By Olivia Kumwenda-Mtambo, Wendell Roelf and Kopano Gumbi
CAPE TOWN (Reuters) -South Africa’s government plans to take on more than half of struggling state power company Eskom’s debt over the next three years to help strengthen its balance sheet and operations and enable it to restructure, National Treasury said on Wednesday.
Treasury said the government would take on 254 billion rand ($14 billion) of Eskom’s 423 billion rand debt that was at risk of default, to enable the utility to pay down the debt and interest obligations. The move will free up money for spending on maintenance and the transmission and distribution parts of Eskom’s business.
South Africa has been struggling for years to overhaul Eskom, which is plagued by corruption and mismanagement and has received 263.4 billion rand in bailouts since 2008/09.
Eskom is implementing the worst power outages on record, hurting economic growth that is projected at 0.9 % this year. President Cyril Ramaphosa declared a “state of disaster” over the energy crisis earlier this month.
“Our economy is facing significant risks,” Finance Minister Enoch Godongwana said in his budget speech. “Uncertainty is on the rise. It requires us to do bold things.”
In an interview with Reuters after his speech, Godongwana said there would be “no more future bailouts for Eskom,” adding that if Eskom failed to comply with the conditions of the debt relief, “heads must roll”.
Eskom said in a statement it was grateful for the financial relief by the government and would study the details of the plan before making any comment.
‘NOT AUSTERITY BUDGET’
Treasury said about 168 billion rand of Eskom’s debt relief will be in capital and 86 billion rand in interest payments over the next three years.
Of this, 66 billion rand will be funded through the budget while 118 billion rand will be additional borrowing over the period, with government directly taking over up to 70 billion rand of Eskom’s loan portfolio in 2025/26.
As a result, South Africa’s gross debt is now seen stabilising at 73.6% of GDP in 2025/26 compared with 71.4% of GDP in 2022/23 seen in October.
But the consolidated budget deficit is seen narrowing to 4.0% of GDP in 2023/24, the lowest in four years, as higher commodity prices boost mining tax receipts. It is projected at 3.2% in 2025/26.
“This is not an austerity budget. It is a budget that makes tough trade-offs in the interests of the country’s short and long term prosperity,” Godongwana told parliament.
The rand gained while Eskom’s dollar-denominated bonds rose on news of the governments action on the utility’s debt.
Analysts welcomed the move.
“This budget should be a welcome surprise for the market, which did not expect much detail with regards to Eskom allocations,” Deutsche Bank economist Danelee Masia said in a research note.
STRICT CONDITIONS
Eskom’s debt relief has strict conditions, Treasury said.
These include that the advance funding will take the form of an interest-free subordinated loan from the National Revenue Fund to be settled in Eskom shares rather than cash.
The funds can only be used to settle debt and interest payments and no new borrowing will be allowed until the end of the debt-relief period, unless written permission is granted by the finance minister.
Eskom’s capital expenditure will also be restricted to transmission and distribution, no greenfield generation projects will be allowed during the debt-relief period, and proceeds from the sale of Eskom’s non-core assets will be used for the debt-relief arrangement.
A key assumption in the debt-relief determination was the implementation of tariff increases, Treasury said, adding “without these increases, the debt-relief arrangement is not sustainable.”
A proposal to address the debt municipalities owe Eskom, at 56.3 billion rand as of end December 2022, was being finalised. The discussions include a conditional debt write-off, Treasury said.
($1 = 18.2727 rand)
(Additional reporting by Alexander Winning, Bhargav Acharya, Nellie Peyton, Rachel Savage and Promit Mukherjee in Johannesburg; Writing by Olivia Kumwenda-Mtambo;Editing by James Macharia Chege and Bernadette Baum)
