South Africans will bear the brunt of a government bailout for Eskom

Struggling South African public utility, Eskom, is looking for ways to become financially sustainable and profitable enough to maintain regular power supply for the people. To achieve this, the company wants the government to take up its R100 billion ($7 billion) debt.

The debt relief has the potential to turn the troubled company around. However, it will compound South Africa’s debt-to-GDP ratio by 2 percent and this is not good for an economy that is barely coming out of recession, as it will put a strain on the already stretched government finances.

Eskom Chairman, Jabu Mabuza, confirmed last week in a news conference that asset sales could not solve the company’s problems, hence the need for a bailout or debt relief. Economist Mike Schussler, however, feels that saving Eskom may put more financial pressure on the average South African citizen. “Loan guarantees from the government to Eskom are put on the shoulders of taxpayers. Eskom does not have the ability to do anything without borrowing. Either way, we as electricity users and taxpayers will bear the brunt,” he said.

Currently, South Africans are paying more than double what they should, for electricity, according to Energy expert Ted Blom. In July, the country announced its plans to impose a Home User Tariff for the electricity it sells.

Since November, Eskom has instituted daily rolling blackouts to avert a total collapse of the grid and regardless of a bailout, the outages are expected to persist for a few more months pending when Eskom’s new management resolves the company’s maintenance backlogs, construction delays and coal shortages.

On 4 November, Eskom fell 4,000 megawatts short of the country’s electricity demand of 28,000 megawatts. The power utility has the ability to produce 45,583 megawatt but could only supply 24,000 megawatts due to maintenance issues.

In July 2017, Eskom was forced to suspend its Chief Financial Officer Anoj Singh, when the Development Bank of South Africa threatened to recall a R15 billion loan if no action was taken against Eskom officials who were involved in corruption allegations involving the infamous Gupta family.

The increasing debt and corruption scandals made investment bank Goldman Sachs to declare Eskom the “biggest risk to South Africa’s economy.” The company had R413 billion in debt and plans to raise an additional R340 billion ($26 billion) by 2022; 8 percent of South Africa’s GDP.

Eskom is still in operation because of a R350 billion ($25.36 million) debt guarantee from the government and it expects a loss before tax of more than R11.2 billion ($811.3).