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Abu Dhabi, UAEThursday 15 November 2018

Eskom's $2.5bn China loan will keep the lights on for another year

The exact terms of the loan from China Development Bank were not being fully disclosed, something analysts criticise

Lights illuminate the windows of an office in the Sandton district of Johannesburg, South Africa. Analysts said the country's cash-strapped power utility, should be broken up and sold to private investors rather than being rescued. Photo: Bloomberg
Lights illuminate the windows of an office in the Sandton district of Johannesburg, South Africa. Analysts said the country's cash-strapped power utility, should be broken up and sold to private investors rather than being rescued. Photo: Bloomberg

Financially embattled South African energy utility Eskom received a reprieve this past week with a US$2.5 billion loan from China Development Bank that will ensure it keeps the lights on for the coming year.

Eskom is one of the state-owned enterprises (SOE) that hold a strategic place in the country’s economy, supplying around 95 per cent of South Africa’s electricity needs. Eskom is also in debt to the tune of 600 billion rand ($45.52bn), more than South Africa's entire budget for healthcare and education.

The utility was set to struggle in months to come until the Chinese stepped forward with the loan package. With the finance in place, Eskom should ensure it continues uninterrupted operations into the next financial year.

On Monday Eskom chief executive Phakamani Hadebe presented the utility’s results, which showed an operating loss of 2.3bn rand and ‘irregular’ spending of almost 20bn rand.

"Eskom continues to face significant financial and liquidity challenges in the short term, mainly due to the high debt burden, low sales growth and increased finance costs," Mr Hadebe said in Parliament on Monday

Eskom’s predicament is the result of years of mismanagement and erratic leadership. Mr Hadebe is its 11th chief executive in the past decade. Jacob Zuma, who was president of South Africa until his ousting in February this year, had packed the boards of Eskom and other SOEs with close associates, his critics allege.

Eskom’s board allowed it to run up debt while pursuing big budget projects such as two giant coal power plants that are now years overdue and way over their original cost estimates.

However, since Cyril Ramaphosa took office at South Africa's president in February, he has appointed Pravin Gordhan as public enterprises minister and tasked him with clearing out the rot. Mr Zuma has also since been charged with a host of corruption charges, and his associates are being investigated for their activities within the SOEs.

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Mr Hadebe was made the chief executive of Eskom in May, and his first task was to root out corruption and place the institution on sound footing. Eskom WAS struggling to raise enough from electricity sales to cover its operating budget for the year.

However, Chinese premier Xi Jinping was in South Africa this past week to attend a Brics summit, during which a loan of $2.5bn to Eskom was announced on Tuesday. The amount is part of a wider, $14.8bn Chinese investment package announced at the summit. The details of the loan were not made public, which some analysts question.

“The exact terms of any loan to any organ of state including an SOE should be fully disclosed,” said Dirk de Vos, a corporate finance consultant covering the energy sector.

In other cases, where Chinese loans were made, such as to Zambia, without terms been made public, other potential lenders stayed away. Without being able to assess the terms, interest payments and other details, lenders could not determine the level of risk associated with the Chinese loan.

“This means no-one else will lend to them – except the Chinese,” Mr de Vos said.

Also uncertain is the fate of plans to build a fleet of nuclear power stations. The Zuma administration had concluded a deal with Russia to supply up to eight reactors, but current financial constraints make this unlikely. Mr Ramaphosa also met with Russian premier Vladimir Putin during the Brics summit, and reportedly discussed the nuclear deal.

According to local reports, Mr Ramaphosa told his Russian counterpart that any nuclear build would have to wait until Eskom's financial status improved.

Meanwhile some analysts said that rather than being rescued, Eskom should be broken up and sold to private investors. "Our view as well is that you need to break Eskom down, probably into three pieces: a company doing production, another doing transmission and then distribution,” treasurer general of the ruling African National Congress said at a briefing in Cape Town on Tuesday. "It is too big of an elephant, that is struggling to walk."