SA Govt’s R105bn Eskom bail-out insufficient as utility’s financial morass laid bare

Jabu Mabuza, acting CEO & chairman, Eskom

THE recent R49bn bail-out from the South African government for 2019/20 and R56bn for 2020/21 is not enough: Eskom needs a higher electricity tariff to cover its costs, CFO Calib Cassim said on Thursday.

Eskom’s tariffs have increased by over 500% in the last decade to a current average of 110c/kilowatt hour. This year the energy regulator has allowed it to increase tariffs by 13.8%, followed by 5% next year. But the state-owned power utility has applied to court to allow it to raise an additional R34bn through price increases.

Acting group CEO and chairman, Jabu Mabuza, told a media presentation on Eskom’s interim results that the board and management were fully aware of the implications for customers of continual tariff increases: that they would either go out of business – as was happening in the ferroalloy industries – or find it cheaper to provide their own power.

In the last few years, some South African mining companies have sited their ferroalloy smelters offshore to access cheaper and more reliable electricity, while some ferrochrome companies have closed down. Earlier this month, ArcelorMittal SA announced it would close its Saldanha Steel plant, citing raw materials costs and regulated prices.

Cassim said Eskom understood that for its industrial customers the longer term price path was critical and it would work on providing greater certainty, based on the recently-approved Integrated Resource Plan 2018.

Eskom reported a net profit of R1.3bn for the six months to September but expects to make a full-year loss of about R20bn, similar to last year’s, as sales are lower and costs are higher in the second half.

The group’s debt was R454bn at the end of September. By the end of September Eskom had secured 61% of the funding it needs for the current financial year. It is currently borrowing to service debt costs, and spending more on interest than staff, which is unsustainable, Mabuza said.

The unresolved issue of how to address Eskom’s debt hangs over government’s plans to split the utility into three separate divisions: generation, transmission and distribution. Cassim said Eskom had not yet held any discussions with its bondholders on how the debt would be restructured. It was still examining its options with government and once there was clarity it would approach its lenders.

Cassim said Eskom’s losses were expected to lessen in its 2021 and 2022 financial years as a result of lower operating costs, the full commissioning of its new power stations which would generate more revenue, and collection of arrear debts.

The group has committed to reduce costs, without retrenchments, by R33bn by 2023, with a target of R6bn in the current financial year. In the six months to September it cut costs by R5.5bn, but Cassim warned this trend would not be sustainable in the second half.

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