JOHANNESBURG – The South African government needs to “bite the bullet” and bail out struggling state-run power firm Eskom, which has asked for R100 billion ($7 billion) in government support, the chief executive of Rothschild & Co in South Africa told Reuters.
Rothschild advised Eskom in 2008 when it last received a major cash injection from government. At the time, Eskom sought R115 billion, but was granted a R60 billion loan which was later converted into equity.
Eskom has implemented controlled power cuts for much of the past week, which could erode support for the ruling African National Congress at next year’s national election.
This morning Eskom said it would not implement load shedding BUT that “the electricity system remains tight and the risk of load shedding still remains high for today”. Eskom again urged residents and businesses to use electricity sparingly.
Opinion is divided on whether Eskom, which provides more than 90 percent of South Africa‘s power but was embroiled in corruption scandals under its previous management, should be bailed out again.
Rothschild’s Martin Kingston said in an interview that recapitalising Eskom could cost the country its last investment grade credit rating but that there was “no other obvious solution” if Eskom was to survive.
“The government knows that putting money into Eskom is going to exacerbate a downgrade scenario. But I think it is going to have to bite that bullet,” Kingston said. “The level of debt on Eskom’s balance sheet is completely unsustainable.”
Eskom’s debt has ballooned from around R106 billion to more than R419 billion over the past decade, while electricity sales have fallen.
Eskom executives told investors on a roadshow last week they wanted the state to take on R100 billion of the company’s debt. But Finance Minister Tito Mboweni is yet to approve the proposal and has said the state cannot afford to continue “pouring money” into loss-making state firms.
President Cyril Ramaphosa has made reforming Eskom a priority since taking office in February, but the scale of its financial difficulties has made progress slow.
Kingston said the government had kicked the can down the road by not providing Eskom with more funds in 2008 and that restructuring the utility could take three to five years.
(Editing by James Macharia and Mark Potter)