‘If Eskom’s finances weaken, government’s risk exposure increases’
Any deterioration in Eskom’s financial position would increase the government’s "contingent liability" exposure by about R200bn, Finance Minister Pravin Gordhan cautioned on Tuesday.
He said power-purchase agreements between Eskom and independent power producers (IPPs) were now categorised as contingent liabilities.
The government’s total guarantees to state owned companies as at the end of June amounted to R469bn, Gordhan said in a written reply to a parliamentary question by DA finance spokesman David Maynier. This excludes the additional R4.4bn granted subsequently to SAA, bringing the national airline’s total state guarantee to R19bn.
Gordhan noted that 67% of the total of R469bn had been issued to Eskom and 13% to the South African National Roads Agency Limited (Sanral). He explained that only the portion of the guarantees that these companies had borrowed against — known as the exposure amount — was a contingent liability to government.
"Creditors can call on government to service or pay off the guaranteed debt on which an entity has defaulted. Exposure amounts increased from R264bn as at March 31 to R266bn as at June 30. Most of the increase is accounted for by Eskom (R2.3bn), Development Bank of Southern Africa (DBSA) (R20m) and Land Bank (R88m)," Gordhan explained.
As part of the bail-out of African Bank in 2014-15, the South African Reserve Bank provided support on the back of a government guarantee constituting an explicit contingent liability of R7bn. As at June 30, the guarantee amount had declined to R3bn and the Reserve Bank has not realised any exposure against this guarantee.
Gordhan said the state guarantee for the power purchase agreements with independent power producers provided insurance to the produces. Should Eskom be unable to purchase power as stipulated, then government would have to buy the power on Eskom’s behalf.
"The probability of default is low, since the regulator generally approves tariff increases that accommodate these agreements. However, significant deterioration in Eskom’s financial position may increase government’s risk exposure," the minister said.
As at June 30, the inclusion of public private partnerships added R9bn to contingent liabilities, of which national public-private partnerships (PPPs) account for 37% and provincial PPPs 63%.
"Given that none of the contingent liabilities in this category have been realised since the first PPP contract was entered into, they are considered very low risk. In PPPs, contingent liabilities only arise where contract termination would require the state to reimburse the private partner."
Government’s other contingent liabilities include the actuarial deficits of social security funds — the difference between the claims owed by these entities and their total assets. Government commitments to the Export Credit Insurance Corporation of South Africa — the net underwriting exposure of the company and its total assets — also fall into this category, as do claims against government departments, and post-retirement medical assistance to government employees.
Other contingent liabilities were projected at R286bn in 2015-16, R34bn higher than in 2014-15, due to an increase in claims by exporters and increased exposure of the Road Accident Fund. Over the medium term, these contingent liabilities are projected to increase to R323bn.