ESKOM does not plan to use its full R350bn government guarantee for fear that it would have an adverse effect on the country’s sovereign credit rating, as it affected the debt to gross domestic product (GDP) ratio, the power utility’s chief financial officer Paul O’Flaherty said on Wednesday.
Answering questions before Parliament’s trade and industry committee on Thursday, Mr O’Flaherty, along with CEO Brian Dames, explained Eskom’s model of shoring up its balance sheet.
They were taken to task by Democratic Alliance MP Geordin Hill-Lewis who stated that Eskom’s application for a 16% tariff increase over the next five years posed a threat to the industrialisation of the country and job creation.
Mr Hill-Lewis questioned why Eskom chose to revalue its assets every year to depreciate them at current costs.
He argued that this was "unorthodox" as it would suggest that Eskom had planned to replace all its current generation capacity, when this was not the case.
Eskom’s plan to offer its bond investors an 8% return over the current inflation rate was labelled as unreasonable by Mr Hill-Lewis as the average return on a Johannesburg Stock Exchange-listed equity for the past 10 years was 6.6%. The inflation rate was recorded at 5.6% last month compared to the same month last year, according to Statistics South Africa figures released yesterday.
Mr Hill-Lewis described the return Eskom promised as exorbitant and said it was being funded by ordinary South Africans.
"The cost-reflective tariffs that you have calculated must be worked out on the basis of the marginal cost of new generation, not including the depreciation costs of existing generation capacity," he said.
Eskom is building a balance sheet that would make any firm in the world proud, Mr Hill-Lewis said.
"It’s a balance sheet to hold up as a model, and I put it to you that Eskom doesn’t need that kind of a balance sheet in the country that we are living in at the moment."
Mr O’Flaherty said Eskom’s aim was to become an investment grade company and that, currently, its bonds, if they were without the government guarantee, would be of "junk" status.
This meant Eskom had to develop a proper investor matrix comprising its balance sheet, funded from operations to support its goal of being an investment grade company
"The logic behind that is to that extent we currently have support from government of R350bn credit guarantees of which we only intend to use R150bn.
"The reason for that is if you look at government’s debt to GDP ratios. The knock-on effect on the sovereign (rating) would be extreme. What we are saying, Eskom needs to build a strong balance sheet to be able to support future growth," he said.
Eskom CEO Brian Dames said the revaluing of Eskom assets every year was in accordance with the National Energy Regulator of South Africa’s regulations. He said to change these regulations now would create investor uncertainty.