South Africa set to take over a part of Eskom’s $24 million debt

An Eskom sign stands outside the headquarters for Eskom Holdings SOC Ltd., South Africas state-owned electricity utility at Megawatt Park in Sandton, near Johannesburg, South Africa, on Wednesday, Nov. 11, 2015. A plan to reform state-owned power company Eskom Holdings SOC Ltd. and bring South Africa and its economy out of the dark is starting to show results, according to Chief Executive Officer Brian Molefe. Photographer: Waldo Swiegers/Bloomberg via Getty Images

South Africa’s Treasury is finalizing a plan to take over a portion of Eskom Holdings SOC Ltd.’s 396 billion rand (24 billion U.S. dollars) debt as part of a process to place the struggling electricity company on a sustainable footing, a top official said.

An Eskom sign stands outside the headquarters for Eskom Holdings SOC Ltd. /Bloomberg via Getty Images

The “broad brush strokes” of the debt transfer will be announced in the mid-term budget scheduled for October, Duncan Pieterse, head of assets and liability management at the National Treasury, said in an interview Wednesday. The authorities will seek cabinet and parliament’s approval for the plan after determining the amount, along with the conditions the utility will need to meet before and following such a transaction.

The Treasury has done financial modeling around the debt transfer and appointed lawyers to advise it on regulatory and legal hurdles, including loan covenants, Pieterse said. It’s also working with Eskom to determine what needs to be done to ensure the state-owned company is sustainable after the debt transfer has taken place.

“There is no point in dealing with the debt, only for the entity to return to the fiscus for further support,” Pieterse said. “Then you are basically executing a debt transfer without making sure that you will have a sustainable entity in the end,” he said, adding that “Eskom has been very constructive in our engagements with them.”

Setting a plan for Eskom’s debt would mark a key step toward turning around the engine that drives Africa’s most industrialized nation, after years of government bailouts and rolling power outages that have weighed on the economy. The utility has been unbundling into generation, distribution and transmission units in a strategy to update the nearly century-old monopoly, but the government has been stymied by the debt pile that’s required cash injections just to service.

Among the other proposals to help reduce Eskom’s debt is one resurrected by Godongwana to sell some of its coal-fired power plants. That idea is still under consideration, Pieterse said.

“In terms of the selling of power plants, it is something that we have asked Eskom to look into and it is obviously tricky,” he said. “That is one of the issues under discussion, but it isn’t the main issue. The main issue is how do you create the space for Eskom to maintain the plants they currently have and to invest in the transmission and distribution parts of their business.”

Taking a large portion of Eskom’s debt onto the state’s balance sheet may help lower South Africa’s borrowing costs by removing the uncertainty that’s built into sovereign yields, Pieterse said.

“The question is what happens to our risk premium going forward,” he said. “The feedback we have received has been along the lines of, provided you can get the right conditions in place, provided it is a credible transaction, this can actually be net positive for the sovereign.”

 

Original article published by Bloomberg Africa