray expenditure of an exceptional nature which could not, without serious prejudice to the public interest, have been postponed to a future parliamentary appropriation of funds.”

Mboweni says treasury did not submit a special appropriation Bill for consideration by Parliament as there was no indication that Eskom would experience difficulty in raising the required funding to defray its obligations until the end of the appropriation process.

“However, by the end of March 2019, it became evident that Eskom was experiencing difficulties in raising the required funding as well as drawing down existing facilities.”

That the utility was in trouble, is evident. Mboweni quotes the 2019 budget review: “Government’s immediate focus is to address the substantial risks that Eskom poses to the economy and public finances. In its current form, South Africa’s state-owned power utility is not financially stable, nor can it meet the country’s electricity needs.”

But the month after Mboweni budgeted for Eskom to get R23-billion between August and October 2019, there was Eskom needing to immediately access the public purse to keep it afloat.

“In order to avert a default by Eskom on its obligations, on April 2, the minister of finance involved section 16 of the Public Finance Management Act,” Mboweni’s report reads, pointing out that a default by Eskom may have triggered a call on government guarantees (R281-billion in all) of Eskom’s debt. The R281-billion is money the cash-strapped fiscus does not have.

China Development Bank

Mboweni says in his report that the reason for Eskom’s liquidity crisis at the end of March was that it had expected to draw down R7-billion from a China Development Bank facility of $2.5-billion, adding that Chinese central bank exchange control requirements were the reason for the delay. The Corporation for Public Deposits then turned down an Eskom request for short-term funding, Absa Capital loaned R3-billion until April 2, backed by a government guarantee, to keep the electricity giant liquid, while Mboweni invoked the special section 16 emergency powers of the Public Finance Management Act to advance R17-billion of the budgeted R23-billion.

Michael Sachs, former chief of the budget office at treasury and now an adjunct professor at Wits University, says it matters little where Eskom intended sourcing the funds, the fact is that its needs were not communicated to treasury.

“When the budget was tabled, there was no liquidity crisis. Why did treasury make this assumption? Was it misled?” he asks, explaining that section 16 is only meant to be used in national crises such as earthquakes.

Sachs says that while the Eskom story has been long in the making, there appears to be a new development each week.

Mboweni’s report pointedly says that during the time the energy department and Eskom were engaging on a March 26 proposal from Eskom for financial support to be considered by the minister of finance, “upon reviewing this application, the national treasury established that it was focused on addressing the medium- to long-term financial sustainability of Eskom instead”.

Only R17-billion of the R23-billion could be advanced to Eskom; there is a 2% limit of the total national budget. R5-billion was paid on April 2 with “the rest to be disbursed in accordance with Eskom’s cash flow requirements. The next tranche will be required before April 30,” Mboweni said in his report.

Although Mboweni’s report says the funds from the China Development Bank were expected during April, Eskom specialist Chris Yelland tweeted on April 30, that the funds had not arrived.

Yelland says this $2.5-billion loan from the China Development Bank was for the completion of Kusile and not for operational expenditures.

“The delay accessing the CDB funds by Eskom apparently resulted from Chinese concerns as to whether Kusile would in fact proceed to completion, something Eskom and DPE [department of public enterprises] were investigating.”

Yelland further tweeted that “visits by department officials to China to reassure the China Development Bank that Eskom would continue its capital expenditure programme are said to have been successful in unlocking access by Eskom to the bank’s funds. Drawing on the [bank’s] funds by Eskom is now expected within days.”

It is in the interest of government, Eskom and the bondholders that there not be a default. Eskom has already indicated it is attempting to negotiate more favourable terms with bondholders, to shift deadlines as its debt burden is restructured.

Part of the reconfiguration envisaged for Eskom is a mooted split into three divisions: generation (power stations), transmission (the electricity grid) and distribution (local supply through sub-stations). Yelland says there appears to be concern among bond investors as most of the debt sits in generation while transmission runs on well-maintained infrastructure and is in good shape. It is robust, well-invested and performing well with not a lot of debt, the “jewel in the crown”, Yelland calls it.

