The South African government has announced that it will provide a support package for Eskom, the state-owned power utility, which has announced that it has a projected funding gap of around US$20bn over the next three years, prompting Standard and Poor’s to lower the company’s credit rating. Earlier this year Eskom, which provides 95% of South Africa’s electricity, enforced power black outs for the first time in six years in order to carry out essential maintenance works on power plants which had become necessary due to poor planning and under-investment over the last few years. The company is also investing R260bn in new infrastructure including building two coal-fired power plants and the renovation of older ones in a bid to avoid further blackouts. However, the cost of the new plants has escalated and the works have suffered serious delays. In order to fund the projects, Eskom wants to increase prices further, but these have already been increased by 100 per cent over the past 5 years. The lack of suitable electricity capacity has been blamed for hindering the growth of new investment in the country and the company has faced fierce criticism from some of Africa’s biggest companies who have said that the price hikes and instability of electricity supply have greatly affected their competitiveness.
Under the rescue package, the government will make an unspecified equity injection, funded by the sale of “non-strategic government assets”. The company will also be authorised to raise a further US$4bn in debt finance. According to the South African National Treasury, “Cabinet approved a package to support a strong and sustainable Eskom to ensure that the energy security of the country is maintained, as well as supporting gross domestic product growth.” -. The news comes as South Africa struggled to avoid a recession with GDP growth down to 0.6% in the second quarter of this year. Although the deal will protect Eskom’s credit rating, the terms of the package are likely to negatively affect the country’s sovereign rating which has already been downgraded this year and faces pressures to be further downgraded when this deal goes ahead.