🔒 Eskom bumper bailout won’t be its last, analyst tells FT

EDINBURGH — The slow decay of Eskom barely attracted attention for at least a decade, with engineers excised from the utility giant in the late 1990s and early 2000s a sign that the government had not understood the central role of Eskom in the economy. But, thanks to former president Jacob Zuma forming a cosy friendship with Russia and Russian companies pushing the country to build a vastly expensive nuclear power programme, Eskom started appearing in the headlines with increasing frequency. Add to this the ongoing blackouts, which frustrate and anger business operators, and Eskom has become a dirty word in South Africa. Some would like to pull the plug on Eskom altogether. This week, finance minister Tito Mboweni unveiled details of how the government plans to nurse Eskom back to health, starting with the biggest ever government bailout – which some analysts reckon won’t be the last. – Jackie Cameron

By Thulasizwe Sithole

South Africa has unveiled the largest bailout in the country’s history for Eskom, the struggling state power monopoly on the brink of collapse, reports the Financial Times.
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The government will inject R69bn ($4.8bn) over three years to stabilise Eskom’s $30bn debt as it attempts a turnaround, Tito Mboweni, South Africa’s finance minister, said on Wednesday as he delivered the national budget, it tells its influential global audience.

The risk of a collapse at Eskom is a serious threat to South Africa’s already stretched public finances as its debt is mostly state-guaranteed. Without a plan to control Eskom’s rising costs, a bailout could also imperil the country’s last remaining investment-grade credit rating, with Moody’s.

“The crisis at Eskom has plunged Africa’s most industrialised nation into periods of darkness and throttled its economic recovery. The country receives nearly all of its power from ageing coal-fired plants that Eskom has failed to maintain or replace even as costs spiralled during a decade of decline at the utility,” it continues.

The FT quotes Mboweni as describing “pouring money directly into Eskom in its current form is like pouring water into a sieve”.

Mboweni, says the FT, insisted the bailout was conditional on Eskom achieving steep cost cuts of more than R20bn per year, and on the imposition of a Treasury-appointed “chief reorganisation officer”.

“The bailout also depends on a plan announced by President Cyril Ramaphosa this month to split up Eskom’s power stations, distribution networks and grids into three separate businesses.”

The unbundling plan has met fierce resistance from trade unions, points out the FT.

The pink paper tells how years of mismanagement have left Eskom unable to finance even basic maintenance at old stations.

“Its balance sheet is also being overwhelmed by huge cost overruns at unfinished new plants that were meant to solve the country’s energy crisis. The utility sells less electricity than it did a decade ago even as its staff numbers and costs have bloated over the same period.

“With cash drying up, Eskom can only repay current debts by borrowing more money. Corruption and patronage at Eskom was also central to a sprawling graft scandal under Jacob Zuma, the former president replaced by Mr Ramaphosa a year ago.”

Analysts have been awaiting the details of Eskom’s bailout, which is being partly funded through government spending cuts such as early retirement for more civil servants.

“It comes at the cost of deteriorating state finances. This year’s budget deficit will be bigger than expected at more than 4 per cent of gross domestic product, while state debt as a share of GDP will rise to more than 60 per cent and peak later than hoped, Mr Mboweni said. In order to fund Eskom’s bailout, the Treasury will also breach a state expenditure threshold that credit rating agencies have typically seen as a red line.”

Peter Attard Montalto, formerly with Nomura and now an analyst at South Africa’s Intellidex research company, said it was unlikely Eskom’s bailout would be the last.

“I do not see how you can deliver R20bn of cost savings when you are funding an unbundling that will cost money in itself,” he is reported as saying.

The bailout’s form means Mr Mboweni rejected a plan by Eskom’s own managers for the state to take over $7bn of its debt, explains Montalto.

“The national government is not taking on Eskom’s debt. Eskom took on the debt. It must ultimately repay it,” he said.

Phakamani Hadebe, Eskom’s chief executive, is reported as saying that the bailout would support two-thirds to three-quarters of its debt servicing costs in three year period.

“It releases resources to do maintenance and we will be in a better state than we are now,” he said.

The Democratic Alliance has criticised the plan, saying the Eskom crisis is only being partly dealt with.

According to Treasury estimates, says the FT, Eskom’s financial black hole will require R150bn ($10bn) overall over the next decade.

“The Treasury hopes that higher economic growth and increased tariffs paid by Eskom’s customers will be able to plug the gap left by the state bailout. Eskom’s split into three businesses will be partly financed by allowing private investors to take a stake in the newly-independent state transmission grid, according to Wednesday’s budget,” it adds.

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