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Pretoria - Treasury believes that if Eskom is granted its requested tariff hike, the state utility’s finances could be strengthened considerably.
Finance Minister Malusi Gigaba said in his mini budget that the Finance Ministry is concerned about the challenges facing Eskom, as they expose the government to great risk. As a result, Eskom has to be assisted to create its own revenue stream and not depend on government guarantees, he said.
Granting the tariff hike would represent a step-change in Eskom’s future revenues, Treasury said in its Medium-term Budget Policy Statement.
“Combined with strong cost management, this could allow the utility to cover all its obligations without fiscal support.”
Financial management a concern
Gigaba said Eskom is critical to SA’s development, but expressed concerns about the apparent mismanagement at the state utility.
“Eskom is simply too important to the country to fail and we will not allow it to do so,” said Gigaba.
Eskom’s governance issues are a major concern to government, Gigaba said.
“The failures of governance, leadership and financial management at Eskom are of grave concern.”
He told journalists at a briefing that he didn’t think Treasury would be able to step in and save Eskom “if anything went bust".
Guarantees keeping Treasury awake at night
Gigaba said government guarantees issued to Eskom are keeping Treasury awake at night.
“As government is guarantor over a significant portion of Eskom’s debt, it has become a significant risk to the entire economy,” he said.
Eskom is the benefactor of the government’s largest state guarantee of R350bn, which supports Eskom’s capital investment programme.
In describing the risk it faces in terms of government guarantees, Treasury admitted Eskom’s financial turbulence is because of weak governance. The state utility received a qualified audit opinion. There are also concerns about Eskom’s violation of some of its debt covenants with lenders.
Flat electricity sales
Eskom‘s forecast is that its electricity sales growth will remain flat, with tariff increases the only way for the company to secure revenue growth.
It is likely that the National Energy Regulator of South Africa could grant tariff increases below Eskom’s application, as it did previously. Hearings for Eskom’s requested hike start at the end of October and are likely to face stiff opposition from advocacy groups, which argue that Eskom first has to clean up its house before it can demand more money from South Africans.
There are also risks that sales growth will perform below projections or decline as households and businesses improve their energy efficiency, Treasury said. If this happens, Eskom will likely apply for even steeper tariff hikes.
It said any of the options required to stabilise Eskom could have significant fiscal implications.
“If higher tariffs slow economic activity, tax revenue collections will be lower, delaying government’s fiscal objectives of closing the deficit and stabilising debt,” Treasury explained.
But if Eskom’s requested tariff hike is not granted, its financial position may weaken, requiring it to seek government assistance.
Government also extended its R350bn guarantee from March 2017 to March 2023 because of delays in Eskom’s capital investment programme. This extension will allow Eskom to use the remaining portion to complete its programme, Treasury stated.
New board
The new Eskom board, which the minister said would be appointed before the end of November, will have to develop a plan to address lenders' governance concerns.
“Working with the new board, we will ensure a credible executive management team is in place,” said Gigaba.
National Treasury will work closely with the Department of Public Enterprises to strengthen governance and financial management at Eskom, he said.
“We will ensure its financial management complies with the Public Financial Management Act and that irregular expenditure is accounted for.”
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