Massive Eskom debt bailout

Finance Minister Enoch Godongwana, during his 2023 Budget Speech, announced that the government will take over more than half of Eskom’s current debt.

Godongwana tabled the Eskom Debt Relief Bill, which outlines a “direct charge against the National Revenue Fund for debt relief for Eskom”.

The total bailout package amounts to R254 billion, separated into two components.

The first amounts to R184 billion and are split into tranches across the next three fiscal years. R78 billion will be transferred in the 2023/24 tax year, R66 billion in 2024/25, and R40 billion in 2025/26.

This is to ensure that South Africa’s debt-to-GDP ratio remains stable and is not massively increased.

The second component comprises of Treasury’s direct takeover of R70 billion of Eskom’s loan portfolio in the 2025/26 tax year.

Godongwana said that Eskom “will not need further borrowing during the relief period”.

This bailout comes with strict conditions.

• Eskom must prioritise capital expenditure in transmission and distribution.
• Eskom must focus on the maintenance of its existing generation fleet to increase the energy available.
• The relief is only to be used to settle debt and interest payments.
• Eskom must implement the recommendations from an independent assessment of its operations which the Treasury has commissioned.

In the Eskom Debt Relief Bill, Treasury is required to report on compliance with these conditions to Parliament.

Godongwana said they are taking over Eskom’s debt because of two reasons:

• Doing so will ease pressure on the company’s balance sheet, enabling it to invest in transmission and distribution infrastructure. It will also allow Eskom to conduct the maintenance required to improve the availability of electricity.
• R337 billion of Eskom’s debt is already government guaranteed. Explicitly taking on this debt will reduce fiscal risk and enhance long-term fiscal sustainability.

Effects of the Eskom bailout

The transfer of debt will add to the large state debt burden and increase debt servicing costs – the fastest-growing expenditure line item in the budget for the last decade.

The net impact of a government takeover of a significant portion of Eskom’s debt is a higher debt ratio, around 2.5% to 3% higher, and a higher debt servicing ratio, according to Momentum Investments.

The consolidated fiscal deficit is projected at 4.2% of GDP for 2022/23, and this will reach 3.2% in 2025/26 with the Eskom bailout included.

Mainly due to this Eskom debt relief, government debt will stabilise at a higher level of 73.6% of GDP in 2025/26. This is three years later than anticipated in the 2022 Medium-Term Budget Policy Statement

The government takeover of debt will enable Eskom to tap capital markets to fund its maintenance programme and expand its capacity.

Current Eskom CEO Andre de Ruyter has said that a debt transfer will “go a long way to returning Eskom to profitability” and ensure its financial stability.

However, the success of this debt transfer lies with how effectively Eskom’s management allocates its freed-up balance sheet.

Ultimately, it is up to Eskom to improve its operations when it is relieved of its debt burden.