South Africa Rules Out Privatizing Eskom to Plug Funding Gap

South Africa ruled out privatizing Eskom Holding SOC Ltd. to solve the state-run electricity supplier 225 billion-rand ($21 billion) funding shortfall, Public Enterprises Minister Lynne Brown said.

“It would be a grave mistake to privatize this critical player in the economy,” she said in an e-mailed statement. “To my knowledge, Cabinet has not discussed the matter of privatization, and there is no need to unnecessarily raise temperatures around this matter.”

Eskom bond yields jumped the most on record today after the South African Communist Party, which has members in government, said there were moves afoot to privatize parts of the state-run utility. That would leave bondholders with fewer assets over which to make a claim in the event of a default, according to Elena Ilkova, a credit analyst at FirstRand Ltd.’s Rand Merchant Bank unit.

The government’s departments of energy and public enterprises and the National Treasury are working on a way to close Eskom’s funding shortfall. The utility’s bonds have a 50 percent chance of being lowered to junk by the end of September, Standard & Poor’s said June 20. That would significantly raise borrowing costs.

Eskom’s funding deficit for the five years to 2018 arose last year after South Africa’s energy regulator granted the utility only half the tariff increases it requested. The state-run electricity provider was forced to schedule managed blackouts in March and June as it struggled to keep the lights on after a decade of underinvestment in power stations.

Future Projects

While privatization is off the table, the government needs to make decisions “on the extent to which future build projects will be undertaken by the private sector” to ensure the long-term stability of Eskom, Brown said.

“It is critical that the private sector participates in the energy sector and through IPPs, this practice is firmly entrenched,” she said, referring independent power producers.

Yields on Eskom’s $1 billion of bonds due in August 2023 increased 25 basis points to 5.97 percent by 5:13 p.m. in Johannesburg, the most since they were issued in August last year. The South African Communist Party, which is in alliance with the ruling African National Congress, said earlier it was aware of moves to privatize parts of Eskom.

“There are individuals within the broader liberation movement who would gladly support privatization,” spokesman Alex Mashilo said in an interview, declining to identify anyone. The SACP is opposed to privatization because it would lead to increased electricity prices for the poor, he said.

The government has committed to backing 350 billion rand of Eskom’s debt, of which the company has used about a third.

Brown said she is exploring a “portfolio of options” to plug Eskom’s funding gap.

“There has been serious public speculation about public-sector equity injection, assets being sold, private-sector equity and tariff hikes,” Brown said on July 29, according to a separate statement from her department today. “These are levers which must be considered in any serious discussion.”

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