Eskom awaits Nersa ruling to assess bailout


Uncertainty is the order of the day as power utility awaits the regulator’s March decision and is left to clean up with limited government assistance

Eskom appreciates the R69 billion bailout announced last week by Finance Minister Tito Mboweni during his budget speech.

So says Calib Cassim, the power utility’s chief financial officer.

He told this to City Press, but qualified his statement by being unable to provide an assessment of the impact of the R69 billion financial support package, which National Treasury has earmarked to pay for Eskom’s debt and debt servicing costs over three years.

This, said Cassim, was because Eskom was first waiting for the National Energy Regulator of SA (Nersa) to decide on a proposal by Eskom to hike tariffs by about 15% for three years, as part of its total revenue application for almost R784 billion.

Eskom wants the state to take over R100 billion of its debt in order to shore up its financial position, which is teetering close to bankruptcy.

Ratings agency S&P Global last week placed its Eskom credit rating on review, following the bailout. S&P rates Eskom CCC+, which is seven notches below investment grade.

Last week Mboweni told Parliament that National Treasury could keep on covering Eskom’s debt and interest costs for the next 10 years at a rate of R23 billion – for a total nominal amount of R230 billion.

The exact breakdown of the R784 billion comprises a R21.6 billion recovery that Eskom has applied for as a result of declining power sales, as well as an application for a 17% power price hike in the first year, followed by a 15.4% increase the next year, and a 15.5% rise in electricity tariffs for the third year.

If Nersa does not give Eskom’s application the green light, said Cassim, “Eskom will assess the impact and strive to extract cost efficiencies”.

Nersa’s decision is expected in the first week of March.

Only after that would the power utility analyse the full impact of that decision and the government’s bailout, said Cassim, adding: “The Nersa decision must allow Eskom to pay for efficient operating costs and earn a fair return.”

If you had R100 billion, where would you rather put that: in the transport environment? Would you put that into an airline that is loss-making? ... Putting money into a terrible SOE is like putting ice into a sieve to hold for a while. Then it will melt and disappear.

Regarding the conditions that come attached to the government’s R69 billion allocation, Mboweni said: “Pouring money directly into Eskom is like pouring water into a sieve ... Eskom has a debt book, which they must service. They must pay their debts. As a shareholder, we are assisting Eskom to pay their debt … The money is meant to help them pay off their debt. It is not to be used for salaries.

“We cannot just be providing state-owned enterprises (SOEs) with cash and stand back. The chief reorganising officer won’t work against the Eskom directors or the chief executive, but work to guard our cash. There is no free lunch here. This is taxpayers’ money. We must look after it,” he told Parliament.

In response, Cassim said: “Eskom is aligned to this position where the government support is to service debt commitments.”

Adrian Saville, CEO of Cannon Asset Managers, told City Press on the sidelines of an event hosted by the SA Institute of Tax Professionals on Friday that it was “lovely gesturing that Mboweni said Eskom will pay its own bills”.

“It does not change the fact that the state cannot allow Eskom to fail and that, ultimately, the state [is the sole owner] and funder of Eskom. Saying that Eskom will have to pay its own bills does not mean that that’s how it will work out,” Saville said.

The reality, he said, was that the government owned a “deeply financially distressed enterprise that needs rescuing and reorganisation”.

City Press asked Cassim if it was going to be difficult to have a chief reorganising officer at the same time as having an Eskom board and CEO.

“This is a shareholder [government] prerogative. Please refer to the department of public enterprises and National Treasury,” he said.

Asked when Eskom would release a comprehensive turnaround plan, Cassim said discussions were taking place with government. “Once concluded, this will be shared with the public, bearing in mind that the president made pronouncements on Eskom’s turnaround in his state of the nation address.”

Mboweni said National Treasury had had “very, very difficult” conversations with the ratings agencies and he was left feeling “damned if you do, damned if you don’t”

Deputy Finance Minister Mondli Gungubele told City Press: “Eskom was one of the top four best performing SOEs in the world ... The ball was dropped, things were allowed to slip, government systems were left out and no one looked for efficiencies. In the medium term, there needs to be a dramatic change at Eskom.”

Regarding SOEs, Mboweni said: “At the psychological level we are post the Soviet Union period. The Soviet Union collapsed a number of years ago. We need to move with the times.

“If you had R100 billion, where would you rather put that: in the transport environment? Would you put that into an airline that is loss-making? ... Putting money into a terrible SOE is like putting ice into a sieve to hold for a while. Then it will melt and disappear.”

Mboweni’s budget speech seemed to be an attempt to pacify two critical constituencies: the electorate ahead of the May 8 elections and the ratings agencies. This, while having to deal with a distressed Eskom, a stagnant economy and a big tax revenue shortfall.

Saville called the budget speech an “absolute non-event” and a “holding pattern” document that included some “furniture rearranging”.

It is clear that National Treasury made some of its budget choices to placate the ratings agencies – in particular, Moody’s, which is the last agency to keep the country’s rating at investment grade.

At a post-budget speech press conference last week, Mboweni said National Treasury had had “very, very difficult” conversations with the ratings agencies and he was left feeling “damned if you do, damned if you don’t”.

Also commenting post the budget speech, SA Reserve Bank Governor Letsetja Kganyago said that as a central banker, “you plan for the worst and hope for the best”. A Moody’s downgrade to “junk” status would result in higher borrowing costs, and investments would be hit. This, in turn, would reduce economic growth and jobs, he added.

Moody’s will announce its latest review of South Africa’s credit rating on March 29.

To try to partially offset the Eskom bailout and limit the amount of extra debt, Mboweni announced a R50.3 billion reprioritisation of expenditure over the next three fiscal years.

Investec economist Annabel Bishop said the budget speech might be enough to stave off a credit-negative response from Moody’s, but the risk remained that the agency could downgrade its outlook for South Africa to negative from stable later this year.

Saville said: “Moody’s has been very forgiving. By almost every measure you can think of, South Africa should have been downgraded. The fact that we haven’t can arguably be put down to goodwill and confidence that we will improve. The capital markets – in particular, the credit default swaps pricing – point to South Africa being subinvestment grade. So, even if Moody’s does not have us there, the capital markets do.”

Moody’s was likely to keep its credit rating on South Africa unchanged until at least after the national elections, Saville added.

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