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SA staring 'down a barrel of a downgrade' if Eskom doesn't turn around soon – analyst

Oct 17 2019 05:00
Lameez Omarjee
Standard Bank

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The international fiscal community will lose patience with South Africa if it fails on its promise to turn around Eskom, and by extension the economy, according to a tax expert.

Speaking at a briefing on Wednesday, Mazars tax partner Bernard Sacks and other analysts shared views on the mini budget to be announced by Finance Minister Tito Mboweni later this month.

Mboweni is expected to shed more light on plans to turn around debt-ridden power utility, Eskom. Government has proposed splitting the power utility into three entities – generation, transmission and distribution – with the three entities remaining under a state holding company.

Sacks and Mazars' national head of tax services Mike Teuchert have both questioned whether keeping all three entities under the ownership of Eskom will make a difference in solving Eskom's financial problems.

Unlike other state-owned enterprises, Eskom is essential in ensuring the sustainability of the economy, which would impact on the country's credit rating, Sacks explained.

Moody's blues

"We may be staring down a barrel of a downgrade. We hope that won’t happen, but that is a very real risk," he warned. Moody's is the only ratings agency which still has SA ranked at investment grade, and its next review is due in November.

One of the biggest causes of concern is the recent announcement of stage 2 load shedding, Sacks said.

Eskom on Wednesday issued a statement indicating that five electricity generating units are down. Furthermore, a conveyor belt carrying coal to Medupi power station broke down on Saturday on October 12, contributing to the problem, Fin24 previously reported. Eskom has been relying on open cycle gas turbines to meet energy demand. But diesel levels and dam levels – which are needed to run the open cycle has turbines – are running low.

Eskom is yet to respond to Fin24 to provide more clarity on the technical issues.

Eskom's inability to deliver electricity demand, especially in spring, when demand is expected to be lower than the winter months, is cause for concern, according to Sacks.

"The capacity of Eskom to deliver is on [a] knife edge," he said.

Load shedding is one more contributing factor to Eskom's drain on the fiscus, he added. Currently, Eskom cannot service interest on debt, indicating the company is not viable.

In an economy facing sluggish growth, load shedding will add more challenges, he noted. It has been estimated that load shedding this year cost the economy R1bn per stage, per day, Sacks said.

'Window dressing'

Bloomberg previously reported that Eskom has asked government to take on its debt. Sacks commented that although this would help solve Eskom's financial performance problems, it would make government's financial position look "even more shabby".

"What that means is, we are plugging the gaps. It's a bit of window dressing," he said. Instead the focus should be on fixing Eskom's ability to deliver as well as its financial performance, he opined. However, he added, solutions might not be welcomed by all stakeholders - especially unions, who might push back if proposals could impact jobs.

"But if we fail to take action now, my fear is that we would find that load shedding becomes a way of life. I don't think any of us want that," Sacks said.

He even suggested that government would not be able to deliver on other goals, such as National Health Insurance, if income remained constrained. "Sufficient income is going to require growth and growth is going to require electricity. We are in a vicious circle. We have to break the circle and start growing the economy," he said.

Restructuring

Commenting on the restructuring of Eskom into three entities, Sacks said it would be a "long and expensive" process. "In doing so, it may detract from the job at hand to generate sufficient electricity and paying the bills," he said.

Teuchert said that up until 2009, Eskom was functioning successfully as a single entity. He said once corruption and state capture came into play, the power utility started floundering.

He suggested selling off one of the entities or privatising it to help Eskom settle some of its debt. But simply splitting the entity and not changing the ownership structure will not result in Eskom's debt going away, he said.

mazars  |  eskom  |  tito mboweni  |  mini budget 2019
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