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Eskom needs at least R200bn from government – Busa

R100bn request ‘understates severity of problem’.
‘Any bailout will be pointless unless there is a parallel process to restructure Eskom and re-evaluate the whole energy and electricity sector,’ says Busa’s Martin Kingston. Picture: Moneyweb

The R100 billion debt support Eskom has requested from government is not nearly enough to return the struggling utility to sustainability, says Business Unity South African (Busa).

It should be at least R200 billion, but even that would be pointless unless there is a parallel process to restructure Eskom and re-evaluate the whole energy and electricity sector, according to Busa vice-president Martin Kingston.

Kingston spoke to Moneyweb on Monday, two days before finance minister Tito Mboweni will deliver his annual budget speech. Mboweni is expected to announce financial support for Eskom, which is currently over-burdened with R419 billion of debt. On the current trajectory, Eskom’s debt is expected to increase to more than R600 billion in the next few years.

Read: #Budget2019: 4 things to watch

Government has issued guarantees of R350 billion to Eskom, most of which has been utilised. These guarantees are recorded as contingent liabilities in the government books.

Eskom is widely considered to be the biggest threat to the fiscus.

Mboweni has been left with little room to move. Government debt is already high and rating agencies will be watching his every move in this regard.

Strong incentive

Moody’s is currently the only ratings agency that still attaches an investment grade rating to the sovereign debt. It acknowledged in a report last week that the country’s heavy reliance on Eskom’s generation fleet, which represents 88% of installed capacity, provides a strong incentive for government to help improve Eskom’s “very weak financial position”.

Kingston points out that government has made it clear that it is not prepared to see Eskom fail. Busa supports that. Eskom is fundamental to the South African economy.

Busa is, however, not suggesting that Mboweni make a once-off announcement for government to take over R200 billion of Eskom debt, Kingston says.

He says government will have to decide the extent of direct or indirect support it provides, but points out that with its better credit rating, government would be able to borrow at an interest rate several percentage points lower than Eskom gets.

That could be one way of removing costs from Eskom, he says, adding that government could take on the debt directly or through the Development Bank of Southern Africa (DBSA) or another agent.

A signal for the market

Kingston says it is important for Mboweni to give a signal to the market that Eskom is on a path of debt reduction to a sustainable level of gearing under a fit-for-purpose business model.

This means that debt should be at an appropriate level for an organisation of Eskom’s size and structure.

Eskom’s request for R100 billion understates the severity of the problem, he says.

He adds that Eskom’s tariff should be cost-reflective (which Eskom maintains it isn’t), but at the same time affordable. Consumers should however only pay for prudently incurred cost.

It is nevertheless a fact that Eskom has incurred costs that are not prudent –  such as those associated with delays and cost overruns at the Medupi and Kusile power stations – and these must be recovered somehow, Kingston says.

He also points out that Eskom’s municipal debtors and the debt of Soweto residents continues to grow, by between R500 million and R1 billion per month.

These costs must be covered by the shareholder – which means government, through the tax payer. “There are only two sources, the consumer and the tax payer,” he says.

Electricity tariff relief?

Kingston says the maturities of Eskom’s debt must be extended and that measures such as extending the power purchase agreements with Independent Power Producers (IPPs) could relieve pressure on the electricity tariff.

He warns that it will take time to restructure Eskom into a sustainable, fit-for-purpose organisation. It is important to have the different social partners on board to ensure the sustainability of the restructured organisation, he adds. “One shouldn’t underestimate the number of voices that should be heard and accommodated,” he says.

Some stakeholders have called for the cancellation of Eskom’s capital expenditure programme. Kingston says Busa needs to know the true facts before before it could be sure that the cancellation would indeed result in lower costs.

He says that while it has been stated that stopping the construction of Medupi and Kusile would result in costly penalties, there is little detail available about the extent of such penalties. “One should be able to renegotiate that,” he says.

Lack of confidence

Busa does not have confidence that Eskom has the capacity and capability to complete the build process and there is no evidence that the country needs the extra generation capacity over the short to medium term, he says.

If construction proceeds, there must be competent oversight, he adds.

Kingston says the turnaround of Eskom should be viewed holistically and the country as a whole should take responsibility for Eskom’s problems.

