Market players could be forgiven for greeting last week’s news that the Treasury is working on a sustainable solution to Eskom’s debt problem with loud yawns. They have definitely heard this one before, more than once in the nearly four years since government first promised a solution to this supposedly urgent issue.
The problem, in essence, is that Eskom does not generate enough cash from its operations to service its debt — that is, to meet the interest payments and repay capital when the bonds or loans fall due, which now totals about R40bn a year. The gap continues despite steep tariff increases over many years.
The temporary solution has been in the form of a series of large annual cash infusions from the public purse. These have enabled Eskom to meet its obligations to its lenders and bondholders, and have simultaneously reduced the total quantity of debt on its balance sheet to a net R360bn at end-September. But this “government support” (the Treasury doesn’t like to call it a bailout) has entailed large quantities of taxpayer money annually: almost R90bn over just the past two fiscal years, with annual sums of over R20bn before that.
The answer Eskom and government have long sought is to move a chunk of the debt off Eskom’s balance sheet and so reduce the burden of servicing it, so that Eskom can focus on other important things such as trying to maintain its power stations and attempting to keep SA’s lights on — and the Treasury can end the bailouts.
Not that any of the solutions that have been mooted will make the debt go away. Rather, they will shift the risk and the burden. One option that was discussed was that the Public Investment Corporation, Eskom’s largest bondholder, should convert its debt to equity in Eskom. Another was that the debt should be shifted into a special purpose vehicle. The main option has always been that the government simply takes some or all of the Eskom debt it has already guaranteed onto the government’s own balance sheet.
This will mean the Eskom bonds become government bonds, which the taxpayer has to service, probably more cheaply because the government’s debt is more creditworthy than Eskom’s. That will balloon SA’s public debt and debt ratios, but the ratings agencies have generally been assuming the Eskom debt is part of government debt anyway. The crunch issue is that bondholders and other lenders have to agree to whatever solution is proposed: they cannot be treated unfairly or forced to convert their bonds. They have a duty to their own beneficiaries — in the case of pension funds, it is to get the best deal.
All these options and issues have been aired at length and in many forums since Eskom first urged in 2018 that up to R200bn of its debt needed to be removed from its balance sheet and government first promised a solution. In the February 2019 budget then finance minister Tito Mboweni said government was working on a plan. Current finance minister Enoch Godongwana, then head of the ANC’s economic transformation committee, said a plan would be announced by March 2019.
Government’s Eskom road map, released in November 2019, promised a solution to the debt that would make Eskom financially sustainable; so too did the Eskom social compact signed by the social partners at Nedlac in December 2020. Indeed, the November 2020 medium-term budget said all would be revealed before the end of 2020.
So here we are in July 2022. President Cyril Ramaphosa said in his big electricity crisis announcement last week that the Treasury is “working to finalise a sustainable solution to Eskom’s debt” and the finance minister will announce this in October’s medium-term budget. The Treasury has confirmed that it is working on it. And it has made clear that it will impose tough conditions to any solution. We’ll have to wait and see.
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