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Power giant strives for independence

Jul 08 2012 13:11 Antoinette Slabbert

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Pretoria – Eskom hopes to stand on its own feet within five years with an investment grade credit rating.

During this period electricity tariffs will practically have to double if this is to be achieved.

Eskom financial director Paul O’Flaherty told Bloomberg that Eskom wants to disengage itself from government support, which ensures it has access to cheaper finance than most utility companies in emerging markets.

“One cannot just assume one will get additional guarantees when you need them,” O’Flaherty said.

Without government guarantees Eskom’s  credit rating would have been seven grades lower, said Bloomberg. This would mean higher funding costs.

Eskom’s debt in the past financial year increased dramatically to R138bn and, according to O’Flaherty, is expected to rise to R350bn over the next three years, with annual interest costs of around R23bn.

If Eskom achieves its objective of raising the average electricity tariff of 50c/kWh to 97c/kWh by 2016/17, it will probably manage an independent investment grade rating.

Eskom spokesperson Hilary Joffe told Sake24 that one of the factors underlying an independent investment grade rating is releasing government from its guarantee obligations.

According to Phumza Macanda, spokesperson for National Treasury, in previous financial years government has made R470.2bn worth of guarantees available to state institutions, R170.1bn of which has been used.

Eskom has used R86.1bn of its R350bn facility.

Government’s  total debt obligations on March 31 equalled about 46.8% of the gross domestic product and by 2014/15 will rise to 49.8%.

Treasury wants to keep the debt below 50%, although the Southern African Development Community sets a benchmark of 60%.

Macanda said Treasury welcomes Eskom’s aspirations for an independent credit rating because this would limit government’s exposure to guarantees.

Dr Roelof Botha, economic adviser to PwC, said South Africa’s gross government debt between 2006 and 2011 rose an average 14.7% a year and the level of guarantees a “worrying” 19% a year.

He said an independent credit rating for Eskom is aimed at lightening pressure on government’s debt position and avoiding a possible increase in the rate at which government borrows money.

Because of greater government debt and poor economic growth, both Standard & Poor’s and Moody’s altered South Africa’s outlook from stable to negative.

Botha said: “If Treasury continues issuing guarantees for the ambitious future upgrading of infrastructure, a credit downgrade is a definite possibility.” This would increase the state’s interest account and taxpayers would have to foot the bill.

But Ratings Afrika director Charl Kocks reckons it's highly unlikely that on its own Eskom will get a higher rating than government. Eskom sells its electricity mainly to South Africans and cannot therefore be stronger than the country itself.

He questions Eskom’s aspirations for independence. “If you have a big daddy that is both stronger than you and counter-cyclical, hold onto it.”

Kocks also doubts whether government’s ability to provide guarantees is under pressure.

He believes Eskom wants to use an independent credit rating as leverage in negotiating for higher electricity tariffs.

Government and the National Energy Regulator (Nersa) are putting pressure on the electricity giant to contain its tariff increases, and Eskom wants to dangle the threat of downgrades over their heads to push through the increases.

“Why would government let go of Eskom, one of its most strategic institutions?

“Many industries and households have reached a point where they can simply no longer afford the higher electricity tariffs.

“Eskom now wants to hike them even further in order to achieve a rating status that it does not need,” said Kocks.

Leon Claassen, an analyst at Ratings Afrika, said if Eskom foresees that its loans could rise to more than R350bn and government could not provide further guarantees, a good independent rating would be to its benefit.

 - Sake24

For business news in Afrikaans, go to Sake24.com.

Government guarantees to state institutions in Rbn:
















Development Bank of Southern Africa





Trans-Caledon Tunnel Authority










Land Bank










Source: national Treasury

eskom  |  credit rating


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