The South African government's announcement that it will inject R20-billion worth of equity into State-owned power utility Eskom over the coming three years has been described as the final piece in the group's long-awaited funding-plan puzzle.

Cabinet confirmed its support for the "hybrid" funding solution at its meeting on Wednesday, which it argued would enable Eskom to continue with its R550-billion-plus build programme between now and 2017.

The solution consists of the recently announced increase in the guarantees framework from R176-billion to R350-billion and the R20-billion equity injection, starting in the 2011/12 fiscal year.

This is above-and-beyond a R60-billion subordinated loan granted to Eskom, of which some R50-billion had already been absorbed.

Initially, it was announced that the injection would be funded by "liquidating State holdings in nonstrategic and noncore assets", which would be identified by the National Treasury in consultation with the Department of Public Enterprises and other relevant departments.

But government later corrected the statement, revealing that the injection would arise as part of the normal Budget process. It said that the recommendation to sell assets had not been approved by the Economic Sector for Employment and Development Cluster.

Eskom CFO Paul O'Flaherty told Engineering News that the announcement meant that the utility "no longer had a funding gap, but a funding plan".

He added that the R20-billion injection would help protect Eskom's coveted investment-grade credit rating and should also enable it to draw less heavily on the government guarantees.

"Ideally, we would like to return those guarantees to government unutilised," O'Flaherty added.

The funding solution will allow the company, which is already raising debt on the domestic capital markets, to accelerate the international borrowing programmes necessary to fund its Medupi, Kusile and Ingula power stations, as well as new transmission infrastructure and maintenance projects.

Eskom has appointed three banking partners, Bank of America Merrill Lynch, Absa-Barclays and JP Morgan, to help it with the design and implementation of what will be a multibillion-rand international bond programme, which could kick off in the US early next year.

However, it is understood that the utility will also continue to consider other funding options beyond the solution announced, including additional development finance and a possible special purpose vehicle 'quasi-equity' structure to strengthen its balance sheet even further.

Eskom recently received a R15-billion loan facility from the Development Bank of Southern Africa, adding to the R28-billion secured from the World Bank and a R20-billion loan from the African Development Bank.

It was also tapping into export credit agency finance associated with capital equipment and services imports from Asia, Europe and the US - equipment and services that will enable it to add some 12 300 MW to South Africa's electricity-stressed network by 2017.

PRICE PATH?

Less certain, though, was what influence the injection could have on Eskom's future price increase aspirations.

Government spokesperson Themba Maseko was quoted by Sapa as saying that the solution could be seen as a government attempt to fight the inflationary effect of further tariff increases.

"They [Eskom] still have a responsibility of submitting tariff increase proposals that they think will strengthen the balance sheet... but we are not likely to see tariff increases in the region of 30%, 40%. That is what we are trying to do with this initiative," Maseko said.

However, O'Flaherty has consistently argued that further increases beyond average increases of 25% a year between 2010 and 2013, were likely.

In fact, he tells Engineering News that the funding solution is balanced between equity, the guarantees, borrowings and further tariff increases in "years four and five". In other words, two further increase in the range of 25% a year in 2013/14 and 2014/15.

"Without that assumption, the solution is incomplete," he added.

Moreover, the price path outlined in the Department of Energy's recently published draft second integrated resource plan, or IRP2010, suggests that power prices could rise from the current average of around 45c/kWh to around 110c/kWh by 2020.

It is anticipated that Eskom could seek to submit another price application, for the period April 1, 2013 to March 31, 2016, during the first half of 2011 in a bid to provide a longer period of price-path visibility.