/ 27 August 2023

The Fiscal Cliff | Eskom: The fiscal monster the treasury can’t vanquish

Eskomgettyimages 1240782692
Eskom is awaiting government approval to get the 100 megawatts of power offered by the Mozambique energy ministry in July.

When it comes to South Africa’s fiscal crisis — and the economic malaise that accompanies it — one entity is impossible to ignore: Eskom, which, by 2026, will have received close to R500 billion in government bailouts in less than two decades.

The power utility will be given more than half of this amount over the next three years through the R254 billion Eskom debt relief programme, which also happens to be the biggest bailout in the country’s history.

The debt relief is crucial, according to Finance Minister Enoch Godongwana, lest Eskom become a permanent strain on the country’s public purse. Only a year prior, Godongwana decried how more than R308 billion had been used to bail out failing state-owned entities (SOEs), money which would otherwise have gone to front line services and infrastructure.

Today, as Godongwana stares down the prospect of even more SOE bailouts, it has become clear that, somewhere down the line, the government created a monster which is now near-impossible to tame. 

Enoch Godongwana (1)
Tail off: Finance Minister Enoch Godongwana’s medium-term budget due in October is likely to be affected by the drop in the mining sector’s profits. Photo: Mlungisi Louw/Gallo Images

Funding conundrum

A convenient place to begin to uncover the conditions that created Eskom’s burden on the economy and the fiscus is in 2007, the year that marked the start of load-shedding, as well as the government’s eleventh-hour push to get more power plants up and running. The year also marked the beginning of the end of Thabo Mbeki’s presidency, which ushered in a new era of fiscal conservatism that was ultimately overtaken by a commodity-powered spending spree.

The looming energy shortfall had been flagged years prior, in 1998, when energy experts warned that economic growth would cause demand to outpace capacity. Two years later — when Eskom went from being a statutory corporation to a public company with the state as its shareholder — the utility’s financing model changed significantly.

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For the first seven years after Eskom was formed in 1923, the utility was capitalised by government advances, subsequently converted into treasury loans with terms of up to 40 years. After 2001, Eskom had to raise its own revenue through tariffs as well as the debt market. The utility also lost its tax exempt status.

In 2004, the department of public enterprises’ budget vote flagged the severe financial implications of Eskom’s impending capacity shortfall.

The business was still profitable, but a new infrastructure build would jeopardise its otherwise sound financial position. Meanwhile, tariffs — which Eskom now relied on for revenue — had fallen, making it difficult for the utility to keep its head above water. In 2007, Eskom’s profits began falling. 

Trevor Manuel
Trevor Manuel (Paul Botes/M&G)

In his 2008 budget speech, then finance minister Trevor Manuel laid bare Eskom’s funding dilemma as the utility prepared to embark on a mammoth expansion through the construction of the Medupi and Kusile power stations.

 “Now that Eskom once again has a major investment programme to finance, its capital should again mainly be raised through debt and paid for by users over the course of time through appropriately structured tariffs,” Manuel noted.

“However, Eskom’s tariffs were steadily reduced in real terms during the 1980s and

1990s … The tariff structure is now too low to support the required borrowing.”


The treasury set aside R60 billion to support Eskom’s five-year expansion plans. Medupi and Kusile were reportedly expected to come at a combined cost of R160 billion. By 2019, this amount had almost doubled to R300 billion. Last year, President Cyril Ramaphosa indicated that a further R33 billion would be needed to complete the projects, a decade after their initial deadline.

As the costs of Medupi’s and Kusile’s construction piled up, so did the treasury’s bailouts to Eskom. The utility received further equity injections of R23 billion in 2015 and R49 billion in 2019. The 2020 budget allocated the entity another R112 billion.

With a large part of its capital tied up, and with revenues hit by lower capacity, Eskom’s debt also ballooned — soaring to north of R400 billion by 2023.

Meanwhile, as Mbeki’s presidency came to an end, South Africa’s economy was walking blindfolded into a prolonged period of stagnation, which would cause spending pressures to boil over just as the country’s coffers had started to look more lean.

