ISMAIL MOMONIAT: No sleight of hand, the Budget is transparent on Eskom debt relief

The somewhat technical but interesting topic of fiscal accounting made a rare appearance in the Business Day columns of Claire Bisseker and Mamokete Lijane last week (“Budgetary sleight-of-hand hides true fiscal picture”, February 28, and “Treasury’s accounting for the Eskom booster is farcical”, March 1). Both writers argue that the manner in which the recent budget accounted for Eskom’s debt relief inappropriately flattered the country’s fiscal outlook.

The National Treasury welcomes all responses to the budget, especially those that are critical of fiscal policy or accounting methodology. While both pieces touch on important issues in fiscal policy, it is unfortunate that the articles resort to terminology like “sleight of hand”, when both analysts are keenly aware of how transparent and detailed the budget documents are.

In this instance we were completely transparent in indicating the change in accounting treatment and included annexure W3 to explain this change in great detail. We do, however, remain open to technical arguments for or against the approach adopted.

Many of the core arguments presented in both articles are, in our view, simply wrong. It is worth highlighting those errors, but also refocusing the debate on the core challenge we faced: how should government address Eskom’s persistently weak financial position while enabling it to undertake the necessary investment and maintenance to resolve load-shedding?

In arguing that the treatment of the Eskom debt relief arrangement flattered the fiscal accounts, Bisseker makes the point that “the main reason the Treasury can show a rising primary surplus for the next three years is because it has stripped out the previous three-year Eskom bailout of R66bn from the main budget expenditure line”. This is factually incorrect. Even if one adds the previous Eskom bailout of R66bn back to non-interest expenditure there would still be a primary surplus of R44.1bn in 2023/2024, R71bn in 2024/2025 and R115.3bn in 2025/2026.

The argument that the current accounting treatment is wrong has one major flaw: the government’s debt service costs and redemptions are always reflected as part of the gross borrowing requirement. Taking over Eskom’s debt service costs and redemptions should, therefore — correctly in our view — be reflected as part of the government’s gross borrowing requirement and not non-interest expenditure. Simply put, if the government’s debt redemptions are not above the line, why should Eskom’s redemptions be?

Lijane’s column contains several errors. The minister’s budget speech and the 2023 Budget Review make it clear that taking over Eskom’s debt worsens SA’s fiscal path relative to last year’s medium-term budget policy statement (MTBPS). The impact is transparently and fully captured in the gross borrowing requirement, the gross loan debt, debt service costs and the debt-to-GDP ratio.

While there is understandable scepticism regarding the required repayment of the loan to Eskom, this does not justify failure to take meaningful action. Indeed, it is precisely the point of the debt relief arrangement: if Eskom fails to meet the conditions proposed by the finance minister in annexure W3 of the Budget Review, the interest-free loan will not be converted into equity and will instead attract a market interest rate payable at the end of the debt relief period. This is a key mechanism through which the government will ensure Eskom undertakes the necessary reforms required to avoid ending up in a similarly difficult situation in future. And how the National Treasury intends to safeguard our public finances.

Lijane also incorrectly asserts that the government’s cash balances, including dollar balances, are being used for the Eskom debt relief. The government’s use of its cash balances remains unchanged since the MTBPS, which was published before the Eskom debt relief arrangement was announced. A key tenet of the government’s cash management approach is that dollar balances are used for dollar commitments only, and are therefore not being deployed to settle the Eskom debt relief arrangement (which is in rand).

Correcting these errors is important, but should not detract from a conversation about how the government is addressing Eskom’s persistently weak financial position and enabling it to undertake the necessary investment and maintenance to resolve load-shedding.

First, the finance minister has repeatedly stressed that bailouts to state-owned companies crowd out important social and other expenditure — between 2012/2013 and 2021/2022, state-owned companies received about R266.6bn in bailouts from the government. The government’s previous approach of providing R230bn over 10 years clearly did not address Eskom’s underlying solvency or liquidity challenges. Nor did it address the fiscal and economic risk posed by Eskom.

Eskom’s R350bn of guaranteed debt, which was at risk of default, is a contingent liability, raising SA’s risk premium and borrowing costs. Addressing Eskom’s debt effectively will enable it to make much-needed investment in critical transmission and other infrastructure, and proper maintenance of plant and equipment.

Second, one should always look at all the fiscal ratios in the Budget Review to get an accurate sense of the fiscal picture over time. Focusing on some, like the primary balance, and not others, like the gross borrowing requirement, creates misunderstanding.

Furthermore, the Budget Review must always be read together with the announcement of the government’s debt auction levels — typically made the day after the budget is presented. The manner in which the Eskom debt relief was executed, combined with the introduction of new funding instruments, has contained adverse market impacts typically associated with rising debt issuance.

Third, the success of the Eskom debt relief arrangement rests on the implementation of reforms that address the inadequacies of the transmission network and performance of existing power stations. In this regard the government will design a new mechanism for building transmission infrastructure that will allow for extensive private sector participation in the development of the transmission network.

In addition, the National Treasury has appointed an international consortium with extensive experience in the operations of coal-fired power stations to review all plants in Eskom’s coal fleet and advise on operational improvements by mid-2023. Eskom is required to implement the operational recommendations emanating from this independent assessment. This will include a determination of which plants can be resuscitated to original equipment manufacturers’ standards, following which concessioning of these power stations must be considered.

Putting Eskom on a more sustainable footing, and implementing other reforms proposed by the National Energy Crisis Committee, aim to create a more sustainable and stable electricity sector that will better serve the long-term interests of the economy and all citizens. This should remain our primary focus.

• Momoniat is acting director-general of the National Treasury.