South Africa can fix the balance sheet of its loss-making power utility by transferring its guaranteed debt to the government’s balance sheet, according to the former CEO of Goldman Sachs Group in sub-Saharan Africa.
Seen as the biggest risk to the nation’s economy, Eskom has received R133-billion in bailouts since 2008 and is due to get another R112-billion over the next three years. Instead of sinking that money into a hole, the utility’s guaranteed debt should be moved onto the government’s books after negotiating for better terms with bondholders, Colin Coleman, now a senior fellow at Yale University’s Jackson Institute for Global Affairs, said on Wednesday in a virtual lecture organised by the University of Cape Town.
That would close the credit spread between the cost of borrowing for the government and Eskom, which currently costs R3.5-billion/year, he said. A debt-for-equity swap could then be arranged to leave the state-owned company with debt of R90-billion “with which it can stand on its own, and which will support an attractive refinancing of the remaining debt stock”, he said.
The utility responsible for producing about 95% of the country’s electricity hasn’t had a stable generation system for more than a decade and is set to implement rotational blackouts for a seventh consecutive day on Thursday after outages at its coal-fired power plants. Eskom doesn’t generate enough cash to meet its costs and is surviving on government bailouts. Its debt pile stands at R454-billion, of which R300-billion is guaranteed by the government.
Proposals to swap Eskom debt for equity have been made by investors such as the Public Investment Corp, which manages about R2.5-trillion and is responsible for investing the retirement money of more than a million state workers. However, moving the guaranteed portion to the government’s books would push public debt up more than the projected peak of 87.4% of GDP by 2023/2024. This month, the economic transformation committee of the ANC suggested that pension funds take over some restructured Eskom assets, without giving more detail.
Credit positive
Changing the company’s capital structure along with negotiating cheaper coal supply contracts and limiting pay increases will be credit positive for Eskom, Coleman said. That would resolve the government’s single largest state-owned company exposure and allow it to concentrate on providing low-cost, secure and reliable energy, he said.
The reforms for Eskom form part of a 10-point plan to grow an inclusive economy that Coleman outlined. He also proposed the introduction of a basic income grant for over 10 million vulnerable people at a cost of R140-billion. The grant could be funded in a “fiscally neutral way” through tax reforms, such as eliminating bracket creep for inflation relief and medical tax credits for certain income groups and increasing levies on alcohol and tobacco, he said. — Reported by Prinesha Naidoo, (c) 2020 Bloomberg LP