Ratings agency S&P Global Ratings sees finding a solution to Eskom’s unsustainable debt position as potentially key to meeting the timelines proposed for the broader restructuring of the State-owned utility into three units of generation, transmission and distribution – an unbundling that is also viewed as necessary for reforming South Africa’s electricity supply industry and attracting much-needed private generation investment.

Speaking during a virtual update on South Africa on Tuesday, corporate ratings director Omega Collocott said the restructuring was progressing “slowly”, but had been negatively affected by the disruptions associated with the Covid-19 pandemic as well as operational difficulties that had resulted in recent bouts of rotational power cuts.

Progress had been made, she said, in separating the units operationally and financially. However, full legal separation would, in her view, require the implementation of a debt-reduction solution so that the remaining debt could be apportioned across the three standalone businesses.

“This reform component – the separation of Eskom into its three entities – doesn’t meaningfully alleviate Eskom’s critical financial stress and high leverage.

“And the reality is that it will be very difficult to complete a legal separation, which would include separating Eskom’s large debt burden into allocations to the different entities, before that debt burden is reduced,” Collocott argued.

Under the current timelines, the intention is to launch a legally separated Independent Transmission and System Operator, under Eskom Holdings, by December this year and for the separation of the generation and distribution businesses to be completed by December 2022.

“The reality is that the reform process is progressing  . . . but I do think the pandemic and Eskom’s operational issues have taken the government’s and Eskom management’s eyes off the ball to some extent.

“So, I think that these deadlines for legal separation will be extended, in some cases by a couple of years,” Collocott said.

Eskom, which is forecasting a full-year loss of over R22-billion, is currently reliant on government support to meet its interest-payment obligations – a fact reflected in its current credit rating, which S&P Global Ratings has pegged at CCC+ with a negative outlook even when taking into account the high likelihood of extraordinary government support.

The utility received a government injection of R49-billion in 2020 and was due to receive R56-billion during 2021. All the funds are reserved for debt servicing.

In December, organised business, labour, community and government officially signed a social compact to support Eskom, which included a commitment to reduce Eskom’s debt burden.

There has been little visible progress on the solution since, however, with Finance Minister Tito Mboweni making no mention of a remedy during his recent Budget address.

In a presentation to Parliament’s Standing Committee on Public Accounts on March 3, Eskom reiterated that its high level of debt required a “structural solution”.

“[Reform] is happening, but it’s happening slowly, and I think a critical [element] for starting the process is going to be dealing with Eskom’s debt.

“The debt burden at the level that it currently is probably needs to be resolved to some extent first before the reform process can really run to its conclusion of the legal separation of the entities,” Collocott said.