Cash-strapped power utility Eskom is running on borrowed time and needs to find long-term solutions to its financial woes as the government bailouts provided to the company will only ensure its going concern status for the next 18 months.
The power utility announced a record loss of R20.7 billion on Tuesday when it released its integrated financial results for the year ending March 2019.
Eskom’s chief financial officer Calib Cassim said the criticality of the parastatal’s financials have reached their peak, prompting government to step in with the R23 billion in financial support over the next three years, plus an additional R59 billion over the next two.
Bailout was necessary
Cassim said this was not the end, but the start of a journey that would allow the biggest threat to the economy to “keep the lights on” as it moves to find “more sustainable solutions”.
He explained that Eskom’s finances are likely to remain the same before they improve with the losses seen in 2019 expected to stay materially unchanged in the current financial year at R20 billion in March 2020.
On top of this, Eskom has debt of R440 billion, with Cassim saying cash from operations was not enough to service the debt, which was R69 billion in the 2018/2019 financial year and will increase to R84 billion in 2019/2020.
He said that current cash from operations of R25 billion would only decrease the debt servicing costs to R59 billion and this reduction would be eroded by the additional R41 billion costs to the funding of the new build plants Kusile and Medupi.
But now the R46 billion of funding that Eskom has been able to raise, plus the R49 billion lifeline from National Treasury made up of February’s R23 billion and the latest R26 billion, shows that “it was necessary and required to ensure that [Eskom] can meet its commitments and operate as a going concern for the next 12 to 18 months”.
Eskom received a qualified audit opinion from its external auditors SNG Grant Thornton, who highlighted concerns to the company’s ability to remain a going concern, citing previous and current losses and the impact of reduced generation and nonpayment from customers.
Chief restructuring officer
One of the critical conditions of finance minister Tito Mboweni’s release of government support to Eskom in February was the appointment of a chief restructuring officer (CRO), as the company prepares to unbundle its operations into three different entities of generation, distribution, and transmission.
Public enterprises minister Pravin Gordhan announced the appointment of Freeman Nomvalo, the current CEO at the South African Institute of Chartered Accountants (Saica) as CRO, saying the government had resolved to see the role as an office rather than an individual.
Nomvalo, a former accountant-general from Treasury, will lead an office of Saica individuals who will, among other things, be tasked with interrogating Eskom’s debt to determine how best to deal with it going forward, assess Eskom’s balance sheet and find ways to make savings, in addition to what the management team has already come up with.
“In about 18 months to two years we can actually say we [will] have an answer [for] the direction we want to move into,” said Gordhan
The office will report to the ministers of finance and public enterprises as well as the board.
The Eskom white paper that will provide details on the utility’s restructuring will be completed and made public between the end of August and mid-September, with Gordhan stating that intensive discussions will take place with all stakeholders, especially labour, to ensure that there is “sufficient consensus”.
Rating agencies have flagged the continued financial support to Eskom as credit negative as it is an additional drain on already constrained government resources.
Gordhan said it was critical to get Eskom and other state entities back on a firm footing as the era of relying on bailouts “needs to disappear”.
“I think we are in for a shock pretty soon because there isn’t going to be government money,” he said.