All eyes on Godongwana as Eskom debt grows to R422bn

Eskom has painted itself into a debt corner and the plan Finance Minister Enoch Godongwana is expected to announce on Wednesday to restore its financial viability will be one of the key factors of his budget speech.

A lack of detail around the debt plan for Eskom would be a significant disappointment against the backdrop of anticipation building around a solution to load shedding, says Old Mutual Investment Group chief economist Johann Els.

Read: The 2023 Budget: A crisis of credibility in the outer years of the forecast

“Rumours are starting to circulate, given the lack of consultation so far with bondholders, that detail on Eskom’s debt will be lacking.

“This would be a big negative for markets. But ultimately, we expect government to take over R200 billion to R300 billion of Eskom’s debt. Strict conditionality must be imposed on this, however,” says Els.

In an affidavit filed at court in response to a DA application to have the 18.65% Eskom tariff increase due for implementation on 1 April reviewed and set aside, Eskom CFO Calib Cassim discloses that Eskom’s debt had grown to R422 billion by the end of December.

This is up from R396 billion at the end of the previous financial year on 31 March 2022.

Read:
Eskom’s survival depends on debt relief and tariffs, CEO says
Government to take on Eskom debt in staggered way
Godongwana says Eskom debt plan remains on track

In the current financial year ending 31 March Eskom’s debt obligations – capital and interest – amount to R81 billion, and in the next three years it is due to repay a further R200 billion, according to Cassim.

The pressure on its liquidity is however so severe that Eskom cannot do this on its own.

A total of R323 billion of the R350 billion government guarantee has been utilised and lenders are reluctant to make further funds available without such guarantee. Any unguaranteed loans that are available come at big premiums.

Godongwana’s announcement about debt relief is therefore critical to keep Eskom afloat.

The minister promised during his Medium-term Budget Policy Statement (MTBPS) in October last year that government will take over between a third and two thirds of Eskom’s debt, saying he would give further detail during his budget speech, scheduled for Wednesday (22 February).

Since government is liable for the debt anyway, it makes financial sense to transfer the debt to government’s balance sheet at lower interest rates and thereby assist Eskom to become financially sustainable again.

Bailout? 

National Treasury has been trying to avoid bailing Eskom out in this way because it fears setting a precedent for other state-owned companies to rely on government rather than clean up their act.

The Eskom situation has however become so dire that it cannot be ignored any longer. Many analysts have pointed to it as the single biggest risk to the economy.

Read:
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Eskom regularly refinances its debt, but according to Cassim it cannot finalise its funding plan before it knows what Godongwana’s announcement entails.

In his affidavit Cassim emphasises that the planned debt relief must leave Eskom independent from government and able to sustain itself.

He said all the scenarios that were considered were based on the revenue determinations made by energy regulator Nersa for Eskom for 2023/24 and 2024/25, showing increases of 18.65% and 12.74% respectively.

Any decrease in those revenues will render Eskom unsustainable again unless government puts its hand even deeper into its pocket.

Financial think tank Intellidex considers Godongwana’s Eskom debt relief announcement as the most important element of the budget.

National Treasury understands the need for a fully fleshed out plan and expects an announcement that government will take over R230 billion of Eskom’s debt in three steps over two years, with strict conditions attached at each step.

Intellidex expects some detail on the conditions, which may include Treasury sending some of its own experts to Eskom power stations to establish what can be done to improve their current poor performance.

Read: The load shedding economy is the ‘new normal’

“We expect that National Treasury will particularly be keen to lock in the new CEO and conditionality will be geared towards constraining [the] madness of whomever might be appointed and whatever goes on into elections next year re[garding] tariffs etc,” Intellidex says.

It expects the first tranche of R157 billion around September, with a further R20 billion to follow and the final R54 billion early in 2025.

New minister of electricity

Intellidex warns that there is great uncertainty about the execution of the debt relief plan with a new minister of electricity and a new Eskom CEO to be appointed, “but we will have cleared the key stage, and then the carrot of debt relief we expect will be too much to refuse and keep things [broadly] on the straight and narrow – this is the baseline at least [admitting to the downside risks]”.

Intellidex says it sees the announcement about Eskom “as a major Rubicon moment followed by a series of investor interactions with creditors in the months ahead”.

In the meantime, Eskom’s plant performance for the week ended 12 February (week six of 2023) showed some improvement in plant availability, although unplanned failures still represent 32.62% of generation capacity.

This deteriorated further on Friday 17 February when Eskom warned at 16 minutes to midnight of more intense load shedding due to the breakdown of, among others, Koeberg Unit 2.

The next day it reverted to Stage 6 load shedding during the night to replenish emergency reserves and Stage 4 during the day. The same pattern continued on Sunday 19 February, when 19 385 megawatts (MW) was unavailable due to breakdowns and a mere 3 566MW due to planned maintenance.