72 hours in late March: When Eskom pushed South Africa to the edge of financial collapse

For 72 hours from 26 March 2019, South Africa stood at the edge of economic collapse as Eskom ran out of money and could not meet its liabilities and obligations. A scramble to raise money ensued as government cannot allow an economic collapse by Eskom default.

A R3-billion commercial loan on the back of government guarantees was obtained on 29 March. It was repaid with the R5-billion disbursed from the R17.652-billion authorised by Finance Minister Tito Mboweni in terms of the Section 16 emergency provisions of the Public Finance Management Act (PFMA) on 2 April.

If Eskom had defaulted, it would have triggered the immediate demand for repayment of R281-billion the power utility leveraged against government guarantees as part of its overall R419-billion debt. This kind of money is simply not available in the national coffers, as emerged in February’s Budget.

In addition, an Eskom default potentially also would initiate a complex cross-default call-in of tens of billions of rands more in government guaranteed debt across state-owned enterprises (SOEs), including SAA, the South African National Roads Agency Limited (Sanral), the South African Post Office and Denel.

Coincidentally, that R17.652-billion authorisation for Eskom is the maximum possible amount under Section 16(1) of the PFMA for funds “to defray expenditure of an exceptional nature which is currently not provided for and which cannot, without serious prejudice to the public interest, be postponed to a future parliamentary appropriation of funds”. The PFMA caps such emergency allocations at 2% of appropriated funds, or the Budget.

The timeline and details, or curious lack of details, of this latest Eskom crisis emerges from the report Mboweni tabled in Parliament as statutorily required. It is because of this that the matter has become public; the Office of the Auditor-General, which also receives this report, is under no obligation to publish it.

On 26 March Eskom realised the R7-billion draw down on its US$2.5-billion loan (approximately R33-billion) it thought would be in its purse by then, courtesy of the Chinese Development Bank (CBD), would not arrive. This should not have been a surprise if Eskom had done its job regarding the loan agreement, signed 24 July 2018 in Pretoria.

The development bank did not timeously execute on this loan drawdown due to Chinese Central Bank exchange control requirements, according to Mboweni’s report to Parliament. “The delay in accessing this planned drawdown from CDB resulted in Eskom being unable to meet its obligations that were due at the end of March 2019 and this resulted in Eskom experiencing liquidity challenges.”

On 27 March National Treasury approached the Corporation for Public Deposit for a R4.6-billion loan until 8 April.

On 29 March that request was turned down. Enter Absa Capital, which was approached by Eskom as “a contingency measure” to provide R3-billion against the back of a government guarantee. That was done until 2 April when the bridging loan was repaid with the R5-billion disbursed as the first tranche of the R17.652-billion authorised to defray expenses. The second tranche of undisclosed rands and cents will be paid to Eskom by the end of April 2019.

While financial services institutions do not disclose clients’ details or terms and conditions, Absa has confirmed the loan to Eskom:

“It was not a bailout. It was a straightforward commercial transaction”.

DA MP Alf Lees said the Eskom crisis is far from over, given the red flags that it is actually not a going concern.

“This was a month-end crisis. But the crisis is not over,” he said, adding another government bailout or debt swop was also needed. “It (R17.6-billion) is not going to give them a going-concern status.”

Lees had wanted the parliamentary finance committee to meet over this Eskom debacle, but is still waiting for a response to his request. MPs are on the election campaign trail since Parliament rose at the end of March.

But those 72 hours in late March and related issues hold interesting twists.

Mboweni left it to the last possible statutorily permissible 14 days to table his report to Parliament, as is required in Section 16(4)(a) of the PFMA. The letter to inform Parliament is dated 16 April, 14 days after the Section 16 PRMA emergency provisions were invoked.

A notice appeared in Parliament’s record of work, the Announcements, Tablings and Committee Reports (ATC), on 18 April, the eve of the Easter long weekend.

“Report to Parliament by the Minister of Finance on the use of funds in terms of Section 16(1) of the Public Finance Management Act, 1999…” it said. The actual document had to be tracked down; Daily Maverick has seen it.

In a recent brief Intellidex analyst Peter Attard Montalto raised concerns that information around this Eskom emergency financial allocation was “buried in Parliament… and not communicated openly with Eskom creditors”.

