The Eskom Sustainability Task Team – which has already had its proposal for the unbundling of the utility into three separate units accepted by government – is now finalising an updated report for President Cyril Ramaphosa which will include a financial recovery plan for the State-owned entity.
Appointed in December 2018 the team includes Professor Anton Eberhard, Tsakani Mthombeni, Grové Steyn, Frans Baleni, Mick Davis and Busisiwe Vilakazi.
The task team has concluded that further interventions are required beyond the tariff increases announced by the National Energy Regulator of South Africa (Nersa) in March and the National Treasury’s commitment to inject R23-billion a year into the business for up to ten years.
Its analysis indicates that Eskom’s losses, which are likely to surge to a record R25-billion for 2018/19, will continue to increase under the current scenario and that capital and interest payments for new debt will overwhelm cash from operations.
Eskom’s debt has increased to around R450-billion and could rise to over R600-billion in the absence of any further intervention. Its sales, meanwhile, have flat lined, owing to a combination of weak economic conditions and price elasticity of demand in a context of nominal tariff increases of more than 500% since 2007.
Speaking at a University of Cape Town Graduate School of Business function in Johannesburg this week, Eberhard stressed that work on the financial solution was yet to be finalised and required further interactions with National Treasury, the Department of Public Enterprises and Eskom itself.
Nevertheless, he revealed that a suite of interventions was under consideration, which would carry a degree of pain for all stakeholders, including consumers and tax payers.
In addition to tariff support and a substantial intervention around debt relief, financial modelling undertaken by the task team shows that it is important to also reduce the cost of Eskom’s debt, which has become hugely expensive following credit rating agency downgrades of ten notches over the past decade.
Eskom used to have an investment-grade credit rating above the sovereign, but is currently deep into junk territory.
“There is a unique opportunity to bring some climate-related money into Eskom, because we are sitting with the most carbon-intensive electricity sector in the world and the rest of the world wants us to be reducing our greenhouse gas emissions.
“If we committed to even a modest acceleration of carbon reduction below what we have already promised, there could be, in exchange, the opportunity for concessionary climate-related money, blended with development finance and even some institutional money.”
The task team has already modelled a possible injection of R150-billion from a blended finance facility, which would be the largest deal of its type in the world.
Together with an upward revision to the Nersa-approved tariffs for 2020/21 and 2021/22, and financial restructuring to deal with Eskom’s debt burden, the utility’s financial ratios could be turned around and placed on a more sustainable trajectory.
“The core lesson here is that no single intervention will solve this problem and it’s going to be painful for everyone,” Eberhard said.
“We’ll need more on the tariff, there will need to be a bold initiative on Eskom’s debt and lower-cost new finance will need to be accessed. Doing nothing is not an option.”