Dark clouds over Eskom

If municipalities continue to default on their debt to Eskom, the amount owed to the state entity is expected to rise to R200 billion, placing its revenue under considerable pressure.

This is according to Eskom’s CFO, Calib Cassim, who told Newzroom Afrika that the current debt is R85 billion after climbing by R11 billion in the first five months of the financial year.

“What is concerning for us is that if the municipal debt is not arrested, the positive benefit that Eskom is receiving through the R254 billion financial relief will be nullified through the growth of the debt,” Cassim said.

“This does not help Eskom’s financial sustainability going forward. After the debt relief, we want to be in a position where we no longer have to rely on the fiscus.”

The CFO says half of this financial year’s debt growth has come from metros and the rest from smaller municipalities.

Eskom cited the government’s inability to rein in delinquent municipalities as one of the reasons it needed to introduce the controversial 36.15% electricity price hike, which still needs to be approved by the regulator.

However, the South African Local Government Association’s (Salga) head of energy, Nhlanhla Ngidi, points out that the amount owed to municipalities by South Africans is four times more than the municipal debt owed to Eskom.

This totalled R347 billion at the end of March.

Because of the debt owed to Eskom by municipalities, the country launched a municipal debt relief programme in May 2023.

Cassim said that of the 72 municipalities that secured spots in the programme, only 14 are compliant.

Ngidi said this low compliance rate was partly due to the debt relief programme being too impractical and optimistic.

“Once a municipality joins the debt relief programme, it has to begin paying its Eskom current account within a month or two,” says Ngidi.

“This is not practical because, behind the municipality’s inability to pay, several systemic issues need to be addressed. This includes vandalism and non-payment by citizens.”

Ngidi argued that the fact that metros, which have historically tended to keep their finances in order with the utility, are defaulting on their payments to Eskom emphasises this problem.

Eskom’s plan to return to profitability

Despite this issue, Eskom has revealed a plan for the utility to return to profitability. It expects to break even in the 2025 financial year and post a R12 billion profit the year after.

However, Cassim said that was only if the power utility could control its municipal debt.

Since 2006, Eskom has had to deal with a growing revenue shortfall, which has ballooned from R1 billion to a cumulative R535 billion.

To compensate for this shortfall, Eskom issued a significant amount of debt. Despite repeated government bailouts, the company has a total debt burden of R445 billion.

The utility outlined its profit maximisation programme (PMP) in a performance update presented to the Standing Committee on Public Accounts (Scopa) on 9 October.

The PMP is a two-year plan with several savings targets to ensure Eskom breaks even in year one of the programme (FY2025) and becomes profitable in the second year (FY2026).

Ultimately, the PMP aims to make the utility financially sustainable in the coming years and reduce its reliance on government funding.

Eskom is already saving billions by using significantly less diesel to run its OCGTs. From 1 April to 22 August 2024, Eskom’s diesel expenditure was R3.59 billion, 75% less than the same period last year.

This translates into R10.6 billion in savings for the utility.

However, this is not enough to break even, with Eskom’s board setting a target of R16.2 billion in cost-saving measures for the 2025 financial year.

The plan focuses on ‘quick wins’, such as improving the utility’s overall efficiency and minimising the impact of high-cost initiatives like running OCGTs.

If these initiatives continue into the next financial year, Eskom estimates it could return to profitability in FY2026 with a profit of around R12 billion. The utility is also targeting a profit margin of around 10%.