Eskom will be key to addressing the current economic crisis

Jonathan Faurie
Founder: Turnaround Talk

If we are being honest, has South Africa ever fully recovered from the 2008 Global Financial crisis? Yes, we did experience a boom period during the 2010 FIFA World Cup, but that money soon ran out and industries such as the construction industry and the tourism industry returned to normal as tourist numbers normalized. This ushered in an economic crisis that we have not recovered from.

A constant narrative since the 2010 FIFA World Cup has been that South Africa is facing a significant economic crisis. This has been underpinned by corruption, state capture, one of the worlds biggest unemployment crises and our old friend loadshedding.

In terms of the challenges that we face, addressing the energy crisis will go a long way to resolving our economic crisis. The blueprint has been established across Africa; before the Covid-19 Pandemic, Rwanda, Ethiopia and Tanzania were part of the worlds 10 fastest growing economies. Post 1994, South Africa and Nigeria were the economic powerhouses on the content.

Our fall from grace has been dramatic, Nigeria took over as the continents largest economy in 2007 and South Africa is now third behind Nigeria and Egypt. By 2050, economists believe that economic power on the continent will be equally shared between East and West Africa with Southern Africa being a small contributor to the continents expected $29 trillion GDP.

Can we change this narrative? While delivering his State of the Nation Address, President Cyril Ramaphosa admitted that South Africa has significant structural issues that it needs to address and that this can only be achieved through increased involvement from the private sector. The private sector cannot become involved unless the light remain on and the wheels of industry are well greased. A report from the Sunday Times points out that half of the generating units at 14 of Eskom’s coal-burning power stations break down again within nine months of being repaired, and the worst performers are out of service for nearly 70% of the time they should be keeping SA’s lights on.

How do we save Eskom?

When addressing this question, a logical place to start would be to resolve Eskom’s R400 billion debt crisis. Despite warnings from the Finance Minister that Government wont be bailing out under performing State Owned Entities, a News24 article points out that Treasury is working on a credible solution for Eskom’s debt crisis which it hopes to put to the Cabinet ministers’ committee on the budget by October which will be just in time for the Finance Ministers Medium Term Budget Policy Statement.

The article points out that the problem of what to do about Eskom’s debt has been a significant issue for SA’s risk profile and the budget since 2018. But due to uncertainty in government over what route to take, no progress has been made. This is the first time that the Treasury is doing the technical work to explore what debt relief for Eskom would mean for the fiscus and on under what conditions it could be credibly done.

Government wont be bailing out failing SOEs
Photo By: Supplied

It follows Finance Minister Enoch Godongwana’s commitment in the budget in February that a solution to the Eskom debt would be finalized within a year. Godongwana also said that it was also up to Eskom to take steps to fix itself, by selling assets and cutting costs to demonstrate that it would not be in the same situation again further down the line.

The article adds that, Treasury Head of Asset and Liability Management – Duncan Pieterse – confirmed on 3 July that technical work was under way but said that it was nowhere near certain yet that the proposal would find its way into the fiscal framework. It first had to go through the cabinet budget process and find approval.

Saving Eskom will be key to addressing the country’s economic crisis.

A long road ahead

The expansion and strengthening of the national transmission grid are essential if new power projects are to be connected and the country’s energy generation capacity is increased.

The News24 article points out that it is generally acknowledged that Eskom would require R200 billion of debt removed from its balance sheet to be sustainable. The splitting of Eskom into three separate companies – generation (the power stations), transmission (the national grid), and distribution (the poles and wires) also make the resolution and apportioning of the debt urgent.

Owners of Eskom debt will need to be involved in this process.

The technical work will explore what quantum of debt could be shifted to the sovereign balance sheet. It will also look at the conditionalities around such a move and what Eskom would have to do to get its finances in order.

The article adds that we have already seen how getting financers to commit funds can be a volatile process. Comair’s financers would not commit capital to fund the airlines business rescue process because of fears of future economic risks and the reputational damage caused by the grounding of the airline by the Civil Aviation Authority of South Africa earlier this year.

While not in business rescue, will the owners of Eskom’s debt show the same reluctance to commit funds to addressing the company’s maintenance issues?

Cash flow management in times of economic crisis is tough. This is where the value of splitting Eskom into three separate units will show significant benefit. Where are we in that process?

Lack of progress in addressing the economic crisis

The article points out that one of the reasons for the lack of progress on an Eskom debt solution has been its impact on SA’s debt consolidation plans. SA needs to bring down debt and borrowing costs which threaten to engulf the budget. SA’s high quantum of debt has also increased its risk profile, resulting in long-term borrowing costs for the government being at an all-time high.

To deal with these issues, Treasury has pledged itself to debt consolidation by borrowing less to fund new expenditures. A take-over of some of Eskom’s debt would affect these plans.

The article adds in a sign that Treasury is serious about finding an Eskom debt solution, the International Monetary Fund, which visits SA twice a year, commented approvingly on a possible balance sheet restructuring after its visit last month.

In a statement it said: the operations, finances, and governance of Eskom and Transnet need to be improved decisively and quickly. Any solution to Eskom’s debt problem must be preceded and accompanied by concrete and credible actions to downsize the company’s balance sheet and restore its commercial viability.

This is the first step in addressing financial distress in a time of economic crisis.

Eskom has been told by the IMF that it needs to fix itself
Photo By: Eskom

Fix yourself to fix the economic crisis

However, the IMF also underlined the importance of Eskom itself taking steps to be financially sustainable. This would include cutting costs and collecting arrears, it said.

The article points out that Eskom’s commitment to fix itself is an essential part of presenting “a credible” debt restructuring plan, said Pieterse.

In the past, Treasury has loaded conditionalities onto Eskom in return for financial support, but these were seldom met. For the plan to be credible this time, the conditions would need to be well-designed and carefully chosen. If not, government will risk being seen by the investor community to be rewarding Eskom for bad behaviour.

Eskom Chief Financial Officer Calib Cassim has recently spoken encouragingly at investor meetings that a balance sheet restructuring for Eskom was receiving far more attention from the Treasury. In an interview with New24 last week Cassim said: we definitely see urgency by National Treasury and for me that has been very positive.

“If Eskom is to take on more debt, it needs to have more headroom on the balance sheet,” he said.

All animals are equal

At this point it is prudent to turn to a quote by George Orwell’s classic Animal Farm: all animals are equal, but some animals are more equal than others.

This quote is often used to bemoan the preferential treatment that one party gets over another despite assurances that all parties are equal in importance. Government pledged significant cash to Mango as part of the SAA business rescue plan, yet the Department of Public Enterprises recently told Mango that it should expect less than what was promised. While sounding out a warning that Government will be reluctant to bail out failing SOEs in one breath, it will throw money at the Eskom situation hoping that a water-to-wine miracle may occur and the utility finds some stability.

The economic crisis and energy crisis will be the ANCs rubicon. We will now see if Ramaphosa is serious about growth or if he was paying the same lip service that the ANC paid 28 years ago when they promised free housing, education, healthcare and electricity.

This is an important year for the ANC, if we do not see significant progress in addressing the crises discussed above, the wheat may be separated from the chaff in 2024 when the country returns to the polls.