Confirmation by Finance Minister Pravin Gordhan of an additional R174-billion in government guarantees for Eskom forms part of a bigger funding package for the State-owned power utility, which is pursuing a R553-billion, seven-year programme to add 13 000 MW of generation capacity to the power-stressed grid.

Gordhan, who was expected to make the announcement in his Medium Term Budget Policy Statement (MTBS), instead disclosed the increase in presentation to a parliamentary committee on Thursday.

The R174-billion is in addition to the government guarantees of R176-billion announced in 2009, as well as a R60-billion subordinated loan injection, which had flown from the National Treasury to the utility over the past few years.

Gordhan said that the R350-billion in guarantees would enable the utility to continue with its build programme through to 2017.

Eskom CFO Paul O'Flaherty welcomed the announcement and told Engineering News Online that it could be viewed as the "first part" of a larger funding package, which has been under discussion for a number of months.

The next stage would involve a "recapitalisation" of Eskom through a further equity injection, which should be announced soon.

But the guarantees in themselves would be sufficient to allow Eskom to approach the domestic and international bond markets to raise the borrowings necessary to close a significant funding shortfall, which peaks in the first three years at over R100-billion.

It was particularly supportive of Eskom's stated intention to approach the international capital markets for funding in early 2011.

THREE BANKS SELECTED

O'Flaherty confirmed that the utility had selected three banking partners, Bank of America Merrill Lynch, Absa-Barclays and JP Morgan to help it with the design and implementation of what will be a multibillion-rand international bond programme, which could kick off in the US early next year.

He refused to be drawn on the size of the first tranche, save to say that it would be "sizeable".

He also confirmed that Eskom was considering an option to accelerate its bond-raising efforts, owing to the strength of the rand and the favourable interest-rate environment. "There could definitely be merit in raising more earlier," O'Flaherty told Engineering News Online.

Eskom has indicated previously that it could borrow R90-billion a year over a three-year period to help fund the programme and that up to R50-billion of that will be sourced from the international markets.

The balance of the funding would arise from shareholder equity, loans and guarantees, as well as from consumers, who are facing strongly rising tariffs of around 25% a year between 2010 and 2013.

The utility was also targeting cost savings of R20-billion over the next three years, with most of these likely to arise from efficiencies surrounding its yearly procurement budget of R90-billion.

In the MTBPS, Gordhan cautioned that the total public sector borrowing requirement would be higher over the medium term to March 31, 2014, owing primarily to the borrowings that will be needed to part-fund the capital expenditure programmes of State-owned enterprises (SoEs), such as Eskom and Transnet.

The public-sector borrowing requirement is expected to be 10,1% of gross domestic product in 2010/11 and the SoEs are expected to add over R320-billion to public sector debt between 2010/11 and 2013/14.

Gordhan's announcement dovetailed with an earlier assertion by Eskom CEO Brian Dames, who announced that its current projects were now "fully funded".

Dames added that it was, thus, moving ahead with the outstanding orders for the R142-billion Kusile power station, the first unit of which was now scheduled to come on line in 2015, instead of 2014.

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