Cash-strapped power utility Eskom will receive an additional R59bn over the next two years, R26bn for this fiscal year and R33bn for the 2020/2021 fiscal year.
This provision was made in a special appropriation bill tabled in parliament Tuesday.
The details of the funding package for Eskom ends months of uncertainty over government support for the financially troubled utility and will be welcomed by credit rating agencies, particularly Moody’s Investors Service. The agency has kept SA on investment grade pending clarity on the financial stabilisation of Eskom, which is regarded as a key risk to public finances and the economy.
The allocation will also allow Eskom to finalise its annual financial statements as without government support it is not a going concern.
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In terms of the bill, the finance minister Tito Mboweni may impose conditions that Eskom will have to meet before any of the money is transferred, must impose conditions after the transfer has been effected and can stop payments if conditions have not been met.
The amount allocated in the special appropriation bill is in addition to the R23bn allocated in the February budget for this year and over 10 years. The R23bn was not enough for Eskom to service its mountain of R440bn in debt and to repay debt redemptions of R45bn this financial year.
The utility is unable to service its debt from the revenue it earns and is unable to raise new funding from the capital markets. Some of Eskom’s debt is underpinned by government guarantees of R350bn.
President Cyril Ramaphosa announced in his state of the nation address in June that Eskom had sufficient cash to meet its obligations only until the end of October 2019 on the basis of the state funding outlined in the 2019 budget and that it would therefore be necessary to allocate, on an urgent basis, a significant portion of the 10-year fiscal support of R230bn in the early years.
Eskom announced recently that to meet its obligations and supply electricity over the next three years it needed an additional R250bn over and above the R69bn injection announced in February’s budget. This was due to higher-than-expected costs for diesel and maintenance, lower-than-expected revenue allowed for by the National Electricity Regulator of SA’s (Nersa) decisions on tariffs, and Eskom’s regulatory clearing account, which is a mechanism through which Eskom can retrospectively claw back certain costs from consumers.
In March, Nersa granted tariff increases of 9.4%; 8.1% and 5.72% over the next three years. The revenue gap from the lower-than-expected tariffs was R102bn, according to Eskom chair Jabu Mabuza and the government’s assistance fell short of what Eskom had requested by R31bn. Eskom also failed to get Nersa to approve its full regulatory clearing account application, leaving a further shortfall of R17bn.
Nersa has also deemed that the R69bn in government support over three years should be subtracted from its allowable return on assets.
Of concern to credit rating agencies will be the effect of the bailout on the budget deficit, which has been estimated by the Treasury at 4.5% for 2019/2020 and 4.3% for the following year. Also of concern is how the bailout will affect the expenditure ceiling set by the Treasury or the commitment for gross government debt to stabilise at 60.2% of GDP by 2023/2024.
Eskom itself is seven notches into junk territory, having dropped 10 notches over the past 10 years
The plans to restructure Eskom into three separate entities — generation, transmission and distribution — and the appointment of a chief restructuring officer to drive this process have not been finalised. Details are also needed about the company’s CEO after the resignation of Phakamani Hadebe, who leaves at the end of July.
Moody’s left the door open for SA to escape a negative sovereign rating decision on March 29, by intimating that the public release of a credible and detailed plan on Eskom could cast a different light on SA’s fiscal position.
“Unless and until a clear adjustment path is detailed Eskom will remain the source of contingent liability risks, weighing on SA’s fiscal strength.”
Moody’s is the only one of the three ratings agencies that has SA’s debt on investment grade, at Baa3 with a stable outlook.
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