Eskom is currently the single biggest risk to South Africa’s economy: Goldman Sachs

Debt and corruption scandals at Eskom Holdings SOC Ltd. make the utility the biggest risk to South Africa’s economy and the government needs to replace its management, Goldman Sachs Group said.

Eskom plans to raise almost R340 billion ($26 billion) in the next five years, while meeting R413 billionof interest and debt repayments, which amount to 8% of South Africa’s gross domestic product.

The utility is caught up in allegations of corruption related to contracts it signed with companies linked to the Gupta family, who are friends of President Jacob Zuma. It’s also without a permanent chief executive officer and has suspended its finance director. Zuma and the Guptas deny any wrongdoing.

“We are having discussions on solutions,” Colin Coleman, a partner of Goldman Sachs and head of sub-Saharan Africa, said in an interview in Johannesburg on Thursday, without elaborating.

“Government has got to put the governance in place and clean it out. It needs a permanent credible, independent non-conflicted chairman and a credible board and from that, credible managers.”

The New York-based lender in 2015 provided informal advice to the South African government on the sale of state assets to raise money for Eskom and proposals on how to improve the utility’s cash flow, people familiar with the matter said at the time.

Eskom faces lower demand, with South Africans last year using the least amount of electricity generated by Eskom in more than a decade.

The utility is also spending billions of dollars on new power plants that are years behind schedule and over budget. The company disclosed R3 billion of irregular expenditure in its financial results on July 20, a figure which its auditors said they couldn’t independently confirm.

“Eskom is the biggest single risk to the South African economy,” Coleman said.

“If you strip out corruption and sort out procurement, I’m sure there are efficiency gains there. There are self-help initiatives that can deliver a company that’s a lot more efficient. You’ve got to incentivize efficiency.”

The South African government, which saw its budget deficit widen to 92.2 billion rand in July, is hamstrung by an economy that’s barely growing, political infighting, and losses at other state-owned companies such as South African Airways.

Two ratings agencies cut South Africa’s foreign debt to junk in April, citing the firing of former Finance Minister Pravin Gordhan at the end of March and poor governance at state-owned enterprises.

Eskom, which has used R218.2 billion in government guarantees, hasn’t held a public auction for its debt in South Africa since 2014, relying on development finance institutions and export credit agencies for loans.

The power utility is confident it can reduce its dependence on the government by targeting funding sources that do not require explicit guarantees, the power utility said in an emailed response to questions.

“Eskom continues to access various debt markets, which include funding from development finance institutions, domestic and international bond issuances, funding supported by export credit agencies as well as short-term commercial paper bill issuances,” the company said.

Read: Eskom instructed to begin legal action against McKinsey