Gigaba hints at Eskom operational overhaul

2018-02-21 14:25 - Yolandi Groenewald

Pretoria - Major changes and tough decisions lie ahead for Eskom if the power utility is to survive its current storm, this year’s budget has shown.

Finance Minister Malusi Gigaba made it clear in the budget presented on Wednesday that government is increasingly reluctant to hand out a lifebuoy to struggling state enterprises when that money is needed elsewhere.

Eskom’s business model will have to change as part of broader transformation in the electricity sector, Treasury stated in its latest budget review. No specific allocation had been made to recapitalise Eskom in the current budget.

South Africa’s power producer has presented one of the biggest headaches for Gigaba over the last months as he grappled with the institution's financial woes.

And the budget presented on Wednesday showed that despite overhauling the state utility’s board, Eskom is not out of the woods yet.

It is government guarantees issued to the struggling utility that have kept Gigaba awake at night. While enabling Eskom to access funding that would otherwise be unavailable, or to borrow at a lower cost, it created significant risks to the government because a high level of contingent liabilities could lead to a higher risk premium on sovereign debt.

Treasury is firm that it needs to reduce guarantees as part of its efforts to maintain prudent liability levels, and Gigaba was adamant that state enterprises such as Eskom need to become sustainable businesses that do not look to government for a bailout.

Government guarantees

Currently Eskom has a R350bn guarantee from the government, with government exposure at R220.8bn as a result.  

Treasury said Eskom used an additional R18bn of its guarantee in the last financial year and is expected to use R17.9bn annually over the medium term.

It said the unallocated portion of Eskom’s R350bn guarantee framework agreement, which amounts to R96bn, was extended to 2023.

Liquidity issues

Eskom’s finances are in disarray. The national electricity utility’s profits fell sharply from R5.1bn in 2015/16 to R888m in 2016/17, despite an average 8% tariff hike.

Treasury said that this was largely due to a near doubling of finance costs as more power units became operational, resulting in Eskom having to expense historical interest obligations.

Reduced electricity demand also contributed to its flat revenue growth.

As new generating capacity comes on-line, Eskom may have excess supply until economic growth accelerates and demand increases.

“Eskom has committed to speeding up delivery on its capital projects, which will help prevent further cost escalations,” Treasury said, adding that it has not revised Eskom’s build programme costs since 2016.

Commenting on national regulator Nersa's rejection of Eskom’s request for a 19.9% tariff hike, Treasury said it is clear that Eskom can no longer rely on tariff increases to compensate for flat electricity sales growth.

“To remain financially sustainable, the utility needs to reduce operating costs,” Treasury said.

Eskom’s qualified audit last year, related to irregular spending, only worsened the state enterprise’s woes.

As a result, the entity has been unable to raise the required funding to maintain prudent levels of liquidity, Treasury stated, adding that it has instituted a new board and replaced executives to address the issues.

Power-purchase agreements

Guarantees to independent power producers, however, also present a liability to the government in the wake of Eskom's financial difficulties.

Treasury’s review showed that government has committed to procure up to R200bn in renewable energy from independent power producers.

The value of signed projects, which represents government’s exposure, is expected to amount to R122.2bn by March 2018. Exposure is expected to decrease to R97.6bn in 2020/21.

Treasury classified the agreements as contingent liabilities in line with global standards.

These liabilities can materialise in two ways, it said. If Eskom cannot afford to buy power as stipulated in the power-purchase agreements, government will have to loan the utility money to honour the agreements.

Government will also be liable if it terminates such agreements owing to a change in legislation or policy.

Treasury said that at this point both outcomes are unlikely, and the risk of this contingent liability materialising is low.

* Sign up to Fin24's top news in your inbox: SUBSCRIBE TO FIN24 NEWSLETTER