South Africa’S Eskom May Need More Bailouts If Funding Plan Fails

The South African government may be forced to inject more money into state power firm Eskom by the end of March if the struggling utility fails to meet its borrowing plan, a Treasury official told parliament on Wednesday.

Eskom supplies more than 90% of South Africa’s electricity but does not generate sufficient cash to meet its debt-service costs and relies on state bailouts to stay afloat.

Plant outages this year led to some of the worst blackouts in years in South Africa and ratings agencies regularly cite Eskom as one of the biggest threats to South Africa’s investment-grade credit rating status.

The Treasury has already earmarked 26 billion rand ($1.7 billion) to Eskom in the financial year which ends in March 2020 as part of special legislation to inject 59 billion rand over two years. That is on top of a 23 billion rand a year bailout for the next three years.

“Failure to execute its funding plan may result in Eskom experiencing liquidity shortfalls at 31 March 2020 and require additional funding in addition to funding provided through the Special Appropriation Bill,” the National Treasury’s director general, Dondo Mogajane, told lawmakers.

The government plans to restructure, or “unbundle”, the huge organisation into separate generation, distribution and transmission units. It is also exploring debt relief options including the state taking on Eskom debt, while a policy discussion paper published on Tuesday raised the idea of selling Eskom’s coal-fired power plants.

Mogajane also outlined some of the conditions the Treasury was considering imposing on Eskom, a key concern for investors who want to see evidence officials will follow through on promises to reform the utility.

Those conditions could include having Eskom use state financial support to pay off debt and interest, rather than paying bonuses. If Eskom intends to use bailout money for other reasons pre-approval could be required.

Eskom could also need to submit a schedule of debt redemptions, report daily to the Treasury on liquidity issues and sell its mortgage-lending unit, Mogajane said. “There will be more stringent ones (conditions), one can imagine,” he added.

Mogajane said the government’s financial support to Eskom, whose ballooning debt has reached 440 billion rand, was premised on its ability to execute its funding plan of 46 billion rand for 2019/20, with 58% already secured.

Separately, a United Nations climate official sounded a warning on Wednesday about the impact Eskom was having on Africa’s most industrialised economy.

“You’ve seen the shedding of government bonds by international bondholders because they are concerned about the effect Eskom might have on the economy,” Rachel Kyte, a special representative of UN Secretary-General Antonio Guterres, told reporters via videolink during a discussion on climate change.

“It’s a very clear example that people do not want to be exposed to a heavily intensive carbon portfolio.”

Eskom generates most of its power from heavily polluting coal-fired power plants, some of which are nearing the end of their commercial lives.

“How government manages the (Eskom) situation, and the extent to which it attracts investment into clean energy, the extent to which unbundling has to be part of that solution, are things that we are watching closely,”