LONDON (Reuters Breakingviews) - As rolling power blackouts hit South Africa this week, an old gag resurfaced. “What did South Africans use for lighting before candles?” Answer: “Electricity.” The problems at state-owned Eskom are no laughing matter, though. Energy rationing is not even the most serious issue: the utility is broke and its debt pile is too much for the government to handle.
Eskom’s demise over the past decade has been remarkable. A central pillar of the apartheid economy, it still supplies 90 percent of South Africa’s power. But a failure to build new plants after the end of white rule has cost it dear. As it has rushed to catch up, staff numbers have ballooned to 48,000 from 32,000 10 years ago. Corruption and mismanagement haven’t helped. Meanwhile price hikes in a sluggish economy have caused sales to stagnate. Debt has risen tenfold to $30 billion since 2007.
That figure, equivalent to 8 percent of South African GDP and 17 percent of its total national borrowing, should be keeping citizens awake in the darkness. Eskom has a $25 billion state debt guarantee facility but analysts believe this is close to maxed out, leaving the company short of day-to-day funding options.
Company bosses are trying to transfer debt worth about $7.2 billion to the government in an attempt to free up borrowing capacity. That would threaten the government’s last investment grade credit rating. Talk of “debt relief” has also made bondholders nervous, especially after Eskom hired debt-restructuring experts at Lazard in August. The yield on its $1.25 billion 2025 Eurobond has risen to 9.3 percent, the highest level since then-President Jacob Zuma sacked his finance minister three years ago.
Eskom has given bondholders a glimpse of its mooted turnaround plan, which would involve reducing staff numbers by a third. That would be brutal for President Cyril Ramaphosa, who faces elections next year. But cost-cutting is crucial for a company whose operating cash flow was just 59 percent of its debt service costs in the six months to September 30. Even then, some form of debt restructuring may be required to turn the lights back on.
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