Finance Minister Tito Mboweni did not unveil a debt-relief plan for struggling power utility Eskom in his Medium-Term Budget Policy Statement (MTBPS), announcing instead that any debt restructuring would be negotiated only once the utility had reduced costs and made unbundling progress.

The total cost of Eskom’s yearly debt and interest payments will average R85-billion over the coming three years and the National Treasury acknowledges in the MTBPS that Eskom’s R441-billion debt portfolio as of March 31, 2019, is “well beyond what it can afford to hold without government support”. Eskom’s debt has risen beyond R450-billion during the period since the end of March.

Nevertheless, Mboweni said that the “appropriate size of debt relief” would be approved only “once I am convinced that the Eskom board and management has made an irrevocable commitment to implement government’s decisions and there is enough progress”.

He also announced that any further direct financial support to Eskom from the fiscus would take the form of loans rather than equity injections.

DEBT-RELIEF FRAMEWORK
In an update on Eskom reforms provided in Annexure C to the MTBPS, however, the National Treasury indicates that some debt relief is anticipated for Eskom over time and as its operational and financial performance improves.

“Most operational changes are expected to be implemented before the end of 2021. This approach will support an efficient debt-relief arrangement and strengthen the finances of the newly created entities relative to Eskom in its current form,” the documents states.

The debt relief process will be managed, the National Treasury states, to ensure that:

• The integrity of the budget process is maintained.
• The credibility of the fiscal framework remains intact.
• The State’s contingent liabilities are reduced.
• Any default and cross-default on total Eskom debt is contained.
• Creditors are treated equitably.
• Confidence returns to the capital market and bilateral funders about Eskom’s borrowing capacity.

“Eskom, with government support, will consult with its funders on detailed plans for debt reorganisation in due course.”

Any further support will be premised on Eskom making progress on a restructuring plan unveiled by Public Enterprises Minister Pravin Gordhan the day before the release of the MTBPS.

The plan envisages the vertically integrated company being separated into three State-owned subsidiaries, under Eskom Holdings, of generation, transmission and distribution.

The functional separation of the transmission company, which will have its own board, is scheduled for completion by March, while complete legal separation is scheduled for December 31, 2021.

Eskom’s 16 coal-fired power stations, meanwhile, will be grouped into three clusters in an effort to introduce an element of competition, with the aim of realising cost savings and efficiency gains.

LOANS NOT EQUITY
Government has already confirmed support of R230-billion over a ten-year period and Mboweni said that “very difficult Budget adjustments have been made” to accommodate Eskom.

Proposed transfers of R49-billion in the current year includes the R23-billion announced in the 2019 Budget, which has been frontloaded, as well as a further R26-billion arising from the Special Appropriation Bill released in July.

“We have brought forward R2-billion in 2019/20, R33-billion in 2020/21 and R10-billion in 2021/20,” the Minister said, adding that further delays in operational reforms could mean additional support will be required.

To date, R13.5-billion has been transferred to Eskom during 2019/20 and further requests for short-term financial support in the current financial year will be limited to the remaining balance of R35.5-billion, which will be transferred in accordance with Eskom’s cash flow requirements, pending the enactment of the appropriation Bills.

A further R56-billion would flow to Eskom in 2020/21, after which any further support would arise in the form of loans rather than equity.

Mboweni said that the National Treasury was considering the creation of a dedicated liquidity facility for State-owned companies, through which a clear distinction would be made between equity injections and the extension of loans that should be repaid, with interest.

The days of State companies viewing the National Treasury as “Father Christmas” were over, he insisted.

Government, he added, could not continue to “throw money at Eskom” and any further support would be premised on evidence that the utility was running its current plant and equipment better, achieving other operational efficiencies, including much better cash management, and fast-tracking the separation of the utility into three parts.

“Eskom is a business and should be run that way,” Mboweni stated.