Eskom bailout mandates partial privatisation of South Africa’s power grid

Eskom will receive R254-billion in debt relief from the government over the next three years, provided it partially privatises the country’s electricity transmission network and coal-fired plants and takes steps to improve its performance.

The package will strengthen Eskom’s balance sheet and cover all interest payments over the next three years, budget documents presented by finance minister Enoch Godongwana in Cape Town on Wednesday show. That will enable the utility to invest in transmission and distribution infrastructure as the country battles record electricity outages.

Eskom “imposes an enormous drain on the economy”, the national treasury said in its budget review. “Prolonged and debilitating power failures” are among the factors that prompted it to cut its economic growth forecast for 2023 to 0.9% from 1.4% in October.

The relief adds to R263.4-billion in bailouts handed to Eskom since 2008, when it started imposing rolling blackouts that have roiled the economy. The success of the plan partly hinges on the implementation of politically unpopular, inflation-beating electricity tariff increases.

President Cyril Ramaphosa, who is expected to lead the ANC into its toughest election battle since the end of apartheid next year, has appealed to Eskom to suspend the tariff hikes of as much as 18.7%. Opinion polls show the party risks losing its national majority.

The government will give Eskom three annual advances totalling R184-billion through to March 2026 to repay maturing debt and cover interest costs. The funding will be converted to equity if Eskom meets its performance criteria. The bulk of the transfers will be financed through additional borrowing, the national treasury said.

The state will also directly take over as much as R70-billion of Eskom’s loan portfolio in the 2026 fiscal year by converting the obligations to government debt that will be financed by issuing short- and long-term domestic loans.

Painful for the state

The government hasn’t yet discussed the debt-relief plan with Eskom’s creditors, though it has been shaped by feedback from ongoing engagements, said Duncan Pieterse, the head of the treasury’s asset and liability management unit.

While the debt-relief plan will give the loss-making utility room to undertake critical maintenance needed to secure the electricity supply, it will be painful for the state.

Government debt will probably peak at 73.6% of GDP in 2026 — a higher level and three years later than previously expected. Debt service costs — the fastest growing expenditure line item for about a decade — will increase to almost 20% of main budget revenue. That’s even as the government uses higher-than-expected tax revenue to pay down debt and rein in the budget deficit.

Read: Government to take over 60% of Eskom’s debt

Debt relief for Eskom is contingent on the company meeting predetermined performance targets. An international consortium of energy experts will review its fleet of coal-powered stations by mid-year, determine which plants can be ‘’resuscitated” to original equipment manufacturer’s standards and advise on operational efficiencies. Eskom will then be obliged to implement the recommendations, and to concession operations and plant maintenance to private operators.

While the utility will be given a window to boost compliance, it will be expected to meet all the conditions, said Jeffrey Quvane, the director for energy and telecommunications in the treasury’s asset and liability management unit. Eskom’s performance will be reviewed on a quarterly basis and it will have to repay loans at market rates to the National Revenue Fund if it fails to meet targets.

Eskom, national treasury and department of public enterprises also agreed to design a mechanism for building new transmission infrastructure “that will allow for extensive private sector participation”, treasury said. The department of mineral resources & energy, which the ANC wants to take over responsibility for Eskom, was consulted as part of the debt-relief arrangement process, said Ravesh Rajlal, the chief director for oversight in the treasury’s asset and liability management unit.

Under the plan, Eskom may only undertake capital expenditure on transmission and distribution, while any spending on generation will have to relate to meeting minimum emission standards. The utility will also be barred from awarding unsustainable salary increases and taking on new borrowings from April until the end of the debt-relief period without written permission from the finance minister.

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Eskom’s debt burden stands at R423-billion, almost 80% of which is guaranteed by government. The guarantee framework expires at the end of next month, after which the company will no longer be able to draw down on guarantees.  — With assistance from Mike Cohen, (c) 2023 Bloomberg LP

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