Big threat to Eskom

Municipal debt owed to Eskom is on track to hit R200 billion in 2028, growing at an annual rate of R20 billion and threatening the utility’s financial health. 

This continued growth may even force the utility to turn to the government for another bailout as it will effectively render the latest R254 billion bailout null and void, CFO Calib Cassim said. 

In 2018, debt owed to Eskom stood at a mere R13.6 billion. In the first five months of its financial year, R11 billion has been added to the bill, taking it to R85 billion. 

“More concerning from Eskom’s perspective is the growth not just from small municipalities. Half of the R11 billion growth came from metros,” Cassim told Newzroom Afrika. 

He said the debt burden is growing by an average of nearly R2 billion a month and is expected to grow by R20 billion each financial year. 

If this continues, it will result in debt owed to Eskom reaching R100 billion by March 2025 and R130 billion by March 2026. By the 2028 financial year, Eskom will be owed R200 billion by municipalities. 

“If the growth of municipal debt is not addressed, the R254 billion debt relief from the government will effectively be null and void,” Cassim said. 

“This does not help Eskom’s financial sustainability going forward. After this debt relief plan, we do not want to rely on the fiscus anymore.” 

The government has tried to encourage municipalities to pay back their debt to Eskom by creating financial incentives for them, including a potential debt write-off.

However, only 14 municipalities of the 72 that have applied for debt relief from the government have complied with the conditions outlined by the National Treasury. 

Many are not even able to pay Eskom on a current basis, never mind paying back historical debt. 

Cassim said Eskom expected teething problems with this programme and explained that it has only been implemented for one year so far. 

He admitted that some of the conditions may have to be revisited as they are preventing some municipalities from accessing debt relief. 

“From an Eskom perspective, however, you may not be able to pay 100% of your current account, but you can pay at least a portion of what is owed to slow down the growth of the debt burden and prevent it from becoming unsustainable.”

Municipal debt presents a significant threat to Eskom’s financial recovery, with the utility’s plan to become profitable in the 2026 financial year at risk. 

In a performance update presented to the Standing Committee on Public Accounts (Scopa) on 9 October, the utility outlined its Profit Maximisation Programme (PMP). 

This plan is set to ensure Eskom breaks even in the current financial year and post a R12 billion profit in 2026. 

The last time Eskom posted a profit was in 2016, when the utility had a brief spell of improved performance. Its plants were run hard, and open-cycle gas turbines (OCGTs) were used to stave off load-shedding. 

In 2017, the utility posted a loss. However, its financial problems date back well before then. Since 2006, it has had to deal with a growing revenue shortfall, which has ballooned from R1 billion to a cumulative R535 billion. 

To compensate for this shortfall, Eskom issued a significant amount of debt. Despite repeated government bailouts, the company has a total debt burden of R445 billion. 

Its debt-servicing costs on that burden now exceed R40 billion a year, significantly limiting the utility’s ability to invest in new capacity and maintain its infrastructure. 

However, the utility’s improved performance so far in 2024 has given Eskom’s management hope that it can also turn around its dire financial situation. 

The PMP is a two-year plan with several savings targets to ensure Eskom breaks even in year one of the programme (FY2025) and becomes profitable in the second year (FY2026). 

Ultimately, the PMP aims to make the utility financially sustainable in the coming years and reduce its reliance on government funding.

Eskom is already saving billions by using significantly less diesel to run its OCGTs. From 1 April to 22 August 2024, Eskom’s diesel expenditure was R3.59 billion, 75% less than the same period last year. 

This translates into R10.6 billion in savings for the utility. 

However, this is not enough to break even, with Eskom’s board setting a target of R16.2 billion in cost-saving measures for the 2025 financial year. 

The plan focuses on ‘quick wins’, such as improving the utility’s overall efficiency and minimising the impact of high-cost initiatives like running OCGTs. 

It also aims to enhance the collection of municipal debt, reduce theft and find new revenue opportunities. 

If these initiatives can continue into the next financial year, Eskom estimates it could return to profitability in FY2026 with a profit of around R12 billion. The utility is also targeting a profit margin of around 10%.