As Eskom faces a debt bill of R338-billion analysts say it will find it hard to raise capital to pay its bills.  Picture: REUTERS
As Eskom faces a debt bill of R338-billion analysts say it will find it hard to raise capital to pay its bills. Picture: REUTERS

In the life of the near 100-year-old electricity giant, Eskom, January 2008 perhaps marks the most critical stage in its development. As the lights went out across various mines in the country while Eskom struggled to meet demand for its product, an expensive and necessary path towards capacity expansion kicked into high gear.

Billions of rands later, money spent on two still not complete coal-fired power stations, Medupi in Limpopo and Kusile in Mpumalanga, and a host of renewable projects and flirtations with an expanded nuclear future, the company is in a precarious position, facing a debt burden of about R338-billion — a 1,000-fold increase since 2007.

The government and the Treasury, which are custodians of a hobbling domestic economy in recession, are burdened with not only the electricity company but also an airline, SAA, that last reported a profit in the mid-to-late 2000s.

Apart from the fundamental weakness of Eskom's balance sheet and those of the other state-owned entities, the company is mired in corruption scandals around its executives, who have been linked to the Gupta family and President Jacob Zuma's son, Duduzane.

On the sidelines of this week's annual results presentation, Anoj Singh, Eskom's chief financial officer, said he aimed to re-invent the parastatal as investment-grade within the next seven years.

"I think, certainly if you look at the trajectory we have put the organisation on and the plans we currently have, we should be able to reach a point where we have investment- grade credit ratings, probably in the next seven years," Singh, whose name has also been mentioned in the Gupta e-mail leaks scandal, said.

The year 2024 may prove a destination too far for Eskom as its sole shareholder struggles under the weight of its portfolio of state-owned assets, the bulk of which seem to face governance crises, and weak economic growth.

Earlier this week the Reserve Bank said domestic growth prospects had deteriorated further following the surprise GDP contraction in the first quarter of the year. The bank now expects growth of 0.5% in 2017, down from earlier forecasts of 1% in May. Next year the expectation is a lowly 1.2%.

Poor growth

Economists expect such poor economic growth for an extended period. Under these scenarios, an already cash-strapped Eskom saddled with a sizeable debt load can expect low demand for its product.

Electricity sales volumes to industrial customers such as ArcelorMittal South Africa fell 3.7%. Agriculture sales fell 5.7%.

Low demand is not the only constraint the group is likely to face in trying to get its financials back on track. It is also likely to face resistance for a 20% tariff increase from the National Energy Regulator of SA (Nersa), which in the past has rarely been accommodating towards Eskom's requests for tariff increases.

So the question remains: does Eskom have the willpower to embark on a massive restructuring exercise, carrying the risk of staff retrenchments and belt-tightening for Eskom executives, who are among the highest-paid in the public sector and competitive in the private sector?

Eskom has seen its employee number pile up in recent years, growing 46% from 32 674 in 2007 to a present staff count of 47 658. In its expenses line for the year to end-March, employee benefits increased by 13.4% to R33.2-billion, while other operating expenses increased 26.3% to R23.6-billion.

Xolani Mbanga, CE of the Energy Intensive User Group, a voluntary association whose members consume 40% of South Africa's electricity, is not convinced by Eskom's prospects, especially with regard to its debt.

The financials "... show that Eskom is in a situation where it has to service debt, but has reduced financial space to do so".

Eskom is running on borrowed time as the underbelly of malfeasance and mismanagement comes into full view.

Approaching the government for yet another bail-out three years after R60-billion in government loans and a R23-billion cash injection in 2014 is a hard ask.

While its top three executives gave a glowing verdict of being "sound and stable" and not in financial distress, Singh indicated that going below the R20-billion in cash reserves it now has would require support.

Soft support

Last week Finance Minister Malusi Gigaba said his ministry was looking at ways to provide "soft support" until Nersa decided on the company's 2018 tariff adjustment.

A Treasury official said there had been no requests for assistance from Eskom. "At this stage the details of the 'soft support' have not yet been developed," the official said.

"Eskom is responsible for developing the business case and submitting it to the government for consideration."

Eskom's main problem, due to the fall in its credit ratings to junk, is access to funding. Raising debt will prove near crippling.

South Africa Inc is not in the same boat as Eskom. Two of the three biggest ratings agencies hold the country's local currency debt at investment grade while the foreign currency debt has been downgraded to junk. But even so the state would struggle to justify increasing its debt level which sits above 50% of GDP to fund the electricity giant.

To some, the only answer is for Eskom to incorporate private sector investment.

Ian Cruickshanks, South African Institute of Race Relations chief economist, said the group needed an international power producer partner.

While the breakup and selling off of the group into separate entities for functions such as transmission, distribution and power generation has been proposed as an option that could solve Eskom's problems, Cruickshanks said it would create a one-off benefit and could deprive the state of the potential revenue Eskom could bring.

Eskom was going to find few roads to travel for accessing affordable funding in coming years, Cruickshanks said.

One possible shortcut, he suggested, was the state requiring pension funds to put a percentage of their assets into government bonds and entities such as Eskom.

However, "I can remember when we had prescribed investments and it was terrible, because you know what it does in periods of high inflation, it ruins the savings of your pensioners. Will those who make decisions care about that? Well, they have made that quite clear, the answer is, 'No, Live for the day' is their mantra."

Too toxic

Peter Montalto, Nomura emerging markets economist, said Eskom was too toxic to be attractive to a single private equity partner.

"Foreign-owned state entities might have an interest in Eskom, like the Chinese, but I cannot see really, given the amount of money required, how anyone would really have the capacity to do so. It's an impossibility for the private sector," he said.

"The only viable option is to first split Eskom up into its component parts within the state, especially separate out a systems and market operator that removes the issues around IPPs and Eskom, then longer-term privatisation can become easier."

In 2005 Kenya partially privatised its power utility, KenGen and reduced its stake to a 70% shareholding.

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