South Africa’s Eskom bailout is fooling nobody
Fitch released a 'negative' outlook for South Africa on Thursday in the latest aftershock of the government's Eskom bailout announcement.
South African commentators expressed widespread dismay and the rand weakened against the dollar after the government promised additional funding for power utility Eskom without presenting a detailed plan to fix its deep-seated problems.
- Eskom will be allocated an additional R59bn ($4.25bn) over two years, under an Appropriation Bill tabled in parliament on Tuesday by finance minister Tito Mboweni.
- This comes on top of R23bn extended to the state-owned electricity utility in the February budget as the first instalment of a total of R230bn of assistance over 10 years.
- Mboweni said the money was needed so Eskom could remain a going concern to enable it to approach debt markets for further finance.
Eskom is the biggest non-bank issuer of debt in SA. In February, public enterprise minister Pravin Gordhan said the entity’s debt represented 15% of SA’s sovereign debt. If Eskom were to default, it would cause a financial crisis for both government and private-sector banks.
South Africa’s finances are taking strain from below-budgeted tax collection and bail-outs of state-owned entities. According to a report by the International Institute of Finance, SA’s increasing debt to GDP ratio, now approaching 60%, was the most significant amongst sub-Saharan African countries in the past year.
On Friday the government released a response to Fitch’s rating action, saying it was “aware of the strain and risk that [state-owned enterprises], particularly Eskom, present to the fiscal framework. Government is urgently working on stabilising Eskom while developing a broad strategy for its future. Additionally, government will have to make tough decisions in order to reverse the country’s debt trajectory and improve economic growth prospects.”
Moody’s, the only one of the three biggest credit-rating agencies to maintain the country’s sovereign rating at investment grade, is due to review its rating in November. Both S&P and Fitch rate South Africa’s debt below investment grade.
In June, S&P sovereign ratings director, Ravi Bhatia, described Eskom as “too big to fail, yet at the other side, too big to support, because it costs so much”. He warned that the first R23bn tranche of support would have to be supplemented by more direct support from government, higher tariffs, a resolution of outstanding municipal debts and achieving targeted savings of R20bn.
Flaws never addressed
Energy commentator Dirk de Vos of QED Solutions in Cape Town said it was evident a decade ago that Eskom was going to face a funding crisis at some point because it has never addressed the flaws in its economic model.
- Government has never fully quantified the true cost of electricity. For years, tariffs did not take into account the cost of reinvestment in capital assets like power stations and coal mines, which is why the utility had to take on substantial debt to build new power stations.
- Government has also never resolved the issue that subsidising some customers, eg big industry and the poor, means either tariffs have to be high or taxpayers have to provide extra funding. For many years, the solutions to fix Eskom have focused only on the short term, rather than the underlying structural issues.
In the absence of a clear plan to fix the utility, including cutting R20bn of costs a year, dealing with trade unions and appointing a CEO and chief restructuring officer, there was no doubt that the ratings agencies would downgrade South Africa’s sovereign debt, de Vos added.
The chief restructuring officer, whose appointment is expected this week, will discuss with the ratings agencies what form of restructuring would have least impact on the fiscus, Mboweni said. Eskom will be split into three entities: generation, distribution and transmission.
- “At a strategic level, we must face the reality that a large, vertically integrated energy company is an outdated model in a changing industry, both domestically and internationally,” Mboweni said in parliament.
The fresh bailouts for the inefficient and corruption-ridden state-owned entity follow more than a decade of above-inflation increases in South Africa’s electricity price, including a 9.41% tariff hike for 2019/2020 (SA’s current inflation rate is 4.5%). The escalating costs of electricity, combined with intermittent rolling blackouts, have dampened business confidence and economic growth.
Energy market commentator Chris Yelland has forecast that Eskom is likely to report a R25bn loss for the year to March when it releases its results on 30 July.