The dire set of financial and operational results that Eskom presented this week was a disturbing reminder of a risk that SA will have to face sooner rather than later, as it counts the cost of the damage done to the economy in the years of state capture. That risk is that the reforms required to stabilise public finances and make them sustainable over the medium to long term could come at a very steep cost in the short term - and SA will have to make some tough choices on what it can and can't afford.
There's the R20bn-plus cost of saving SAA, which is supposedly less than the R40bn-plus cost of letting it go under. There are the billions of rands which will be needed upfront to fund early retirement packages for civil servants to cut government's wage bill over time. And dwarfing all of these is the potential cost of an Eskom bailout.
It's long been clear that government's guarantees to ailing state-owned enterprises, Eskom in particular, are one of the biggest risks to SA's public finances. This week's results revealed how close Eskom is to asking government to make good on those guarantees - though instead of seeking cash it would probably ask government to take some or all of its R257bn guaranteed debt on to the state's own balance sheet.
"Debt relief" was the word used by Eskom's chairman Jabu Mabuza and its newly permanent CFO Calib Cassim as they talked of "severe financial difficulty" and warned of the urgent need to do something about Eskom's ballooning debt burden. This has jumped over the past two years to a total of R419bn, mainly because of the below-inflation tariff increases the regulator granted Eskom. Gearing is now an unsustainable 72%, rising to 76% over the next three years and Eskom is effectively in a debt spiral - it is borrowing just to pay the interest on its debt, with debt-servicing costs at R45bn for the half year nearly double the R26.7bn generated by operations. The picture will be worse for the full year to March, for which Eskom is now expected to report a loss of as much as R15bn. It plans to "functionally separate" its divisions to make them transparent and accountable, and has started on a restructuring to save R32bn, but this is not expected to get it out of its debt trap any time soon.
A debt-to-equity swap involving the Public Investment Corporation was mooted this year but has now been rejected, as has the option of a "haircut" for bondholders that could see Eskom lose its ability to borrow in future. Hence the option of "optimising the balance sheet", as Eskom dubs it, by getting government to relieve it of debt. How much of the debt depends on the tariff increase the National Energy Regulator grants Eskom for the next five years. Eskom hopes it would need relief only for the next three years until Medupi and Kusile are completed, capital spending drops and the pressure is off.
By then though, the damage to SA's own sovereign credit rating would surely be done, raising interest costs and making borrowing more difficult for government and everyone else. Government's debt ratio is already at 53% and rising and that would increase by four to five percentage points if Eskom's R257bn were added. Perhaps there will be no alternative for the economy but to save Eskom, despite the crippling cost. The crucial question would be what conditions government would demand of Eskom to consider a bailout - radical cost cuts and a radical restructuring of the industry would be a start.
Perhaps Treasury was hoping that Eskom's promised restructure would fix its debt woes but that looks unlikely. Nor are there quick fixes to other fiscal woes such as SAA or the bloated public-sector wage bill. October's budget dodged these issues: February's may not be able to avoid them...