The National Treasury provided the strongest indication yet on Tuesday that the South African government supported a move towards higher power tariffs, stating in the 2009 Medium Term Budget Policy Statement (MTBPS) that tariff increases were necessary "to align prices with the cost of electricity generation".

The statement follows hot on the heels of a controversial application by State-owned electricity utility Eskom for tariff increases of 45% a year between April 1, 2010, and March 31, 2013.

In its application - which is currently before the National Energy Regulator of South Africa, which will be entertaining written and oral submissions on the application and will host public hearings early next year - Eskom claims that the increases are necessary to help it deal with its rising costs and to assist it in funding a R385-billion build programme - much of this expenditure will take place over the MTBPS horizon.

The balance of the funding would be secured through a R60-billion loan injection from the National Treasury, as well as through borrowings; with the government having set aside a further R176-billion in government guarantees to support such a programme.

R120BN ESKOM BORROWINGS

The MTBPS indicates that Eskom will have to borrow about R120-billion over the next three years, but adds that the "number may change depending on the level of tariff increases".

Eskom has indicated that it will seek to secure the funds through domestic and international bond issuances, as well as from development finance institutions, including the World Bank and the African Development Bank, commercial banks, and export credit agencies.

But Eskom would not be alone in seeking capital-market finance, with the MTBPS highlighting the fact that public infrastructure expenditure would total R872-billion over the three-year period, and that much of the finance will need to be secured through borrowings.

As a result, expenditure of public sector capital is expected to reach 9,8% of gross domestic product (GDP) by 2012/13. In fact, taken together with the financing requirements of Eskom, other State-owned enterprises and municipalities, the overall public sector borrowing requirement this fiscal year will be R285-billion, up from R89-billion in 2008/9.

Government's own total borrowings are likely to be upwards of R175-billion during 2009/10 to finance its 7,6% deficit, before falling to R167-billion in 2010/11, R155-billion in 2011/12 and R145-billion in 2012/13.

But with Eskom, Transnet and the South African National Roads Agency Limited set to invest R441-billion over the next three years, they too would have large borrowing programmes, as would some of the development finance institutions.

Therefore, the public sector borrowing requirement is expected to widen, and is likely to rise to 11,8% of GDP this year.

Some market commentators are concerned about the capacity of the domestic capital markets to deal with such strong demand, while others have warned that, given the expected rise in debt at a time of falling revenues, it was possible that the country and certain State companies could face downgrades from credit rating agencies.