Eskom supplies 95% of the nation\u2019s electricity. If it went bankrupt, the entire economy would be dragged down as well. The danger of that is growing: The utility has a mountain of debt, doesn\u2019t produce enough power to meet demand or cover its costs and urgently needs to implement a turnaround plan that will hinge on government aid.<\/p>\n
President Cyril Ramaphosa will announce measures to address the crisis at Eskom in his state-of-the nation address to Parliament Thursday, economic adviser Trudi Makhaya said in e-mailed comments, without providing details.<\/p>\n
The president has given assurances that the utility is too big and important to fail and he won\u2019t allow that to happen, while Dondo Mogajane, the director-general of the National Treasury, has said more funding for Eskom is \u201can issue of how much, and when.\u201d Bondholders are banking on a bailout.<\/p>\n
\u201cWe have no option but to rescue Eskom,\u201d said Johann Els, chief economist at Old Mutual Investment Group in Cape Town. \u201cNo one has the answer on how this should be done. The budget deficit is set to grow to more than 5% and the taxpayer is pretty much maxed out.\u201d<\/p>\n
Not only that, the economy contracted 3.2% in the first quarter, largely because of rolling blackouts implemented by Eskom to prevent a collapse of the national grid. Tax revenue will be reduced as a result, making it more difficult for the treasury to stick to its budget-deficit targets. That in turn raises the risk that South Africa will lose its last investment-grade credit rating \u2014 which would trigger a massive outflow of funds.<\/p>\n
Once rated one of the world\u2019s best power utilities, Eskom failed to secure government approval to invest in enough generating capacity as demand for power surged through the 2000s. The company\u2019s financial situation became increasingly precarious as it hired too many workers, repeatedly failed to win price increases from the energy regulator and cut back on maintaining ageing plants.<\/p>\n
Official probes have shown it was also looted of billions of rand and subjected to constant management upheaval during former President Jacob Zuma\u2019s rule.<\/p>\n
The budget announced in February allocated Eskom R23 billion over each of the three fiscal years through March 2022, but that won\u2019t be nearly enough to save it. Its debt, 62% of which is government-guaranteed, grew by R21 billion to R440 billion in the six months through March, the utility\u2019s latest data show.<\/p>\n
Eskom may have to rethink its entire strategy, including plans to complete the construction of two new coal-fired power plants that are running years behind schedule and way over budget, according to Dennis Dykes, chief economist at Nedbank Group in Johannesburg.<\/p>\n
\u201cThe big risk is that it blows another 100 billion with, again, very little to show for it,\u201d he said. \u201cEskom needs just to be given enough money to keep it as a going concern while it gets to grips with its problems in a very realistic and sensible manner.\u201d<\/p>\n
Investors appear sanguine. The yield on Eskom\u2019s 2028 dollar bonds \u2014 which aren\u2019t government-guaranteed – fell 28 basis points in the past two weeks to 6.78% to a record low. Rates on benchmark 2026 government securities hit a two-year low on Monday after falling 58 basis points this year.<\/p>\n
\u201cInvestors believe that the South African government, which owns the company, has proven capacity and willingness to support Eskom financially,\u201d said Okan Akin, a credit analyst at AllianceBernstein in London.<\/p>\n
\u201cFor many investors the most important issue for Eskom is lack of visibility. Eskom\u2019s problems are well known and widely publicised, but the details about the solution are somewhat hard to come by.\u201d<\/p>\n
Ramaphosa\u2019s other plans for Eskom, announced in his last keynote speech in February, include splitting it into generation, distribution and transmission units under a state holding company \u2014 a move he says will make it easier to manage and raise funding. Those plans have run into opposition from the country\u2019s powerful labor unions, which fear they will lead to privatisation and job losses, and no further details have emerged on how they will be implemented.<\/p>\n
Iraj Abedian, head of Pan-African Investments and Research Services, who has advised the government on economic policy, said time is fast running out to fix the utility.<\/p>\n
\u201cEskom needs operationally to be put to bed in one way or another with a credible solution, not just a bailout solution,\u201d he said. \u201cSuccessive governments have kicked it to the edge of the cliff. Now is the moment of truth.\u201d<\/p>\n