Eskom wants to raise as much as R884 billion in the next three years through a huge hike in power prices and potentially the biggest government bailout of a state-owned company in history.
If the utility gets the backing of the National Energy Regulator (Nersa), which started hearings nationwide this week, this will have a severe effect on the economy, including jobs losses and closures of vulnerable businesses.
Energy consultant Ted Blom noted in his presentation to Nersa that the proposed power price hikes would slash 134 000 jobs.
Eskom had applied to Nersa to recover R21.6 billion for its 2018 financial year due to a revenue shortfall as a result of declining power sales.
It has applied for three annual hikes of power prices of 15% each for its 2020, 2021 and 2022 financial years for total revenue of R762 billion.
President Cyril Ramaphosa said this week at a pre-World Economic Forum event that his Eskom task team was “working feverishly to come up with proposals. Eskom is still a big challenge but ... there is a glimmer of light at the end of the tunnel.”
Jeffrey Schultz, a BNP Paribas economist, said Nersa was unlikely to grant Eskom three consecutive 15% annual power price hikes.
This was because Nersa used a complex formula to decide on what power prices it granted Eskom.
The regulator also considered wasteful expenditure in its deliberations, he said.
Schultz said a hike of 8% for three consecutive years was likely to be more feasible than 15%.
Eskom indicated this week that cash from power generation was insufficient to cover debt servicing and capital expenditure.
The presentation showed that for the half year ending in September, Eskom generated cash of R22.3 billion from power sales, which fell below the R23.2 billion it paid for servicing debt.
Eskom CEO Phakamani Hadebe warned this week at a Nersa hearing in Cape Town that a big rise in local tariffs would not be a “silver bullet” that would solve all of Eskom’s problems.
Even if Eskom got the hikes it wanted, it would still have a R50 billion debt hole to plug. “To plug that, Eskom is seeking a massive bailout.”
National Treasury director-general Dondo Mogajane, confirmed this week in an interview with City Press that Eskom wanted a bailout of R100 billion.
The biggest bailout of a state-owned company was in 2015, when Eskom got R83 billion – made up of R23 billion in cash and the write-off of a R60 billion interest-free loan.
Isaac Matshego, a Nedbank economist, said rating agencies were likely to react negatively and aggressively to an Eskom bailout that was done without a credible plan to stabilise it as this would be interpreted as a signal that Eskom would remain a drain on state finances and the wider economy.
Mogajane said the government did not have R100 billion to bail out Eskom.
“If we have to give them [R100 billion] then we have to bridge the [government’s expenditure ceiling]. If we give them money – then we have to borrow more. A R100 billion bailout is not out of the question per se. It is on the table. Holding all things constant, if you need any extra money – something must give.
“I must stop certain programmes to give to Eskom – the same as SAA.”
Any money allocated to Eskom would require the government’s budget and spending to be reprioritised.
“It is important to reprioritise for growth. Rating agencies will be happy … All the balls are hanging in the air now. These things will be firmed up as we get into the state of the nation address and the budget speech ... We are awaiting the Nersa process.”
BNP Paribas’ Schultz said that the Treasury was likely to wait until Eskom had submitted its turnaround plan and for Nersa to come out with its determination, which could be in March or April, before deciding what level of government injection might be made.
Finance Minister Tito Mboweni made his thoughts known about Eskom when, in December, he tweeted a picture of a sieve, Schultz said.
“The fiscus is not in a position to continue pouring money into assets that are not productive,” Mboweni said in an interview with Bloomberg.