EDITORIAL: What is Eskom hiding from us?
Reluctance to go public with the numbers has raised all sorts of questions in the market
Eskom’s shareholder may have proved incapable of imposing discipline on the crisis-ridden group, but this week it has, again, been subjected to the discipline of the market. The JSE warned that it could suspend Eskom’s listed bonds if the state-owned utility failed to release its interim results by the end of January. This comes after Eskom missed the end-December deadline, in terms of JSE rules, to publish the results for the six months to end-September. In response, Eskom has promised it will meet the new deadline.
But its reluctance to go public with the numbers has raised all sorts of questions in the market about what it might be hiding — questions that will not help to allay the concerns of bond-market investors. They have already imposed their own discipline on Eskom by, in effect, halting new lending to the utility after its June year-end results were qualified by its auditors, who raised the red flag about at least R3bn of irregular spending.
THE LATE INTERIMS HAVE PROMPTED CONCERN ABOUT WHETHER THE AUDITORS ARE AGAIN UNHAPPY.
Asset managers and bankers have made it clear that as long as Eskom’s governance is a disaster and the shareholder refuses to allow it to install stable, clean and competent management, they’re not interested. A transparent set of interim numbers is crucial, though, to enable Eskom to start borrowing on the market again, at least from foreign investors, who are likely to be less wary — as long as Eskom pays well more than the odds for the money.
However, the late interims have prompted concern about whether the auditors are again unhappy. Even more of a concern is the possibility that Eskom is trying to hold back from having to tell the market that it is, quite simply, not a going concern.
That’s especially so after the National Energy Regulator of SA in December granted Eskom a tariff increase for the coming year of just 5.2%, not the 19.9% it had requested. Eskom is waiting for the regulator to process three regulatory clearing applications totalling more than R60bn. If these are processed in time they could boost the coming year’s tariffs. But the regulator made it clear that Eskom needed to do some drastic belt tightening to tailor its cost structure to much lower projected demand for electricity. That means Eskom cannot expect to continue to get the big tariff increases it has relied on in the past to bail it out of trouble.
And while that will affect 2019’s results, not the latest year’s, there is no question that the utility is in trouble. Most of the interim numbers are in the public domain, thanks to a leaked report to its shareholder, which showed revenues running behind target, with Eskom having significant difficulty raising the funding it needs and running out of cash at a significant rate. Its borrowing costs will surely have jumped, reflecting investors’ wariness and the ratings agency downgrades that have most recently taken Eskom’s standalone credit rating down into the C range.
Eskom itself has confirmed that it is having severe liquidity problems, with suggestions that it needs R20bn in cash to get it through to March. Without signed-off interims that confirm it is a going concern, there’s no way it can get that on the market. Nor, surely, is there any way the government can or should be advancing more money to Eskom, which has had successive bail-outs over the years and has now used up much of its R350bn government guarantee facility. That raises the prospect that Eskom could implode in coming months. And an Eskom implosion is the single biggest risk to SA’s finances, given how much of Eskom’s debt the state has guaranteed and how a default could cascade across SA’s financial sector.
The interims need to be released, urgently. But there is no way out of this mess other than for the government to act urgently to put an entirely new set of experienced and highly regarded directors in at Eskom and empower the new board to appoint a new management team with the skill and support to start turning Eskom around, operationally and financially.
For new ANC president Cyril Ramaphosa, this needs to be the most urgent priority on his agenda.