As part of Treasury’s agreement with Eskom for the provision of R254bn in debt relief, the state-owned power utility will not be allowed to undertake any capital expenditure on new “greenfield generation projects” during the debt-relief period.
In addition, Eskom, Treasury and the department of public enterprises will design a mechanism to allow “extensive private participation” in the building of new transmission infrastructure.
Treasury also warned that the new debt-relief arrangement would not be sustainable should Eskom be prevented, through court action, from implementing the 18% and 12% tariff increases that were approved by the energy regulator for 2023 and 2024.
In the 2023 budget that was tabled in parliament on Wednesday by finance minister Enoch Godongwana, Treasury sets out in detail what the debt relief package will consist of, and the strict conditions attached to it to “safeguard public money”.
Godongwana said the lack of reliable electricity supply was SA’s biggest economic constraint and that providing debt relief to Eskom would play a role in transforming the electricity sector to achieve energy security in the long term.
According to Treasury, one of the factors it considered in designing the package was that Eskom was not able to reasonably service its debt, which has ballooned to R423bn, from its own cash flows. In addition, as Godongwana said in the budget speech, R337bn of Eskom’s debt is already government guaranteed, thus, “explicitly taking on this debt, will reduce fiscal risk and enhance long-term fiscal sustainability”.
The debt-relief arrangement covers R254bn or 60% of Eskom’s debt and will be disbursed over the next three years.
Some of the conditions of the debt relief, for which the board will have to account on a quarterly basis, restricts Eskom’s capital expenditure to transmission and distribution and places a moratorium on new borrowing.
“No new borrowing will be allowed from 1 April 2023 until the end of the debt-relief period, unless written permission is granted by the minister of finance,” Treasury said.
The only capital expenditure that Eskom may undertake over the period for generation relates to minimum emissions standards, flue-gas desulfurisation and required maintenance.
According to the Budget Review, Treasury has appointed an international consortium with extensive experience in the operations of coal-fired power stations to review all plants in Eskom’s coal fleet and advise on operational improvements. The review is scheduled to conclude by mid-2023.
Eskom will be required to implement the recommendations contained in the review.
The debt relief, said Treasury, will be in the form of advances of R78bn in 2023/24, R66bn in 2024/25 and R40bn in 2025/26. These amounts represent Eskom’s full debt settlement requirement over the next three years. Additionally, in 2025/26, government will directly take over up to R70bn of Eskom’s loan portfolio.
The advances will be financed through the R66bn medium-term baseline provision announced in the 2019 Budget, and R118bn in additional borrowing over the period. This will increase SA’s debt-to-GDP ratio.
“Mainly due to this Eskom debt relief, government debt will stabilise at a higher level of 73.6% of GDP in 2025/26. This is three years later than anticipated in the 2022 Medium-Term Budget Policy Statement,” Godongwana said.
Funds will take the form of an interest-free subordinated loan, to be settled in Eskom shares rather than cash.
“The debt-to-equity conversion will result in an immediate improvement in Eskom’s balance sheet,” Treasury said.
Treasury said it was also finalising a proposal to address outstanding municipal debt owed to Eskom which has grown to about R56bn. One of the key elements under discussion was conditional debt write-off.
Godongwana told journalists during a pre-budget briefing that it was clear some municipalities will never be able to repay what they owe Eskom.
“Undertaking a debt relief of this magnitude without addressing this risk would be counterproductive. We are working with Eskom to provide a solution to this problem, wherein Eskom will provide incentivised relief to municipalities whose debt is unaffordable,” Godongwana said.
To avoid a repeat of debt build-up over time measures such as the installation of prepaid meters will be attached to any relief provided, he said.
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