A new report analysing Eskom’s financial position warns that the State-owned utility is simply not generating enough cash through operations and electricity sales to cover the interest on its borrowings, which will peak at around R500-billion in the coming three years.

However, it also argues that a return to sustainability lies not in larger tariff increases, but in eliminating unnecessary expenditure, reducing employee costs and extending short-term support to electricity intensive businesses at risk of being forced to cut production, owing to rising power costs.

Written by Eton Group analyst Nicholas Saunders and edited by senior consultant Jarredine Morris the report equates the position “to using one credit card to pay off another”. It also warns that there is a growing risk that government may have to provide future equity, or provide further debt guarantees.

“The financial consequences of poor planning and management in Eskom are now plain to see. Unnecessary expenditure and the implementation of political agendas have caused massive inefficiencies for a company that does not have the luxury of largesse,” the report states.

It notes that Eskom’s employee headcount has increased by 45% since 2007/08, and has remained above 47 000 people for the last four years, despite energy available for distribution having remained flat over the period. “The total energy available for distribution, coupled with the decline in sales, raises concerns regarding the level of overstaffing at the utility.”

Although Eskom ended its 2016/17 financial year with a positive cash balance of R19.9-billion, the cash flow statement “would have been much worse” had it not been for new borrowing of R51-billion. Saunders and Morris, therefore, warn that the utility’s debt repayment profile is poised to become “massively pressurised”.

Interestingly, this sustainability warning is also reflected in a macroeconomic scenario included by Eskom in its recent application to the National Energy Regulator of South Africa (Nersa) for a 19.9% tariff hike from April 1, 2018.

In one scenario, which was produced for Eskom by Deloitte, Eskom receives an 8% increase next year, with the revenue shortfall being funded by raising additional government debt. The simulation shows that this would lead to a marked deterioration in government’s Budget balance and that government’s debt-to-gross domestic product (GDP) ratio would reach 75% by 2021 and 104% by 2030. By contrast, under the 19% tariff scenario, the debt-to-GDP ratio stabilises at around 66%.

However, The Eton group analysis is far less optimistic that increasing tariffs will help address the utility’s financial problems, pointing to an “alarming” deterioration in Eskom sales to the industrial and mining sectors as tariffs have increased in South Africa. Sales in 2017 to industry and mining combined, the report notes, were more than 14% below 2011 levels.

The decline is attributed to industrial and mining capacity shutting either permanently or temporarily, or moving offshore.

To reverse the trend and halt or slow the so-called utility “death spiral” phenomenon, the report argues in favour of short-term tariff deviations for vulnerable entities, a move to internationally competitive industrial tariffs and changes to the industry structure into the long-term. “The success of such interventions depends on the characteristics of such changes, the urgency with which they are implemented, and the rate of such tariffs.

Saunders and Morris also note that the 19.9% tariff application for 2018/19 is already widely contested, even before the public consultation process has started. Nersa has released Eskom’s application for public comment and hearings will be held in all nine provinces between October 30 and November 16.

“Eskom is going to be hard pressed to continue to turn a blind eye to issues that are crippling the institution,” the report concludes.