According to a 2021 analysis by Michael Sachs, an adjunct professor at Wits University and the former head of the treasury’s budget office, the Mbeki years post-2002 were marked by a significant expansion in spending, which continued into Jacob Zuma’s first term as president.

As the country enjoyed the spoils of the commodity boom, between 2002 and 2012, employment in the public sector grew, enabling it to serve a larger portion of the population. So did the salary bill, which years later would become the target of the government’s efforts to rein in spending.

There was also a rise in transfer payments to poor households, according to Sachs. Social grants and other transfers to households increased from 3% of GDP in 2001 to 4.6% a decade later. Transfers to local governments to fund free water and electricity to poor households increased from 0.8% to 2% of GDP over the period.

Sachs’s analysis also points to a considerable rise in infrastructure spending. Over and above the Eskom build post-2007, the budget also supported the construction of the 2010 World Cup stadiums and getting the Gautrain up and running. 

Moreover, Sachs notes, state rail, port and pipeline company Transnet’s capital formation doubled as a share of GDP, rising from 1% to 2.1% of GDP between 2005 and 2009.

Prior to the 2000s, public investment in infrastructure had stagnated. 

According to the 2011 budget documents, infrastructure investments peaked in the late 1970s — during Eskom’s last major build programme and during the development of the coal export railway line — at 16% of GDP. By 1994, this figure had declined to about 4% of GDP where it remained until the early 2000s.


After 2011, South Africa’s economic prospects changed markedly. As Sachs notes, it was at this time that China’s growth slowed and the commodity boom tailed off. Add to this a burgeoning electricity crisis and Zuma-era corruption — each also threatening investor and the tax-paying public’s confidence — and South Africa’s economy was in for more than a decade of pain. 

The country endured its first set of credit rating downgrades in 2012. Moody’s justified its ratings action that year by noting “the South African authorities’ reduced capacity to handle the current political and economic situation and to implement effective strategies that could place the economy on a path to faster and more inclusive growth”. 

The ratings agency also flagged that the country had lost considerable fiscal space, a predicament which worsened after the government granted public sector workers a higher-than-expected wage deal.

Successive ratings downgrades, ultimately resulting in South Africa falling into junk status in 2017, dealt another blow to public finances. 

Meanwhile, Eskom’s own ratings downgrades caused the utility’s debt position to deteriorate. Given how entangled South Africa’s economy, its public purse and Eskom are, the company’s financial stability emerged as the single-greatest risk to the sovereign’s creditworthiness. The government is the payer of last resort if state-owned entities are unable to manage their debt.

In 2018, a Nedbank research note said it was almost impossible to conceive any turnaround plan for Eskom that did not include some combination of a fresh capital injection or a plan to restructure the utility’s debt. 

It would be five more years before the government would come to the table with a plan to deal with Eskom’s oppressively high debt, a move that was widely welcomed. However, whether the debt relief programme — which will go hand-in-hand with Eskom’s restructuring — will unburden the fiscus in the long term remains to be seen.

Sachs will join the Office of the Premier as the deputy director general responsible for performance monitoring and evaluation.
Michael Sachs

In an interview with the Mail & Guardian, Sachs pointed to policy failures as being at the heart of the Eskom crisis. 

Sachs has previously noted that the surge of public infrastructure spending in the 1970s coincided with an increase in South Africa’s incremental capital-output ratio (ICOR), a measure of the inefficiency with which capital is used. In the 2010s, the surge in public investment — which coincided with a slowdown in economic growth — was comparatively smaller, but the escalation of the ICOR is unprecedented, according to Sachs.

Whatever the reason for this, he wrote in the aforementioned 2021 analysis, “where the public sector creates assets with a value below their cost of production, society will be saddled with servicing the liabilities that result”.

“In general, public sector prices have outpaced inflation in the private sector. A significant driver of this divergence may be the costs imposed by poor infrastructure choices.”

