Some of Eskom’s coal-fired power stations could be concessioned out to private operators as part of a raft of conditions that finance minister Enoch Godongwana has attached to a R254bn package.
The package will relieve Eskom of almost two-thirds of its debt burden over the next three years and prevent it doing any more borrowing over that period, or any investments in new generation projects.
Godongwana announced the details of the long-awaited Eskom debt relief package on Wednesday as he tabled a budget that showed the government is well on the way to delivering on its promise to put public finances on a more sustainable path. The government will in the current fiscal year record its first primary main budget surplus since 2008/2009, enabling it to stop running up the public debt ratio, though this will now stabilise in three years’ time because of Eskom debt relief package. The budget, which reported higher revenues and lower fiscal deficit projections than even the improved numbers shown in October’s medium-term budget, announced no new taxes and provided R13bn of tax concessions.
The minister has ordered a consortium of international experts to review all Eskom’s coal-fired power stations and advise on improving their operations by mid-2023. Those power stations that the consortium determines can be restored to original equipment manufacturers’ specifications could be considered for concessioning once the process is completed.
The move could over time see Eskom exit power generation altogether. Godongwana conceded that it still needs to gain consensus over the whole of government, and concessioning does not necessarily mean selling power stations.
“But we want that,” he said in an interview after his budget speech on Wednesday, in which he said he would be open to any solutions that would ensure there is electricity.
“Even if you were to get people to operate the power stations, that would be good enough for me because if you know you are not going to get revenue if the power station doesn’t work, you have an incentive to get it to work.”
The debt relief package is expected to strengthen Eskom’s balance sheet so it can invest in strengthening transmission and distribution to support more private power generation coming on to the grid, as well as to improve its own performance.
One of the conditions is that Eskom can invest only in transmission and distribution, and in reducing emissions and doing required maintenance. It cannot invest in any new greenfields generation projects during the three years of the debt relief package. A further condition is that Eskom cannot give pay increases during that time that would be negative for its financial position.
The debt relief package is in the form of a subordinated loan from the government to Eskom, which can be converted to equity if Eskom complies with the conditions set by the Treasury. If it does not, it would have to repay the money at market rates.
The Treasury is also looking at solutions to the R56bn in arrears that municipalities owe Eskom, which is up from R44bn less than a year ago. But Godongwana said this is difficult because almost all the 43 municipalities are already regarded by the Treasury as financially distressed and in financial straits.
A further condition is that the 18.6% and 12% tariff increases the energy regulator granted Eskom for the next two years be implemented — despite earlier suggestions from President Cyril Ramaphosa that Eskom should suspend it.
Eskom has received R263bn in government bailouts since 2008/2009 but does not generate enough cash from its own operations to service its R423bn of debt. Treasury officials said this package, unlike previous bailouts, is in line with the new “tough love” approach to state-owned enterprises that Godongwana announced in October, in which money would be disbursed only subject to pre- and postconditions.
The minister — who in the October medium-term budget policy statement provided R30bn in bailouts to Sanral, Transnet and Denel — provided a further R2.4bn bailout to the SA Post Office and R1bn to SAA in Wednesday’s budget.
He told Business Day the Treasury has imposed conditions that have to be met for the bailouts, even if not as comprehensive as those at Eskom.
Godongwana also said he is keen to see the Just Energy Transition Investment Plan loans that SA’s international partners are extending to the government used to invest in Eskom’s transmission network.
The Treasury plans foreign borrowing of $2.6bn in 2023/ 2024, all of which is expected to be in the form of low-interest concessional loans from the World Bank and the European Investment Bank as well as further loans from France and Germany, which have already agreed to €600m of climate loans with the Treasury.
Total foreign borrowing of $9.1bn is pencilled in for the next three years, which keeps foreign borrowing at just over 10% of the government’s total borrowing.
The rand pared losses in the hour leading up to the speech after being 0.7% weaker at R18.38/$ earlier in the day. By 8pm it was 0.3% firmer at R18.19 after reaching the day’s best level of R18.10.
The Budget Review shows the extra debt burden as a result of the Eskom package will delay the government’s debt stabilisation, with gross loan debt to GDP growing from the projected 72.2% in 2023/2024 to 73.6% in 2025/2026 compared with the projected 70.8% and 70% respectively provided in October’s statement.
Despite this extra burden, the Budget Review paints a benign picture of the state’s finances over the next three years when the consolidated budget deficit is expected to decline from 4% in 2023/2024 to 3.2% in 2025/ 2026, much in line with the medium-term budget policy statement projections. The consolidated budget deficit for 2022/2023 improves from the October figure of 4.9% to 4.2%.
A major achievement is the primary budget surplus — due mainly to higher revenue and underspending — which is projected to grow over the next three years to 1.7% of GDP in 2025/2026.
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