Government comes to Eskom’s rescue by taking over R254bn of its debt
Eskom’s debt stands at R423bn. The government plans to take over a portion of Eskom’s debt, providing money to the power utility to pay its debt and interest payments over the next three years.
The government plans to provide Eskom with debt relief worth R254-billion to ease the utility’s worrying financial situation and provide it with the space to fund the maintenance of its power stations.
In essence, the government plans to take over a portion of Eskom’s debt, providing money to the power utility to pay its debt and interest payments over the next three years.
Eskom’s debt stands at R423-billion and the power utility is struggling to independently pay it back because it doesn’t generate enough revenue from electricity sales. Eskom’s outgoing CEO Andrè de Ruyter has previously argued that for Eskom to be financially sustainable, at least R200-billion of the power utility’s debt should be taken off its financial books.
With the government’s intervention and takeover of Eskom’s debt worth R254-billion, the power utility’s debt is expected to reduce to below R300-billion. Removing debt obligations from Eskom’s financial books will pave the way for the power utility to embark on other capital initiatives such as allocating more money for the maintenance of its power stations, the breakdowns of which cause rolling blackouts.
The government is already exposed to Eskom’s debt because it guarantees most of it (about 60%). Lenders and banks have provided Eskom with debt on the basis that the government, or the taxpayer, would step in and pay for it if the power utility fails to do so. So, the government issues Eskom guarantees and would be on the hook for debt payments if the power utility enters a default scenario.
The shape and mechanism of the Eskom debt relief was revealed on Wednesday 22 February 2023 in the National Treasury’s 2023 Budget review documents.
How it will work is that the Treasury will provide Eskom with payments in three tranches from 1 April 2023 to 2026. Eskom will receive the first payment worth R78-billion in 2023/24, R66 billion in 2024/25 and then R40-billion in 2025/26.
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The Treasury says these payments will cover Eskom’s capital (loan) and interest payments when they fall due, and the funds can only be used to reduce the power utility’s smothering debt load.
The Eskom debt relief measure will come at an extreme cost to the government as it will worsen its own debt profile. Over the past five years, the government has been on a mission to reduce and stablise its debt and expenditure. Its expenditure alone tends to go towards consumption measures such as paying SA’s 1.2 million public servants and paying down debt, instead of funding initiatives that can grow the economy and create jobs.
Helping Eskom will result in the government’s total debt increasing from R4.73-trillion in 2022/23 to R5.84-trillion in 2025/26 and will decline thereafter. As a percentage of GDP, government debt will rise from 71.1% to 73.6% over this period. The government initially anticipated that its total debt would decrease and stabilise by 2025. But it will, in fact, increase. Rising debt is not good because it consumes the government’s revenue as it pays more in debt and interest payments.
The debt relief measure to Eskom is not a blank cheque as there are strict conditions attached to it. The conditions include, among others;
- From 1 April 2023, Eskom will not be allowed to take on more or new debt from lenders and commercial banks because the intention of the relief measure is to ease its debt profile. Approval from Treasury needs to be sought if Eskom needs to borrow more money.
- Eskom will no longer have access to government guarantees. It had a government guarantee framework agreement worth R350-billion, which will be cancelled.
- Eskom’s capital expenditure will be restricted to its infrastructure that allows for the transmission and distribution of electricity. The only spending that Eskom will be allowed to embark on is the maintenance of its old power stations. But no large investment or capital projects can be undertaken by Eskom.
- Eskom cannot implement remuneration adjustments that negatively affect its overall financial position and sustainability. In other words, Eskom cannot award its workers salary/wage increase in its remuneration bill and worsening its financial position.
- Before implementing the entire debt transfer plan, Eskom and the Treasury require approval from its bond/debt holders. The government is still in consultation with debt holders.