Eskom has many problems. Let’s work through them sequentially. At the risk of over simplifying, there are three types: operational problems, financial problems and energy market structure problems.
The financial problems are also many, but probably can be lumped into two: balance sheet problems and income statement problems. The balance sheet problems are also many, but the main glaring one is that the entity carries too much debt. The income statement problems include a tariff that is probably too low, poor repayment of municipal arrears, and a drop in income from loadshedding.
Government is eating the mountain of Eskom problems one by one. The debt relief that was announced is all about dealing with the balance sheet problems. As I have argued elsewhere, it doesn’t help the unbundling, which is absolutely critical for loadshedding.
How the Treasury proposal deals with the “balance sheet problem”
In the hour or two after the Budget was tabled, everyone had the same instinctive question: how could the Treasury simultaneously table a primary surplus and bailout Eskom? It apparently didn’t make sense. Soon, the market worked it out. The Treasury’s “bail out” is a subordinated loan to Eskom followed by a debt transfer in 2025/26. It is a loan, so “below the line”, in contrast to a cash payment, which is “above the line”. It has no impact on the primary balance.
Analysts have had mixed responses. Some welcomed the certainty, no matter what the form. Others felt it made the Budget numbers annoyingly complex and meant they had to read a little more closely. And some have gone so far as to say the Treasury’s data is “farcical” and that it might be misleading the public.
First, what exactly has the Treasury done? The words of Albert Einstein spring to mind: the definition of insanity is doing the same thing over and over again and expecting a different result.
For once, the Treasury has done something different. They’ve not just bailed out Eskom. They’ve decided to advance a loan. This idea is not new - Eskom got a subordinated loan in 2015 and Tito Mboweni circulated lending to SOEs as a structural solution in 2019, and there has long been a view that the Treasury should lend money to recalcitrant SOEs rather than write them blank cheques.
As with all things, there are pros and cons. The pros are that it gives the Treasury more leverage over Eskom (literally). Treasury is now a creditor, even if it’s a subordinated one at a zero interest rate. It may have been better to have made a normal loan (i.e., not subordinated) or charged a market-related interest rate, but those are fine points. It may well be that Treasury will be bullied at some future date to convert the loan to equity, perhaps regardless of whether or not Treasury’s conditions are met. But that is a future date, and in the meantime, Treasury gives itself some space to use the structure to hold Eskom’s feet to the fire.
The cons are that it is complicated. To this, the response is that Eskom is complicated. Fixing it is going to take some financial engineering. Subordinated loans are common place within large groups, showing that Treasury is thinking more like a shareholder than like a piggy bank.
Also, Treasury has correctly accounted for it. A loan creates an asset for the Treasury, and a liability for Eskom. Perhaps a loan to Eskom is a worthless asset, but it is an asset to the bean counters. And Treasury has not hidden anything - the Speech did a good job of explaining the structure, as did the detailed annexure.
In short, the Treasury is thinking on its feet, adapting and pushing the boundaries a bit. Time will tell if this experiment will work, but the alternative - endless bailouts with no binding conditions and no way to enforce them - is worse .