South Africa is weighing extra options to support Eskom, including swapping the financially troubled state power firm’s debt for government bonds or ring-fencing it in a special account, a senior treasury official said.
Discussions are at an early stage, and it is not yet clear which option will be chosen, he said. Eskom, which supplies more than 90 per cent of the country’s electricity, has this year been forced into rolling nationwide power cuts that have eroded growth in an already fragile economy.
President Cyril Ramaphosa has pledged 230 billion rand ($16 billion) of support over the next 10 years but, with the firm operating at a hefty loss, officials say other measures will be needed to make it financially sustainable.
Ian Stuart, acting deputy director general for the National Treasury’s budget office, said various scenarios including a debt transfer were being considered for resolving the “large and complex” issue, with implications for South Africa’s credit rating a key criterion.
Moody’s, the only major credit agency that still classes South Africa at investment grade, said last year that taking on Eskom debt might under certain circumstances be ratings-neutral for the sovereign. The agency declined to comment on Stuart’s remarks.
For Eskom, meanwhile, passing on all its debt obligations would probably return the firm to profit.
“We are looking at which option is best both in terms of fiscal costs and support for the reform process,” Stuart told Reuters. Support could take the form of ongoing subsidies, or the firm’s debt could be moved off its balance sheet to the government or into a special purpose vehicle (SPV).
“A switch to South African government bonds will be looked at, but we have to confirm the legalities of each option and implications for ratings agencies,” Stuart said.
Ramaphosa’s government is anxious to present a credible plan for rescuing Eskom without putting public finances at risk, while investors say any support measures would need to be accompanied by efforts to cut Eskom’s costs and boost its revenues.
While the size of any debt transfer is still up for discussion, the ensuing rise in the government’s debt servicing costs would probably be offset by a reduction in its guarantees to Eskom – something that credit agencies factor into their assessment of “contingent liabilities.”
For this reason Moody’s said in December, when Eskom asked government to take on 100 billion rand of its debt, that the impact on the sovereign of such a transfer could be neutral.
Eskom had around 440 billion rand ($31 billion) of debt as of March, of which more than 270 billion rand – just over a tenth of the government’s net debt – was state-guaranteed.
Its year to March 2018 financing costs were around 25 billion rand and probably rose during the following financial year, for which it is expected this month to post a loss of up to 20 billion rand.
That suggests that, once debt-servicing costs are stripped out, it has the potential to make investments and reward stakeholders.
The government wants a “deep restructuring” of Eskom’s business model once its generation performance and liquidity had improved, said Adrian Lackay, a spokesman for the Department of Public Enterprises, which is co-ordinating rescue efforts with the treasury and the presidency.
Government-appointed experts are promoting a model whereby Eskom could unlock relatively cheap development funding if it cuts its carbon emissions quicker.
But that idea could face strong opposition from unions strongly opposed to policies that could lead to job losses at coal mines.
Investors want to see more steps to fix Eskom fast.
Pavel Mamai, partner at fund manager ProMeritum, said all the support measures had their merits, but Eskom would need to cut costs and increase revenues.
“A swap for South African government bonds would probably help deleverage Eskom best, allowing it to achieve lower borrowing costs and opening market access,” he said. “In the SPV option it would depend how the debt is accounted for.”
Peter Attard Montalto, head of capital markets research at Intellidex, said the government should split Eskom into generation, transmission and distribution businesses as promised because “a deleveraged Eskom with the state-owned enterprise’s monopoly mindset is a dangerous thing.”