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Why we can't ignore the Eskom cash crunch

| Economic factors

South Africans should be concerned over the cash crunch our state-owned power utility Eskom currently finds itself in‚ but don’t worry about the lights going out just yet.

On Monday a report by EE Publishers revealed that by the end of November‚ Eskom will have only R1.2-billion in hand against a target of R20-billion.

The figure came from a report Eskom sent to Public Enterprises Minister Lynne Brown .

The report raises questions over whether or not Eskom will be able to cover salaries and operational costs from as early as the end of November.

Eskom on Monday said its financial position was not where it should be.

“What I can confirm is that our position is not where it should be or could be. Our revenue is low because of low electricity demand caused by low economic growth‚” Eskom spokesman Khulu Phasiwe said on Monday.

The report said‚ without further funding‚ Eskom would only have R1.2bn in liquid assets at the end of November and would move into negative liquidity of about R5bn by the end of January.

Phasiwe said Eskom would release its interim results before the end of the month‚ where the true financial situation of the power utility would be revealed.

He also said Eskom’s sales growth had been declining for a number of years while operating costs remained very high in relation to purchasing electricity from independent power producers.

“We spent R21-billion buying electricity from independent power producers last year. This is up from R15-billion the year before. However‚ our own costs of producing energy from coal and diesel are going down.”

Phasiwe said Eskom had not been folding its arms.

“We are targeting municipalities which owe us. Currently municipalities owe Eskom R11.2bn in arrears debt. We have sent letters to owing municipalities to pay us.”

Eskom was also trying to recoup money through the Regulatory Clearing Account (RCA).

The RCA is a monitoring and tracking mechanism that compares certain uncontrollable costs and revenues assumed in the multi-year price determination made by the energy regulator to actual costs and revenue incurred by Eskom.

Phasiwe said it had identified R54-billion that could be recouped through the RCA process.

Eskom would also attempt to speak to the Chamber of Mines and business to increase electricity usage.

Eskom was also asking the National Energy Regulator of South Africa (Nersa) for a tariff increase of 19.9%‚ up from the current 2.2% increase granted by the regulator‚ Phasiwe said.

“A tariff increase is not the only factor that will get us out of this situation. We need to improve our efficiencies. Where we are able to cut costs‚ we will be able to do so. But we are not looking at retrenchments as a cost-cutting measure.”

Phasiwe also denied the report by EE Publishers that Eskom was in discussions with banks to provide short-term capital expenditure of R5-billion to R10-billion until funding issues were resolved.

“Our fundraising efforts had been ongoing as we are trying to raise R337-billion for new build programmes. These efforts are not directly linked to this issue‚” he said.

Eskom has a total debt book of R471-billion – only R350-billion of which is secured by government guarantees.

If Eskom defaulted on one of these loans‚ it could cause a domino effect of drawing other lenders to immediately recall the full amounts - a situation National Treasury cannot afford.

But economist Professor Alex van der Heever says even if a lender would want to call in their loan tomorrow‚ it would not have an immediate effect on citizens.

“Government would have to immediately fund Eskom and it would have to be deficit financed. The effects would therefore be those of a higher deficit rather than an unfunded Eskom‚” he explained.

“I don’t think it would have an immediate impact. There is a perceptual impact of general confidence‚ I am sure there would be a slight adjustment in perception of government’s ability to repay its own loans and Eskom being able to manage its own book but effects on people won’t be immediate.”

Van der Heever said in theory‚ Eskom could raise its tariffs to pay off the loans faster‚ but that confidence in the utility played a big role.

“They have been consistently requesting price increases that have been adjusted down by the energy regulator. The question is how people assess their fundamental need. If the increases were not related to their loan book‚ paying down their debts‚ the issue is really whether or not they are using it to fund their current activities.”

“They should be financing cost of operations and investments and debt servicing. If there is anything else‚ for instance the nuclear build programme that spills into that increase‚ then it raises all sorts of concerns‚” Van der Heever said.

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