“We need to attract resources from business to supplement those in Eskom and government, because the size and complexity of the challenge is unprecedented since 1994,” he says.

“And we should manage expectations. There is no silver bullet and it is not going to happen overnight.”

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At the time EoH bought the company i worked for we had issues to renew some existing goverment contracts. They fixed it in no time. Must have pulled strings in high places.

At the induction meeting the person of EoH said the motto of the company is to do everything right the first time they do it.

I thought it sounds well but it’s going to end badly.

Bailing Eskom out will just reinforce what looters and unions have known for a long time, and that is Eskom is too big to let it fail. Do whatever you want, the government will step in and pick up the pieces at the expense of all South Africans. Another R 100BN , R 200BN or whatever will just ring the bell for happy hour at the feeding trough.

Unfortunately it is the Taxpayer, not the government, who is bailing Eskom out. The taxpayer who has no say, either as a voter (mostly in the minority) or as a consumer (prices will still rise way above inflation). Screwed from both ends.

Nationalise the Reserve Bank and print a R200 billion note. What could be easier?

Agree under the circumstances. First take Govt’s own money, thereafter citizens’ pension & increase tax. (…this buy people time to externalise funds).

At last, desperate resort…Govt starts to print money…and there goes the ZAR (..but then at least Saffas have a hundred US$100 offshore to live off..just imagine the future exchange rate.)

Bloody marvelous idea

I suspect that Eskom is such a mess that if we sold South Africa tomorrow,
Eskom would need a bail-out again in five years’ time.

Audit the place, check where the money is mostly being spent on?

Audit the contracts, let government pay for the Coal and check that it gets delivered to Eskom.

What a mess!

Maybe government should go fetch the money in Dubai?

Auction some mansions? the sixteen bedroom one.

Time for a national shut down.
Get your own solar panels and stop using the Goverment.

No water no electricy and no roads.
They anc claim revolutionary but really they are devolutionary.

Maybe we all we get a piece of land to heard our goats and chickens.

Let the private sector take over, let eskom implode as a management – as mentioned yesterday all eskom’s liabilities could be paid today, but by the end of the year they will have a cash shortage due to mismanagement / looting with the current management running the show and 27000+ overstaffed personnel who don’t in the first place know why they are employed by eskom because they do sweet-blue-all.

I’m thinking the same thing. We need a managed decay of Eskom into obscurity. Call it “Decaying with style” and let Eskom quietly wither and die.

Am 100% with you both, Johannes & Milo. With residents and industry going the PV-solar route on an unprecedented scale, it will (i) buy the public time to get away from Eskom, (ii) and Eskom will implode eventually / will become unaffordable to the state….Govt will eventually need to decide which depts’ salaries gets priority over others.

An economic “experiment” of AA/BEE is unsustainable, running out of everyone’s money.

Agreed, plenty of straightforward, brutally honest solutions. But none of these will continue make the ANC’s Cyril and sons rich beyond normal measure.

Even 300bn wont help if you don’t have quality management, leadership.
It will just another leaking pipe.

This whole situation is beyond ridiculous. Senior management now (according to a financial journalist who’s name I cannot remember) consists of junior staff who were rapidly escalated to fill the positions they are in as the previous management were booted out due to mismanagement and corruption. The Peter Principal on steroids. “Leading them by the nose” is well intentioned but ineffective Pravin, a socialist politician who has even less knowledge about running any business let alone a gigantic one like Escom. He is a pharmacist by education!
If the government is serious about getting Escom back into a successful and efficient utility they should hire a Trump and give him a carte blanch mandate to do whatever it takes to achieve that. Politics and unions be damped. You can’t have it both ways. As things stand everything being said is just more hot air.

The cost base needs to be sorted first. It involves rightsizing the workforce. Until this is done raising money is simply throwing more of it down the drain.

Not only “right size” but right competencies.

Government has signaled that the tax payer will foot the bill.

Not R100 billion, not R200 billion, but the whole thing. Once municipalities know the tax payer on the hook, no incentive for them to pay either.

What tax payers in SA need to signal to government is that they are not going to pay a dime for the mismanagement. Tax revolt is the only way.

SARS can take on a % of tax revolters, but they can’t handle a countrywide revolt.

Love the idea! Imagine the top 50 companies paying no PAYE or VAT ..even for 1 month. The ANC gangsters will turn on one another when the loot is not available!

