As the public rages against Eskom’s proposed tariff increases and President Cyril Ramaphosa takes cover behind yet another task team, the inevitable can no longer be postponed.
Eskom needs a substantial bailout from the government and consumers need to pay higher tariffs. The only questions that remain are: how big and how high?
That Eskom could fail is now a real prospect. Credit ratings agencies, the Treasury, the World Bank and credit analysts have warned for more than a year that Eskom is the country’s single largest risk.
The power utility cannot service its debt and has been borrowing from one lender to pay another. The debt service cover ratio — the ratio of cash generated against what is needed to cover interest and debt repayments — has shrunk rapidly since September 2017, from 0.99 (close to where it needs to be) and is expected to be 0.52 when the financial year ends in March.
Now, those credit lines are cut. With at least another R15bn needed by the end of March to pay debt service costs, buy coal and pay salaries, domestic banks have told CEO Phakamani Hadebe that a government guarantee no longer cuts it as security for more loans. They want to see a plan that puts its finances on a more sustainable footing.
A default by Eskom would mean the government would immediately have to take all of Eskom’s guaranteed debt (close to R350bn) onto its balance sheet and begin servicing it. This would trigger a ratings downgrade on the country’s debt and cause bond yields to spike. These would in turn raise borrowing costs and could cause a wider banking crisis. It’s a very serious situation.
The size of the bailout will depend on the magnitude of the tariff increases and the extent to which Eskom is able to cut costs. Eskom’s proposal is for R150bn in savings over five years, a 15% annual tariff increase for three years and R100bn in debt relief from the government. Without the tariff increases the bailout gets much bigger.
It is worth adding that the National Energy Regulator of SA is unlikely to agree with Eskom’s tariff increase application in its entirety. The next question then is how can a bailout be done?
When Eskom chair Jabu Mabuza put the R100bn in debt relief on the table, finance minister Tito Mboweni tweeted the image of a sieve and complained that there are people who believe the more water they pour into a sieve, the higher the probability of it filling up. Treasury spokesperson Jabulani Sikhakhane said the government’s policy remained to fund state-owned enterprises in a deficit-neutral manner.
That thinking is starting to shift, with the Treasury officials now turning their attention to exploring the size and mechanics of what to do. The first big question is whether the bailout would be considered credit neutral by ratings agencies. If the government takes R100bn of debt onto its balance sheet, for instance, that would raise the debt to GDP ratio by two percentage points. Instead of this ratio stabilising at just under 60% in 2024 it would overshoot this critical mark. But as Moody’s pointed out in a note last December, the agency does take account of the entire public sector debt when making its credit assessments.
Moody’s and S&P have both described the government support as credit positive for Eskom and Moody’s has gone so far as to say it “could be credit neutral” although there is no guarantee that this would be the case. A key to deciding that would be whether Eskom can pull off its turnaround, cutting costs and securing a higher tariff. Eskom’s advisers are also convinced that a debt swop would be credit neutral.
But a debt swop might not be legally possible and would, at the least, require some negotiation with bondholders. It might require the government settling that debt and taking out new debt. Or it might entail the government instead taking over Eskom’s debt servicing.
So, while there is a possibility that an Eskom bailout could be credit neutral it would not be fiscally neutral. In short, a bailout and tariff increase of some magnitude must and will happen and taxpayers and consumers must take the pain. A big uncertainty remains though: whether after all that Eskom can bring about the turnaround.
Paton is writer-at-large.
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