Eskom’s galloping R109bn municipal debt may force the government to announce another bailout just two years after approving a R254bn relief package for the struggling utility, says Nishan Maharaj, head of fixed interest at asset manager Coronation.
“Eskom municipal debt is a hole that needs to be filled either by them increasing their revenue, which is unlikely, or by municipalities recovering the debt from their constituencies.”
Municipalities, which are dysfunctional to the point where they are “the biggest risk to South Africa’s economic growth”, are clearly incapable of recovering the debt themselves, he says.
“This thing can’t sit on the balance sheet forever, it has to be corrected. And if it’s not corrected via collection of the tariff then inevitably someone has to fill the gap, and that someone will have to be the government.”
He concedes there is a risk that gifting Eskom what he reckons would have to be in the region of R50bn might delay the day of reckoning for dysfunctional municipalities; and it might lead to complacency at Eskom about the need to improve its performance.
“But what the National Treasury has done in trying to tie bailouts to key milestones when it comes to the operational recovery of state-owned entities is a step in the right direction, to ensure that they’re not just ploughing more money into papering over the symptoms instead of fixing the actual problem. So far Treasury has held the line, which is commendable.”
The problem comes when something as large and “systemic” as Eskom requires a compromise to be reached in terms of how much money needs to be injected vs how much operational recovery needs to be seen happening first.
“I think the framework around that is in place to ensure that more money doesn’t just get spent on top of all the other bailouts without some level of operational recovery. But of course as always in South Africa the risk is that the deterioration is so large that a bailout can’t be avoided at some point. Hopefully, Treasury can keep a very tight hold on the rein.”
The reality, says Maharaj, is that dysfunctional municipalities have to be fixed as a matter of extreme urgency to stop the kind of destruction that is happening in Gauteng, the country’s economic hub.
“The breakdown of municipal infrastructure in Gauteng is going to act as a significant headwind against the type of economic growth that we require to stabilise the country and create jobs.”
Permanent, professional workforces are needed to continue the day-to-day functioning of municipalities outside the political sphere, so that the essential work of local government gets done.
“Cadre deployment has done nothing to keep those people with the institutional knowledge and skills required to ensure municipalities do what they need to do to recover. That is something that definitely needs to stop.”
The problem with South Africa is that we’re great at creating policy, we’ve been creating the best policy on paper for years, but it comes down to actual implementation
— Nishan Maharaj, head of fixed interest at Coronation
He believes that from a policy perspective there is “definitely” an acknowledgment that there is a problem at municipal level, and the GNU has developed a framework for putting municipalities back on track.
“But the problem with South Africa is that we’re great at creating policy, we’ve been creating the best policy on paper for years, but it comes down to actual implementation.”
The people who are now tasked with implementing this must have the right skills and calibre to ensure it happens.
“There are some green shoots that you can see sort of coming along, but to see them really developing you need to see the right type of people driving implementation. That relies on the politicians all being on the same page, which is difficult. You need politicians to align in terms of understanding the problem and not getting in the way of implementation.”
Is he concerned about the future of the GNU?
“Every South African should be concerned about the future of the GNU because it would have such large ramifications if it collapses. But partners in the GNU have seen the reaction of foreign investors and capital that has come back into our equity and bond markets since the formation of the GNU, so there’s definitely an agreement by the two major coalition partners that the GNU is something that needs to continue.
“I don’t think it’s going to be a smooth ride. Some of the policies and ideologies definitely clash and there are significant differences about implementation. The DA and ANC both agree on the need for universal access to health care. Significant differences over how you implement that need to be ironed out.”
The fact that the GNU has survived in spite of reservations about it in both the ANC and DA suggests there is a realisation of the importance of the GNU for driving economic growth, he says.
“Logic has prevailed up to now. There have been compromises, meetings of minds, consultations.”
He believes with the GNU having gone to the World Economic Forum and on roadshows together, and having seen the positive feedback from the investor community, “there is definitely a realisation that this is something that needs to endure”.
More focused policy and fewer ministries would further improve investor sentiment and, by cutting the enormous cost of running the government, help the fiscal situation as well, he says.
He believes a large part of why the South African Reserve Bank has chosen to maintain rates “above what we’re accustomed to” is to deal with the threat to the fiscus and the risk premium that needs to be priced in because of that.
“With clearer policy direction and lower costs you’ll see that risk premium come down and the Bank’s willingness to ease rates increase quite significantly, which would also stimulate growth.”
Meanwhile Transnet remains a drag on growth. It is missing its own recovery targets disastrously and sinking under a R138bn debt burden which makes it difficult to borrow the R14bn a year it says it needs to fix its infrastructure.
Maharaj says the Treasury, which gave it a R47bn guarantee just over a year ago, needs to resist growing pressure from the ANC and stick to its commitment not to give it a bailout.
“Issuing another government guarantee would be easier than injecting cash. It also allows the Treasury to set goals and conditions and put more pressure on Transnet to actually push through their operational recovery.”
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