In a bizarre way, Eskom will show that taxpayers will pay less, simply because “load shedding” will reduce business overall, profits and employment particularly. ergo less tax.

How do you suggest I revolt? My employer deducts PAYE and VAT is embedded in everything I buy. My broker pays over the withholding tax on the few shares I own.

Problem is when provisional taxpayers “revolt” others call it “tax structuring”, me and the other saps who have little choice in paying tax just need to pay more. Is that fair?

We tend to ignore the fact that socialist policies constantly transform society, the economy and the infrastructure to the level of the lowest common denominator.

Socialism, collectivism and “political correctness” is a force that equalizes civilization to the level of the lowest denominator. What does this level of equilibrium look like? What are we destined for? How will we know when we have reached the point of equilibrium that is brought about by this chaotic force of destruction?

Easy…find the lowest common denominator….take a trip to any rural traditional community where there in no running water, no electricity and no sewerage. This is where socialism is taking us – to the pit latrine and the nearest river.

This is inevitable under a socialist/collectivist political system. A pit latrine is considered as sophisticated infrastructure in a socialist regime. Most people will be using the bush, as they have done for generations.

The trend is clear and the inertia is growing…… The ANC policies are not delivering the promised results, but it does deliver the unavoidable, and realistically expected results.

yup….the ANC “does deliver the unavoidable”. Well said!!

Like RW Johnson is his famed book stated, at some point an “irrestable force” (the ANC with its socialist/populist stance) will meet an “unmovable object” (Govt running out of funds, as time-honored result of such stance taken).

On AA/BEE he said “so (western) country can survive such as system”.

But an African country can survive as a country by casting aside western principles….as most of us “will be using the bush”.

Does anybody know what is going on here. BUSA says they need R 200bn-Eskom says R100bn. What is R100bn between friends. Come on -is everyone that incompetent. A cash flow budget gets taught at university to 19 year olds-who would probably do a lot better than all these fools!!

Surely the answer is prescribed assets ( as under Baas Oom Hendrik etc) and compel pension funds to invest say 10% to 15% of their assets in SOE bonds. I hate the idea-but there is simply no more money left! ( As for the reaction from the rating agencies…no comment!)

May be a quick fix but sets a dangerous precedent that all failed projects can be shored up by PIC or pension funds.

The options I believe are:

1. Allowing more competitors into the space and forcing Eskom to allow them to sell to the grid.

2. Tax payers absorbing the debt somehow and accepting JUNK status as the new normal.

If prescribed assets are introduced, the govt will need to simultaneously halt or reduce substantially the current offshore allowance as the floodgates will open and billions will leave the country. This will cause a immediate downgrade by the ratings agencies and SA inc will be well on it’s way to bankruptcy and an IMF bailout with severe conditions that the “comrades” will never accept. This could well lead to some sort of civil war. Sorry so gloomy but reality hurts. Magnus, where is that offshore investment application ?

While one agrees with everything he says, the key question is what is the likelihood of, for instance, ” getting social partners on board? ”
And signalling to the market, to avoid a downgrade, that Eskom is on a costs cutting path?
Is it? Watch things like the trade unions, Soweto’s growing arrears, etc, scupper all sound arguments and sound analyses.

And the average salary at Eskom is nearly R700 000 a year

Gotta love the cadres, can’t manage their own personal finances, their Great Leader could not even pronounce the actual numbers and now they want ….. R200 BILLION for Eskom!!!! Shameless leeches

That amounts to ‘only’ ‘another’ R254 167 per taxpayer (excluding interest) to cover this R200B. …Based on the 2017 estimate of 480 000 taxpayers paying 61% of the tax.

This constant idea of “burden on the taxpayer” is really starting to annoy me. It’s not as much a burden on the taxpayer as it is a burden on the tax earner. Perhaps if everyone went around telling the sick, lame and lazy that this was eventually going to get them cut off from free money, they’d start making better political decisions.

You can wax lyrical about Eskom all you want. But the ANC isn’t serious about fixing ANYTHING – just take a look at the sides of the roads where armies of weeds are on the march after the heavy rains we’ve been enjoying… CR is so far removed from the reality that is SA that he may as well be that dude that was marooned on Mars.

End of comments.

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