/ 22 February 2023

Eskom to get a R254 billion lifeline

Eskom Holdings Soc Ltd. Financial Woes Cause Worst Pollution In 20 Years
Eskom told the Mail & Guardian it had only received a R9 billion World Bank loan to decommission its coal-fired Komati power station. (Waldo Swiegers/Bloomberg via Getty Images)

The treasury has proposed that Eskom receive R254 billion in debt relief over the next three years, Finance Minister Enoch Godongwana announced on Wednesday.

He made the announcement in his budget speech to parliament, which he delivered as the country endures persistently high levels of load-shedding

The debt relief — which amounts to almost as much as Eskom has received in bailouts since 2008 — will come in the form of about R168 billion in capital and R86 billion in interest, according to the treasury’s 2023 budget document, also released on Wednesday.

“The goal is to strengthen the utility’s balance sheet, enabling it to restructure and undertake the investment needed to support security of electricity supply,” the review  noted.

Godongwana said in his speech that, because of the structure of the debt relief, Eskom will not need to borrow more money during the three-year period.

In his medium-term budget speech last October, Godongwana said the government said it would take over between one and two thirds of Eskom’s R423 billion debt. Markets were expecting more information about the debt takeover plan, but Godongwana said at the time the finer details would be unveiled in the 2023 budget. 

The state-owned utility’s debt has hamstrung its ability to maintain its ageing coal fleet, which has fed into the country’s 15-year energy crisis, which has deteriorated further since October last year. On Monday, Eskom announced the country would again be plunged into stage six load-shedding.

Since 2008, Eskom has received R263.4 billion in government bailouts. But, as the budget document notes, these allocations “have failed to stem the collapse of Eskom’s balance sheet and operations”. The government guarantees R350 billion of the utility’s total debt, which is at risk of default.

The debt relief plan, according to the budget document, has been the subject of extensive consultation with Eskom and other stakeholders. Its success “rests on the implementation of key reforms that address the inadequacies of the transmission network and performance of existing power stations”.

The reforms form part of certain obligatory conditions for the relief, including the designing of a mechanism for building new transmission infrastructure that will allow for extensive private sector participation. 

The treasury has also appointed an international consortium to review all Eskom’s coal-fired plants, which will advise on operational improvements. According to the budget, the consortium’s review is scheduled to conclude by mid-2023 and Eskom is required to implement its recommendations.

The consortium consists of VGBE Energy, Dornier Power, KWS Energy, RWE Technology and Steag Energy, according to the treasury’s chief director of state owned enterprises, Ravesh Rajlal. He said on Wednesday that the independent assessment will be used to further strengthen the conditions on Eskom that relate to plant management.

“As a treasury, we are not that close to some of the challenges that Eskom is experiencing, so that is why the independent assessment is part of the debt relief arrangement,” Rajlal noted, adding that all stakeholders have been advised of the consortium’s review.

The effect of Eskom’s decline — including its drag on the economy — has become particularly acute in recent months, as persistent and high levels of load-shedding threaten to obliterate growth. Last month, the South African Reserve Bank’s monetary policy committee had a dire prognosis for the country’s crisis-hit economy, forecasting that GDP would grow by a mere 0.3% in 2023.

The treasury itself is forecasting that the economy will expand by 0.9% in 2023. GDP growth is now expected to average 1.4% to 2025, compared with the 1.6% predicted in the 2022 medium-term budget policy statement.

Last week, ratings agency Fitch noted that low growth potential, largely the result of the energy crisis, as well as other problems with state-owned infrastructure, is a key credit profile weakness for South Africa. 

Fitch echoed an earlier warning by Moody’s: “South Africa’s longest-ever stretch of power cuts is credit negative.” Moody’s currently has a stable outlook on South Africa, with a Ba2 rating, a notch higher than the Fitch and S&P Global equivalents.

South Africa has struggled to claw its way out of junk status since it lost its last remaining investment grade rating in 2020.