“Eskom is operating much closer to the edge than most investors realise. Given the blanket National Treasury guarantee, this is not an issue for Eskom per se, but it is for the sovereign — especially as the system remains so tight and so emergency expenditure on diesel and repairs remains so high,” wrote Attard Montalto.

“With a second bailout and possible debt swop in the works investors need clarity of communications direct from government and Eskom…”

The report Mboweni submitted to Parliament seems to imply criticism of how Eskom and Public Enterprises handled this financial crisis, officially dubbed “liquidity challenge”.

Public Enterprises and Eskom had been prepping a financial proposal for Mboweni, but after it was submitted on 26 March, National Treasury found “it was focused on addressing the medium- to long-term financial sustainability of Eskom instead of the immediate liquidity challenges that they were experiencing”.

Because of this, Mboweni invoked the PFMA Section 16 provisions, according to the finance minister’s report to Parliament.

But that report holds no detail as to what the money was needed for.

Strictly speaking, the $2.5-billion loan by the Chinese Development Bank was meant to be for Kusile, which alongside Medupi are the two new-build power stations that are years behind schedule and billions of rand over budget, and only delivering half the megawatts expected at this stage of construction.

“The facility will form part of the funding of Eskom’s build programme and specifically the Kusile power station. Befitting to the current build programme, this long-term government-guaranteed facility will allow Eskom to draw down on the facility up to a period of five years from the effective date,” said Eskom in a statement at the time.

All that the official report to Parliament talked of was the power utility’s “liquidity challenges”. Treasury spokesperson Jabulani Sikhakhane confirmed the disbursement of R5-billion following the PFMA authorisation of R17.6-billion, but referred queries for what this money had been needed for to Eskom.

Calls to Eskom’s four media desk numbers over two days this week, and voicemails and SMSes to spokespeople, failed to solicit a response beyond a referral back to National Treasury and Public Enterprises.

Public Enterprise ministerial spokesperson Adrian Lackay said the emergency allocation was needed “to keep Eskom solvent” so it could honour its commitments, including salaries and payments to contractors.

“They (Eskom) needed to access money urgently. The Chinese finances did not materialise as expected,” he said, adding there was confidence the loan commitments would come through.

Eskom, again, was described as a “substantial risk” to South Africa in the 2019 Budget Review. That wasn’t the case a decade ago, before the power utility found itself at the centre of State Capture, as emerged in the 2017-18 parliamentary inquiry.

And while the official line is that government at the highest level is putting heads together to solve Eskom’s financial crisis, peculiar turns have occurred.

The emergency PFMA allocation has come barely six weeks after the Budget allocated R23-billion a year definitely for the next three years, but with provision to continue for the next decade in what effectively amounts to an amortised R150-billion.

And a day after Mboweni on 2 April saved the day for the power utility with the PFMA emergency allocation, Eskom board chairperson Jabu Mabuza told journalists the power utility actually needed R250-billion to plug its financial hole.

That’s because the National Energy Regulator of South Africa (Nersa) had not approved Eskom’s full 17% tariff increase, leading to an additional R102-billion shortfall. Never mind the R50-million a day spent on diesel and open cycle gas (OCG) to stave off load-shedding.

It seems a clear-cut calculation — particularly as cost savings through retrenchment in Eskom’s unbundling was pushed off the table as trade unions used their muscle in pre-election politicking — but it isn’t, as many underlying assumptions in the entity’s corporate plan fly in the face of Eskom’s own statistics.

Given consecutive years of above-inflation tariff increases, electricity sales decreased between 2007 and 2018 from 218,120-gigawatt hours (GWh) to 212,190 GWh. That Eskom upped its income from R39.4-billion to R177.4-billion over this period underscores the scale and impact of the price rises. These numbers were presented to Parliament’s public enterprises' committee as recently as 13 March.

Those numbers were known when Mabuza made the spin for R250-billion funding for the power utility. The official line from government is that the Eskom shortfall and how to deal with that is receiving attention at the highest level.

Should the power utility fail to get going concern status, or get a qualified audit in mid-2019, the financial crisis around Eskom will be ratcheted up.

The Eskom financial sinkhole appears limitless. And it impacts on the already tight manoeuvring space government has amid tight, tight public finances. It’s a reality that will not go away, regardless of promises made on the election campaign trail. DM