The planned three-way split is causing some consternation among bondholders, says Yelland, as they are worried they may end up holding bonds in the toxic, highly indebted parts of Eskom.

“How will debt be allocated and where?” he says, adding that the split could be “fraught with legal challenges”.

The concerns of debt holders are exacerbated by the announcement in the budget by Mboweni of the intention to bring in a strategic equity partner into a national grid company to be formed mid-year, meaning bondholders may end up holding debt in unattractive parts of Eskom while more desirable parts are sold off to other investors.

Yelland says there is a lack of evidence on what is planned, but one speculated strategic equity partner could be the state-owned Public Investment Corporation which has R86-billion of government employees pension fund money in Eskom bonds. This debt could be swapped for equity in the new national grid company.

An alternative speculated strategic equity partner is the State Grid Corporation of China, a state-owned electricity monopoly that runs the national grid in China. Chinese development agencies have controversially ended up owning public facilities, such as the high-profile case where a Chinese state-owned company came to own a port in Sri Lanka after this asset was used as security for loans.

The New York Times reporting on China acquiring the port, said in June 2018 that the case intensified some of the harshest accusations about President Xi Jinping’s signature Belt and Road Initiative: that the global investment and lending programme amounts to a debt trap for vulnerable countries worldwide, fuelling corruption and autocratic behaviour in struggling democracies.

Too big to fail

That Eskom’s finances are a mess is no secret, but the extent of the mess has not been clear. By some estimates it will need R100-billion over and above the R23-billion a year, which, by the way, treasury expects to run for at least 10 years.

But the dramatic change in its financial position from February to March, at least in what it had apparently communicated to treasury, suggests its financial black hole is darker and deeper than previously thought.

Public Enterprises Minister Pravin Gordhan told reporters last week Eskom is not about to collapse. “We have the problem well under control. We understand the changes which need to be made,” he said.

Sachs says that government will not allow Eskom to fail.

If it fails, so does the whole economy. But this brings into question: just how much more public money will be thrown into this abyss?

State working for Eskom to access Chinese loan

Eskom referred queries from the M&G to treasury and the department of public enterprises.

Ministry of public enterprises spokesperson Adrian Lackay responded as follows:

“The loan agreement with the China Development Bank [CDB] is a binding agreement which was concluded in July 2018. I am advised that neither the loan facility nor the R7-billion drawdown that Eskom wants to access at this time, are in jeopardy.

“A condition of the CDB loan agreement is that it is to be utilised only for capital expenditure, under government guarantee, and not for operational expenses. I am advised that under government guarantee, there is no need to convert loans or debt to equity. Officials within the South African government — national treasury, the department of public enterprises and Eskom — are currently working towards resolving administrative impediments for Eskom to access the loan.

“Regarding whether or not Eskom informed treasury timeously, I think the report by the minister of finance to Parliament sufficiently explains why it was necessary to apply section 16 of the PFMA [Public Finance Management Act].”

The treasury responded to the M&G’s queries as follows:

“Essentially, the chief reorganisation officer (CRO) will be entrusted with implementing the recommendations of the presidential task team. This will be undertaken in consultation with the board and the chief executive.

“There was no miscommunication. Both Eskom and government were under the impression that Eskom would be able to draw down on their existing facilities, which would have enabled them to operate until … after the elections.

“However, when Eskom experienced delays with the expected drawdowns, government decided to expedite the appropriation through section 16 of the PFMA. The R23-billion will still be sufficient for this year as Eskom has subsequently been able to secure funding from the market.

“Government is working closely with Eskom to monitor its cash flow requirements on a regular basis and, yes, another tranche was provided, but the subsequent tranches were pushed out because Eskom has secured some funding in the market.

“The minister of finance has authorised the transfer of the maximum allowable amount, being R17 652-billion during the 2019-2020 financial year, of which only R5-billion was transferred to Eskom on April 2. The remaining balance, the difference between what has been authorised by the minister of finance and the R23-billion announced in the budget, will have to be subjected to the normal appropriation process after the elections on May 8.

“Government is working closely with Eskom’s cash flow requirements and to understand Eskom’s funding plan for the financial year, including those facilities that Eskom is considering refinancing.”