President Cyril Ramaphosa meeting with members of the Eskom board. Picture: JAIRUS MMUTLE / GCIS
President Cyril Ramaphosa meeting with members of the Eskom board. Picture: JAIRUS MMUTLE / GCIS

SA simply has to rescue the nation’s distressed power utility. Even though it can’t afford to.

Eskom supplies 95% of the nation’s electricity. If it goes bankrupt, the entire economy will be dragged down as well. The danger of this is growing: the utility has a mountain of debt, doesn’t produce enough power to meet demand or cover its costs, and urgently needs to implement a turnaround plan that will hinge on government aid.

President Cyril Ramaphosa will announce measures to address the crisis at Eskom in his state of the nation address (Sona) to parliament on Thursday, economic adviser Trudi Makhaya said in e-mailed comments, without providing details. The president has given assurances that the utility is too big and important to fail and he won’t allow that to happen, while Dondo Mogajane, director-general of the National Treasury, has said more funding for Eskom is “an issue of how much, and when”.

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Bondholders are banking on a bailout.

“We have no option but to rescue Eskom,” said Johann Els, chief economist at Old Mutual Investment Group. “No one has the answer on how this should be done. The budget deficit is set to grow to more than 5% and the taxpayer is pretty much maxed out.”

Investors believe that the SA government, which owns the company, has proven capacity and willingness to support Eskom financially
Okan Akin  of AllianceBernstein

Not only that, the economy contracted 3.2% in the first quarter, largely because of drastic load-shedding implemented by Eskom to prevent a collapse of the national grid. Tax revenue will be reduced as a result, making it more difficult for the Treasury to stick to its budget-deficit targets. This, in turn, raises the risk that SA will lose its last investment-grade credit rating — which would trigger a massive outflow of funds.

Once rated one of the world’s best power utilities, Eskom failed to secure government approval to invest in enough generating capacity as demand for power surged through the 2000s. The company’s financial situation became increasingly precarious as it hired too many workers, repeatedly failed to win price increases from the energy regulator, and cut back on maintaining aging plants.

Official probes have shown it was also looted of billions of rand and subjected to constant management upheaval during former president Jacob Zuma’s rule.

Blowing another R100bn

The budget announced in February allocated Eskom R23bn over each of the three fiscal years to the end of March 2022, but that won’t be nearly enough to save it. Its debt, 62% of which is government-guaranteed, grew by R21bn to R440bn in the six months to the end of March, according to the utility’s latest data.

Eskom may have to rethink its entire strategy, including plans to complete the construction of two new coal-fired power plants that are running years behind schedule and way over budget, according to Dennis Dykes, chief economist at Nedbank Group in Johannesburg.

“The big risk is that it blows another R100bn with, again, very little to show for it,” he said. “Eskom just needs to be given enough money to keep it as a going concern while it gets to grips with its problems in a very realistic and sensible manner.”

Investors appear sanguine. The yield on Eskom’s 2028 dollar bonds — which aren’t government-guaranteed — fell 28 basis points in the past two weeks to 6.78%, a record low. Rates on benchmark 2026 government securities hit a two-year low on Monday after falling 58 basis points this year.

“Investors believe that the SA government, which owns the company, has proven capacity and willingness to support Eskom financially,” said Okan Akin, a credit analyst at AllianceBernstein in London. “For many investors, the most important issue for Eskom is lack of visibility. Eskom’s problems are well known and widely publicised, but the details about the solution are somewhat hard to come by.”

Ramaphosa’s other plans for Eskom, announced in his previous Sona in February, include splitting it into generation, distribution and transmission units under a state holding company — a move he says will make it easier to manage and raise funding. Those plans have run into opposition from the country’s powerful labour unions, which fear they will lead to privatisation and job losses, and no further details have emerged on how they will be implemented.

Pavel Mamai, founding partner at London-based hedge fund Promeritum Investment Management, doesn’t expect detailed rescue plans to be announced in the Sona. “I think investors would like to hear a commitment to resolve Eskom’s problems. The stronger and less ambiguous, the better.”

Iraj Abedian, head of Pan-African Investments and Research Services, who has advised the SA government on economic policy, said time is fast running out to fix the utility.

“Eskom needs, operationally, to be put to bed in one way or another with a credible solution, not just a bailout solution,” he said. “Successive governments have kicked it to the edge of the cliff. Now is the moment of truth.”

With Robert Brand, Selcuk Gokoluk and Colleen Goko

Bloomberg