A clear solution to Eskom’s debt problems, which are placing strain on the ailing utility’s ability to perform critical maintenance at its power stations to improve power supply, was a glaring omission from Wednesday’s medium-term budget policy statement (MTBPS).
Finance Minister Enoch Godongwana told parliament on Wednesday that National Treasury will take over between 33% and 66% Eskom’s roughly R413bn debt pile, but provided few additional details.
Despite acknowledging the urgency of SA’s deepening electricity supply crisis — 2022 is the worst year yet for load-shedding with two months remaining — the medium-term budget states that the specifics of the debt-relief programme, including the selection of the relevant debt instruments and the method of effecting the relief, are still being finalised by Treasury. These will now only be announced in the 2023 budget.
Markets were eagerly awaiting particulars of an Eskom debt solution after a pledge by President Cyril Ramaphosa in July when he announced his energy emergency plan and said the debt would be addressed in the medium-term budget. Godongwana has also previously said that details on the size, timing and conditions of the package would be set out in the MTBPS.
While the selection of the relevant debt instruments and the method of effecting the relief is still to be determined, “the quantum is expected to be between one-third and two-thirds of Eskom’s current debt”, Godongwana told MPs on Wednesday.
‘Biggest known risk’
In his foreword to the MTBPS, Godongwana described the utility as “the biggest known risk to the economy and the public finances”.
“A lower debt burden will enable Eskom to implement a viable unbundling process and make resources available for investment in critical electricity supply and transmission infrastructure,” he said.
Eskom estimates that at least R1.2-trillion of investment is required before 2030 to meet SA’s energy needs (a large portion of this is expected to come from private-sector investment in renewable generation capacity).
Godongwana said in his speech that the government has, over the past decade “spent billions of rand supporting Eskom, with limited improvements in the reliability of the electricity supply or the financial health of the company”.
“The debt takeover, once finalised, together with other reforms will ensure that Eskom is financially sustainable. The programme will allow Eskom to focus on plant performance and capital investment and ensure that it no longer relies on government bailouts,” he said.
The debt takeover programme will include strict conditions around addressing municipal and household arrears and providing greater clarity and transparency in tariff pricing.
Municipalities owe more than R43bn to Eskom, of which more than R30bn is overdue.
Independent review
In addition, the conditions will be informed by a Treasury-led independent review of Eskom’s operations, in particular the performance of its generation fleet.
Eskom’s energy availability factor, which measures output as a share of total installed capacity, has for much of this year run at 62%-65% and at times it has been about 50%, well below a target of 74%.
Another condition of the bailout will be Eskom having to complete the unbundling of its generation, transmission and distribution units into separate entities.
The unbundling was expected to be completed by December, but boards for the transmission and distribution entities haven't been appointed yet. In a recent interview with Business Day, newly appointed Eskom chair Mpho Makwana said that setting up the new entities was a priority, but he would not confirm whether the December deadline would still be met.
Godongwana said during a press conference that Treasury would have liked to “be as specific as possible” on how it would deal with Eskom’s debt, but “legalities and complexities” in its “time consuming” negotiations with lenders meant that the details of the programme still had to be ironed out.
A Treasury official said some outstanding matters that will influence the exact debt instruments to be deployed and how transaction will be implemented also depended on a final decision by the National Energy Regulator of SA on Eskom’s application for a a 32% increase in electricity tariffs next year.
Treasury said the government’s efforts to stabilise debt and narrow the budget deficit may be interrupted by the planned takeover of a large portion of Eskom debt. The medium-term budget sees gross loan debt stabilising at 71.4% of GDP in 2022/2023 and net public debt stabilising as a percentage of GDP in 2024/2025, but added that says that the improvement in the pace of debt stabilisation will be partly offset by debt-relief plans for Eskom.
Business Day previously reported that according to RMB Morgan Stanley economist Andrea Masia, if the government were to take over R250bn of Eskom’s guaranteed debt in 2023/2024 it would lift the government’s debt ratio to 72%, from the 68.5% it would otherwise have been.
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