ADVERTISEMENT

South Africa to Allocate Eskom Much of $16 Billion It Needs

South Africa to Allocate Eskom Much of $16 Billion It Needs

(Bloomberg) -- South African President Cyril Ramaphosa said the government will soon give the embattled state power utility “a significant portion” of the 230 billion rand ($16 billion) it needs over the next decade to remain solvent.

The announcement of the support for Eskom Holdings SOC Ltd. comes just four months after the National Treasury gave it a three-year, 69 billion-rand bailout and will place severe pressure on the government’s already stretched finances. Letting Eskom go insolvent just wasn’t an option -- it supplies about 95% of the nation’s electricity and would cripple the economy if it ceased operating.

The financial support will be allocated “in the early years” through a special appropriations bill and Finance Minister Tito Mboweni will give more details in due course, Ramaphosa said. He also plans to soon appoint a chief restructuring officer for Eskom, who will be tasked with repositioning the utility’s finances with a focus on its debt, revenue and cost structure.

“The utility’s financial position remains of grave concern,” Ramaphosa said in his state-of-the-nation address to parliament in Cape Town on Thursday. “With the current committed funding from the government outlined in the 2019 budget, Eskom has sufficient cash to meet its obligations until October 2019. For Eskom to default on its loans would cause a cross-default on its remaining debt and would have a huge impact on an already constrained fiscus.”

South Africa to Allocate Eskom Much of $16 Billion It Needs

Eskom has been hamstrung by years of management upheaval and cost overruns on new plants that have left it with more than $30 billion in debt, insufficient income to cover its costs and a fleet of old and poorly maintained power stations that struggle to produce enough electricity to meet demand. The economy contracted an annualized 3.2% in the first quarter, largely due to Eskom instituting a series of rolling blackouts to prevent a collapse of the national grid.

“We expect almost all of the appropriations for Eskom to be found through increased issuance and a small usage of cash, but only a small amount of offsetting expenditure cuts,” said Peter Attard Montalto, head of capital markets research at Intellidex. “We think with 26 billion rand of interest and principle payments due in fiscal fourth quarter, we will see the bailout have to add a similar amount on top of the existing 23 billion rand for the current year. That would increase South African government bond issuance by 10%, which is meaningful.”

If Eskom is due to make a loss of about 15 billion rand to 20 billion rand in the current fiscal year, that would add further to the amount of money required and total bond issuance could increase by about 20%, Montalto said.

‘Very Vague’

Ramaphosa’s comments on financial support were “very vague’’ and suggest that the government may just bring forward funds that were already allocated, said Darias Jonker, a London-based director at consultant Eurasia Group Ltd.

“We’ll probably see the expenditure ceiling for the next two or three years being breached the same way that the expenditure ceiling for this year will be breached,’’ he said.

Ramaphosa also announced that Eskom’s new chief executive officer will be named after incumbent Phakamani Hadebe steps down next month. Hadebe will be the 10th CEO to vacate the post in as many years. He gave no further details on plans announced in February to break the utility up into generation, transmission and distribution units under a state holding company. Labor unions oppose the move, fearing it will lead to privatization and job losses.

“The fact that Ramaphosa didn’t announce a timeline for the Eskom reconfiguration nor the name of a chief reconfiguration officer points to the fact that the reconfiguration is likely to take much longer than expected,’’ Jonker said.

Paul Mashatile, the African National Congress’s treasurer-general, said work had already begun on breaking up Eskom, and announcements in that regard would be made soon.

Mboweni declined to comment on the bailout plans.

--With assistance from Mike Cohen.

To contact the reporters on this story: Paul Vecchiatto in Cape Town at pvecchiatto@bloomberg.net;Paul Burkhardt in Johannesburg at pburkhardt@bloomberg.net

To contact the editors responsible for this story: Paul Richardson at pmrichardson@bloomberg.net, Liezel Hill, Mike Cohen

©2019 Bloomberg L.P.