Eskom’s CFO has warned that if the power utility is prevented from raising revenue through increased tariffs its liquidity issues could turn into a “national fiscal crisis”.
Calib Cassim was responding to the DA’s court challenge to the recent decision by Nersa that Eskom is entitled to recover R318bn from its customers in 2023/24 and R352bn the following year.
The DA wants the court to urgently interdict the decision, which it said would mean a more than 30% increase in the electricity tariff over the next two years.
While President Cyril Ramaphosa is not defending Nersa’s decision in court, Eskom and the National Treasury said in court papers this week that the interdict sought by the DA would be a disaster — for Eskom and South Africa.
In an affidavit on behalf of the minister of finance, acting director-general of the Treasury Ismail Momoniat said if Eskom was prevented from functioning by covering its costs through raising revenue, or if Eskom was allowed to collapse, it would be “catastrophic for the country generally, and for consumers of electricity specifically”.
Wits adjunct professor and former head of the budget office Michael Sachs and RMB economist Kim Silberman said the picture painted by Cassim was “a bit alarmist” as the government would be able to prevent a full-blown crisis if the interdict was granted. But this would require “very painful” measures, said Sachs.
In his affidavit, Cassim said that for more than 10 years Nersa had refused the amounts sought by Eskom to cover its costs — forcing it to turn to the courts to review irregular decisions by Nersa. By 2019 the accumulated revenue shortfall at Eskom had ballooned to about R300bn.
To plug the hole, Eskom had to borrow and get cash injections from the government. Momoniat said the government had extended more than R350bn in government guarantees to Eskom’s debt and was “injecting R23bn in equity annually to help Eskom pay its debt”.
This was unsustainable and the power utility had now run out of road, said Cassim. Eskom’s existing debt burden was R422bn at the end of December.
The power utility had “material funding requirements” — it needed more than R80bn in 2023 alone, he said. A big chunk of this would be to pay off its debts.
The liquidity problem was “a material disincentive to lenders and other investors”, said Cassim.
This could be seen from how reliant Eskom was on government support. And while the Treasury was “considering a debt solution”, a key principle in looking at options was that the outcome “must ensure that Eskom can achieve independent financial sustainability”, he said.
Because the power utility had for so many years not been able to recover costs via tariffs, Eskom had become over-reliant on borrowing, he said.
This led to lenders and investors demanding guarantees from government. But they are also concerned about the government’s own ability to pay what it has guaranteed “because of its own financial constraints”.
The government’s guaranteed debt had to be used to fund Eskom’s capital programme — building power stations and transmission lines — and not for its operational expenses.
This was not just a problem for Eskom. It had “potentially catastrophic consequences” for South Africa, he said.
This was because the government guarantees and South African state debt were interlinked — “so that a failure to meet any demand on South Africa by any creditor of Eskom with the benefit of the South African state’s Eskom guarantees would also potentially trigger acceleration of the full liability of South Africa’s own debt”.
This “can be accelerated if any such demand is not met when made, potentially exposing over R4-trillion of South African debt”, he said.
Momoniat said: “The DA appears to be attracted to an outcome in which Eskom is allowed, inevitably to collapse. But the DA’s approach is short-sighted.”
He said if Eskom was not able to meet all its obligations and had to prioritise paying suppliers to keep the lights on, it would then default on its debt.
A significant Eskom default would immediately set in motion an unprecedented financial crisis with deep, far reaching and permanent implications
— Treasury acting DG Ismail Momoniat
But “a significant Eskom default would immediately set in motion an unprecedented financial crisis for the government with deep, far reaching and permanent implications for South Africa’s access to capital markets and its long-term prosperity”.
He said the broad implications of such a default would be that the government would need to seek immediate assistance from the IMF. But even that would not be enough to prevent “a very deep recession”.
Sachs said this catastrophic scenario was possible but only if the government did not step in to prevent it happening.
“Why would you let that happen when you don’t have to? Government has other non-catastrophic, yet painful, alternatives, such as raising taxes, cutting spending or incurring more debt. None of these options are palatable, and they all impose very large costs on society, but they would certainly be triggered to avert catastrophe,” he said.
Silberman agreed that if the interdict was granted it would not be an immediate crisis for the fiscus but said if Eskom’s tariffs “don’t become reflective of costs under an efficiently operating Eskom, it will not be able to be a stand-alone entity and will remain a meaningful and escalating risk to the sovereign balance sheet”.
Momoniat said the only alternatives to customers covering Eskom’s costs was that the power utility would be forced to run down its capital stock, as it had been doing in the past, by reducing spending on maintaining its plants and equipment and on buying diesel. It would also need to continue to borrow, which would lead to spiralling costs.
Or government could step in, he said. But this would itself have consequences. Government could step in through a VAT hike or raising income tax if the DA got the interdict it is seeking. VAT would have to rise to 17% and individual tax bills by an average of 10%. VAT increases disproportionately affect the poor, he said.
Or government could draw from other parts of its budget, but this would again affect poorer households that rely more on government services because it would mean cuts to health, education and social grants.
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