An Eskom bailout is on the way

Government assistance in the form of a soft loan or bailout is on the cards for Eskom, according to finance minister Malusi Gigaba, who was speaking on Wednesday at the presentation of the “inclusive growth action plan” to stimulate the economy.

The management of state-owned entities featured heavily. One of the five interventions listed for the energy space included “developing the case for Eskom soft support until tariff adjustment in 2018 and submit to Treasury and the Eskom board” with the stated deadline being the end of this month.

In response to Moneyweb’s questions regarding what this will entail, Gigaba said: “The details will be unveiled as we move forward. What we are expressing is a deep appreciation of the weakening of the Eskom balance sheet. There is an urgency for us to provide assistance so that it is able to implement the capital build programme and fulfil its mandate. The Department of Energy will unveil what interim mechanisms are required in order to support Eskom until the next tariff application.”

Shaun Nel, spokesperson of the Energy Intensive User Group (EIUG), says this can only be a reference to a loan on favourable terms or a cash injection. Other sources close to Eskom agree with this interpretation.

This is a scary reversal. Barely a month ago, in response to a direct question from Moneyweb on what, if any, bailout would be required for Eskom, Gigaba said: “No bailout is required. Eskom has R150 billion available to it in terms of the government guarantee framework. If we address the governance issues at Eskom, and build confidence with regard to executive and non-executive directors, the company would fall off the list of major concerns.”

A government guarantee like those available to Eskom, means a state-owned entity can approach lenders and borrow money with the lender knowing that any default will be honoured by the national government.

In fact, in most cases, the lender can ask for its money back, and if the SOE does not have the money, the government is obliged to honour it, as we recently saw between SAA and Standard Chartered Bank when the bank declined to renew its R2.2 billion working capital facility. The fact that Eskom doesn’t seem to be able to secure funding despite the availability of guarantees raises some serious concerns and questions, namely, why are lenders not prepared to extend the company credit?

This development comes hot on the heels of Eskom cancelling the presentation of its financial year 2017 results due to concerns raised by its auditors, and amid grumbling from overseas that international investors in Eskom’s bonds were gravely concerned about the state of governance at the utility. It also makes a mockery of public enterprises minister Lynne Brown’s assurance earlier this year, that Eskom is doing well and is “even coping with a 2.2% tariff increase”.

Moneyweb has previously highlighted how dependent Eskom has become on the Public Investment Corporation (PIC) for funding. A bailout directly from government would also imply that the utility’s largest owner of its bonds has appetite for no more. Are we about to discover another Enron?

The other energy intervention announced by Gigaba includes a suggested approach to energy regulator Nersa “regarding Eskom hardship”, also scheduled for this month.

The term “hardship” refers to the obligation upon Nersa in terms of the legislative and policy framework to ensure that Eskom remains viable.

When Nersa announced that Eskom average tariffs would increase by a mere 2.2% this year, the regulator also invited Eskom to approach it for a bigger increase on the basis of hardship if necessary. Eskom responded that it would rather submit a proper tariff application for 2018/19, which it did on June 9.

Moneyweb earlier reported that Eskom was applying for a 19.9% tariff increase for its direct customers and 27.3% for bulk municipal customers.

It is unclear whether Gigaba referred to that application that has in fact already been submitted or whether he is suggesting a further application.

Nel says any hardship Eskom is suffering should be provided for in the June 9 application. If Gigaba is suggesting that Eskom submit a further application, it would be open to a legal challenge. He says Nersa anyway does not have the resources to consider another tariff application at the same time.

Eskom has also submitted two applications for tariff increases relating to over-expenditure and under-recovery in previous years and is expected to submit a further such application. Nersa this week confirmed that these applications in terms of the Regulatory Clearing Account (RCA) methodology have been put on hold pending the outcome of an appeal to the Constitutional Court against an earlier RCA interim increase.

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