Government may have to give Eskom even more cash if it fails to raise required funds

State-owned power utility Eskom. Picture: BLOOMBERG
State-owned power utility Eskom. Picture: BLOOMBERG

Eskom could run out of money as of end-March 2020 if it fails to raise necessary finance and this would require more funding from the government, Treasury director general Dondo Mogajane warned in parliament on Wednesday.

He said this would be in addition to the R59bn already provided for by government, stressed the need to cut employee costs, including the salaries of top Eskom executives.

Eskom’s funding requirement for 2019/2020 is R46bn of which 58% has already been secured, but the utility is experiencing challenges raising the required funding due to lenders’ concerns about its future sustainability, uncertainty about the government’s restructuring plan and a lack of clarity on the policy direction of the energy sector.

Mogajane’s comments came during a briefing to the appropriations committee on the Special Appropriation Bill, which proposes to allocate R26bn to Eskom for the 2019/2020 financial year and R33bn in the 2020/2021 financial year. This is an accelerated payment of the R230bn provided for over the next 10 years provided for in the February budget. Of this R17.65bn was allocated on an emergency basis in April to address Eskom’s immediate challenges.

Mogajane said that obligations had to be imposed on Eskom to reduce costs. It could not simply rely on government funding. These obligations would have to include reducing labour costs, which left a lot to be desired and had to be addressed “head on”. The cost of employees — including top executives — was too high, he said. If the number of employees were to be retained, then salaries must be cut.

“This is a tough conversation which we must engage with as we continue to fund Eskom from the resources of the state. It cannot be business as usual,” Mogajane said. He said a social pact was needed in which all stakeholders made sacrifices. Operational costs also had to be reduced.

Mogajane said the Treasury was developing conditions to be imposed before and after transfers are made to Eskom. He noted that the financial support given to Eskom addressed the status of the utility, which allowed the external auditors to sign off Eskom’s latest annual financial statements on a going-concern basis. This is a requirement of some of the utility’s loan agreements and failure to achieve this status could trigger a default.

Mogajane said Eskom’s debt, which currently amounts to over R400bn was unsustainable and it also faced liquidity challenges. The utility had to borrow increasing amounts to service its debt obligations. He said Eskom’s success in raising the required funds was key to improving its liquidity position.

Mogajane noted that the government had so far transferred R13.5bn of the R17.65bn emergency allocation with the disbursement of the remaining R4.1bn being made as required by Eskom’s cash flow.

“National Treasury and the department of public enterprises continues to work closely with Eskom’s treasury to monitor Eskom’s daily cash flow requirements and its financial position,” Mogajane said.

He said the recently appointed head of the chief restructuring office of Eskom, Freeman Nomvalo, was developing a financial turnaround of Eskom which will be vital in the development of a sustainable turnaround strategy.

The government was working on a special paper to outline a roadmap for the reform of Eskom, which would be released in September. This paper would provide details on the transformation of Eskom which the government plans to break up into three entities: generation, transmission and distribution.

The paper will also provide clarity on the measures the government will implement to resolve Eskom’s financial challenges. It would provide clarity on reforms that will be implemented in the energy sector to ensure a sustainable electricity future.

“Government’s ability to restructure Eskom, manage its finances, reduce its reliance on fiscal support and at the same time ensure energy security to all is crucial for economic growth and maintaining a sovereign investment grade rating.

“Failure to urgently strengthen Eskom’s balance sheet while government is working on long-term sustainable solutions may likely have a negative systemic impact as Eskom is the largest nonbank corporate debt issuer in SA and any default will result in a crisis for government and to some SA banks, given that Eskom is the largest exposure to some banks and government.” 

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