From Eskom’s point of view, Sachs explained in the interview, tariffs have been below the utility’s cost of production for 30 years — and the R400 billion that built up on its balance sheet was what it ought to have received to cover its costs of production.

“The problem is, when you think about tariffs, some will say that tariffs must cover the cost of production. But then other people will say that the problem is not that the tariffs are too low, but that the cost of production is too high and that you have an inefficient state-owned company that is producing at high costs. Of course, there is a bit of both,” he noted.


The government has set a high threshold for what it expects state-owned entities to achieve, especially considering commercial conditions. 

This is true for the South African Post Office, which had a large part of its business obliterated by the advent of email, and the SABC, which has an unfunded mandate to produce public-interest content even when audiences aren’t tuning in. 

The same can be said for Eskom, which must raise revenues from tariffs the utility contends are too low, as well as provide electricity to a consumer-base that can’t afford to pay. 

When the government does not subsidise operations that don’t generate a commercial return, spending pressures build up, threatening to create a risk to the fiscus. When fiscal risk ultimately materialises, the state is forced to respond with a bailout.

The Alternative Information & Development Centre’s Dominic Brown pinpoints the beginning of Eskom’s fiscal risk to the utility’s unsustainable financing model.

Such a risk arises, Brown said, when state-owned entities have to borrow from private creditors. “Why are they borrowing? This comes down to the way that public utilities are required to operate. Inasmuch as they are public utilities, they generally have to act in the same way as any private company,” he said.

“The implication is, cost-reflective tariffs and the need to raise revenue and/or debt to be able to cover operational costs, maintenance costs and new investments. As a result, many SOEs are heavily reliant on debt to cover up revenue shortfalls.”

South Africa’s low growth trajectory may have helped delay the worst of the energy crunch. But — along with the hold-up on the Medupi and Kusile power stations, which has been linked to state capture-era corruption — the inadequate maintenance of existing power plants has accelerated the crisis.

The collapse of the country’s state-owned entities can be traced back even further, to the post-apartheid government’s early years, when the state’s investment in public infrastructure came to a standstill, Brown added. Mbeki’s structural readjustment programme reduced public gross fixed capital formation significantly, as part of an attempt to prioritise debt service costs and maintain government expenditure, he said.

“Then you have this build-up — and Eskom becomes a very clear-cut example of this — whereby a lack of investment over time catches up, especially when you are trying to provide more services to the majority of the population that was previously excluded.”

Dominic Brown
Dominic Brown.

‘So many unknowns’

In Brown’s view, the R254 billion Eskom debt relief programme, which comes with conditions that will determine how the utility is restructured, will do little to relieve the public purse in the long-term.

The government laid the foundations for Eskom’s restructuring all the way back in 2001, when the utility was corporatised, but it only truly pulled the trigger more than two decades later.

Brown’s cynicism relates to the conditions attached to the debt relief, which will advance the liberalisation of South Africa’s energy sector through public-private partnerships. A number of critics have warned that this process will leave consumers saddled with even higher electricity prices as private investors endeavour to maximise profits. If energy prices become even more untenable for the majority of South Africans, Eskom’s financial position only stands to worsen.

“There are many things that are going to determine whether, at the end of the debt relief programme, Eskom costs can be covered by their revenues — including tariffs over the next three years, the direction of load-shedding and the amount of diesel Eskom burns,” Sachs said. 

“There are so many unknowns.”

Then there is Eskom’s restructuring, which requires the utility to undertake a complex institutional overhaul, Sachs said. “There are so many issues in the mix that I would be surprised that, at the end of this three-year period, the state simply says, ‘You’re on your own.’”

This article forms part of the first instalment of The Fiscal Cliff, a monthly series by the Mail & Guardian on the state of South Africa’s public purse. The series looks into the effect of fiscal consolidation on public services — which have steadily deteriorated over the years — and considers this policy’s impact on the country’s growth prospects. You can read the other article in part one of the series here.