South Africa Government Plans Support to Avert Downgrade of Eskom

The crisis at Eskom Holdings SOC Ltd., continues to loom, increasing cost to business and the economy of keeping the lights on as businesses are requested to reduce demand for electricity. This has continued to negatively impact on the economy and job creation. This has been worsen by the escalating costs of the two power plants under constructionMedupi and Kusile. Eskom provides about 95 percent of South Africa’s power. According to a statement by the National Treasury, Cabinet has approved a package to close the funding gap at Eskom. The power producer will get government support including an equity injection after rating agency S & P said in June it might downgrade its credit rating.

According to a Bloomberg article, Eskom has a 225 billion-rand ($20 billion) shortfall in funding over five years through March 2018. S&P rates its debt as BBB-, the lowest investment grade. On June 20, the ratings company placed Eskom on negative CreditWatch, meaning it had a 50 percent chance of being cut again to junk within 90 days.

Eskom will raise an additional 500 billion rand over and above the initial 200 billion planned and government will use “non-strategic” assets for an equity injection. In the statement, the Treasury said. S&P said it was awaiting the government’s decision before deciding whether to cut Eskom’s credit to junk.

The equity injection means “an allocation of funding will be given to Eskom to help relieve the impact on electricity consumers, as well as add additional support to Eskom’s balance sheet,” according to the Treasury. “Raising more debt is supported by the substantial guarantee facility available to Eskom from government, which will be used to reduce Eskom’s cost of debt.”

Energy policies and regulations will be refined, electricity demand will be balanced, free electricity will be provided for the poorest households, independent power producers will be supported by government and Eskom’s operations will be made more efficient, the Treasury said.

There is high likelihood that certain assets or divisions of Eskom are on the line for potential privatisation. However, such a decision may have an impact on the country’s credit rating.  Plausible, as the decision of treasury to inject equity into Eskom may have negative impact on the economy’s own ratings given the challenging economic circumstances with downward spiralling credit matrices, and poor economic performance.

While Eskom’s cost keep rising above expectations, South Africa’s consumers have continued to pay increasing costs for electricity and next year’s tariff increases for electricity are estimated at over 8%. Currently, Eskom’s capacity is 41,995 megawatts of electricity and it has 27 plants.