Clouds gather over Eskom debt relief

The debt relief deal between Eskom and the South African government is anything but given, say Absa economists, with uncertainty lingering on whether the ailing power utility can meet the strict conditions put forward by National Treasury for it to qualify.

Finance minister Enoch Godongwana announced in his October 2022 mid-term budget speech that the National Treasury would be working on a deal to take over one to two-thirds of Eskom’s massive R400 billion debt.

However, this arrangement would be contingent on the power utility meeting certain strict conditions. Since the announcement of the deal, things have only deteriorated at the company.

In a pre-budget research note, economists at Absa cast some doubt on whether the debt swap will be fully realised by the time Godongwana presents his 2023 speech on 22 February.

“We do not expect a full Eskom debt deal to be unveiled and implemented at the Budget next week, because of its complexity and Eskom’s apparent lack of progress on the National Treasury’s conditions for granting big debt relief,” the group said.

“For example, Eskom seems to have made no headway on lowering its internal cost base and its hands seem to be tied in terms of the Treaury’s demand that it resolves the problem of growing municipal debt arrears.

“Additionally, it is seemingly proving quite difficult to secure creditor consent for a formal debt exchange.”

Absa said that an easier approach would be for National Treasury to allocate additional funds to Eskom to cover some portion of Eskom’s debt servicing obligations – but the amount of relief actually needed is contingent on actions that Eskom is yet to take.

“President Ramaphosa’s comments in the State of the Nation Address (SONA) on 9 February that the ‘National Treasury is finalising a solution to Eskom’s R400 billion debt burden in a manner that is equitable and fair to all stakeholders’ seems to confirm that a final solution will not be presented in the Budget,” the bank said.

However, because Godongwana promised at the MTBPS that a solution would be unveiled in the 2023 Budget, Absa said that the government will have to provide some further details on the likely approach to avoid disappointing the market.

The debt relief plan is absolutely core to any hope Eskom has of turning its finances around.

While the group remains under siege from all fronts – criminals destroying its operations, a lack of expertise and skills to do effective maintenance, outright hostility from politicians towards management, and customers simply not paying their bills – the R400 billion debt it has accrued over the last decade and a half is simply untenable.

Even if all other problems were resolved, the debt burden would still push the company to breaking point.

Speaking to the Financial Mail, outgoing Eskom CEO Andre de Ruyter said that this was highlighted in the company’s financials. Even though Eskom showed an operating profit of R20.3 billion in its latest financial year, the bottom line sank to a loss of R12.3 billion. The reason? A staggering interest and finance bill of R35.4 billion.

Without a solution to Eskom’s debt problem, the struggle for whoever replaced De Ruyter at the end of March 2023 will continue.

De Ruyter also stressed that cost-reflective tariffs are also needed. Without both the debt relief and higher tariffs, Eskom will simply end up back at National Treasury asking for further bailouts, he said.

“If debt relief isn’t backed by tariff increases, we will be back to the National Treasury with a begging bowl in five years.”

Read: Government to take over significant portion of Eskom’s R400 billion debt