Eskom Appropriation BillsPresentation to Joint Sitting of the

Appropriations Committees17 June 2015

Input from the PBORole of the PBO: Provide independent, objective and professional advice and analysis to the finance and appropriations committees on money Bills, the Budget and related matters (Money Bills Act, 2009)Recently completed a report on financing of state-owned enterprises (SOEs) - requested by the Standing Committee on Finance, based on proposals in the 2014 MTBPSToday’s presentation

1. Background to SOE financing2. Considerations particularly relevant to Eskom3. Analysis of tabled Bills4. Key issues for consideration

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Why fund SOEs?SOEs are established at ‘arms length’, which has advantages but also creates a number of challengesAs commercial entities, SOEs earn revenue and can borrow from financial markets: why fund them?Three main reasons:

1.Capitalisation by the shareholder (government)

2.Non-commercial mandates

3.Reducing (public) borrowing costsOther reasons: economic shocks; SOE not entirely self-sufficient; recapitalisation for infrastructure projects; etc

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FINANCIAL STATUS

OPERATIONAL EXPENDITURE

LOANS

EQUITY

REVENUE

PRICINGEXTENT OF OPERATIONS

ECONOMIC

REGULATOR

NON-COMMERCIAL MANDATES

GOVERNMENT CASH

INJECTIONS

SHARE SALES TO PRIVATE

INVESTORS

INTEREST & GUARANTEE PAYMENTS

GOVERNMENT GUARANTEES

STATE LOANS

LOANS AND

BOND SALES

INVESTMENT EXPENDITURE

CROSS-

SUBSIDISATION

NON-COMMERCIAL MANDATES

INEFFICIENCY

Funding conditions and fungibilityWhen the State does provide funding, one approach to accountability and oversight is to stipulate conditions on funding (cash transfers or loans)A problem with this is the issue of fungibility:

money used for the purpose stipulated by the conditions might just mean the SOE shifts funds it would have spent on that to something elseDifferent example: giving financial assistance to an authoritarian government experiencing a natural disasterImplication: such conditions on the use of financing are hard, if not impossible, to enforceMonitoring, and transparency, of expenditure and outcomes is fundamental

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Broad policy background

The State, as owner should ensure [state-owned entities] access to adequate funding... The Government should adopt appropriate funding principles and models...Government should address the issue of non-financially viable commercial SOEs (Presidential Review Committee on State-owned Entities, 2012)

Given fiscal constraints over the next two years, capitalisation will only be funded by the sale of non-strategic state assets, and will not be drawn from tax revenue or added to the debt of national government. Government policy remains that state-owned companies should operate on the strength of their balance sheets. (National Treasury, 2014 MTBPS)

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Public finance oversight

Finance Committees Appropriation Committees

Relevant areas for oversight

Government contingent liabilitiesFiscal frameworkMacroeconomic impact

Appropriation of fundsOversight of expenditureMonitoring of loan appropriations

Current situation

R350bn in guarantees, R144.5bn have been used (64% of total guarantees from government)NT estimate 0.5-1% reduction in real GDP growth due to loadshedding Impact of tariff increases

R60bn loan disbursed from 2008 to 2011Request for loan conversionRequest for R23bn cash injection

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Background to current BillsThe two Bills tabled are intended to assist Eskom with

the financial challenges it currently faces

Among the reasons for Eskom’s financial situation: Massive infrastructure programme running over schedule:

cost increases and revenue reduction Historically low tariffs Supply challenges lead to: loss of revenue (loadshedding

and demand reduction measures) plus the cost of running diesel and gas turbines

Other possible factors: delayed maintenance, supply chain costs, municipal non-payment

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Meeting demandMassive build and refurbishment programme began

in 2007; arguably should have started earlier

Since 2008 Eskom has had intermittent problems meeting demand, leading to loadshedding

International norm is for a 10-25% ‘reserve margin’ Not enough to have installed capacity > peak demand Ensures that ‘random’ factors - mentioned by Eskom last

week - do not lead to supply disruptions Eskom had 20-22% margin in 2013-2014 but ‘operating

reserve margin’ is negative when gas turbines are excluded

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Electricity tariffsTariffs are regulated by the National Energy Regulator

(NERSA) NERSA governed by the 2008 Energy Pricing Policy (EPP) The EPP emphasises that electricity tariffs need to allow for

investment and must be cost-reflective

Widespread view that NERSA decisions have not allowed adequate tariff increases

Important for State to consider additional issues: Intergenerational equity Overall balance of financing

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1. Eskom applies for revenue from NERSA

Regulatory Asset Base

% Return on Asset (WACC)

Pass through costs Allowable

Revenue

2. NERSA approves revenue

3. Eskom calculates tariffs based on sales

forecasts & revenue allowed

4. NERSA Approves tariffs (publishes MYPD

findings)

Determination of electricity tariffs

Average Tariff =Revenue Allowed / Sales volume

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Eskom Special Appropriation Bill

Part of the 2014 Cabinet-approved support package for Eskom Purpose – to provide operating cash flow 2014 MTBPS and 2015 Budget signalled government’s intention to allocate R23 billion to Eskom in the 2015/16 financial year Funds raised through sale of “non-strategic government assets” Funds to be appropriated in three tranches

1) R10 billion in June 20152) R10 billion in December 20153) R3 billion in 2016/17

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..Implications

Is it useful to think about separate financials for Eskom and government?

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Eskom Subordinated Loan Special Appropriation Amendment Bill

Part of cabinet’s 2014 support package for Eskom Purpose – to strengthen the balance sheet of Eskom Converts the “subordinated loan” of R60 billion granted to Eskom in 2008/09 to equity Priority of claims:

Senior debt Junior debt Subordinated debt Shareholders Funds appropriated in three tranches

Ø R10 billion in 2008/09Ø R30 billion in 2009/10Ø R20 billion in 2010/11

Loan was actually in part a cash injection

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Eskom Subordinated Loan Special Appropriation Amendment Bill

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Eskom balance sheet 2008-2009

Assets (cash) R60bn

Liabilities (loan) R29.5bn

Equity (paid-in capital) R30.5bn

..Implications

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Issues to note/for consideration Various factors suggest that it is necessary and desirable to provide Eskom with financial support The causes of Eskom’s financial situation, and the extent to which they matter, are important for oversight Conditions attached to how a cash transfer is spent may be difficult to enforce: accountability requires detailed understanding of the composition of costs and revenue Loan provisions that allow for interest not to be paid can turn a loan into a partial cash transfer Conversion of the subordinated loan potentially reduces return to the State from Eskom’s future activities Sale of state assets could have some impact on the fiscal framework if those assets would have yielded a return

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Thank you

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The Parliamentary Budget Office (PBO) has been established in terms of the Money Bills Amendment Procedure and Related Matters Act, 2009 (Act no. 9 of 2009). The main objective of the PBO is to provide independent, objective and professional advice and analysis to Parliament on matters related to the budget and other money Bills. The PBO supports the implementation of the Act by undertaking research and analysis for the finance and appropriations committees.

 

Director: Prof M Jahed

Contributing authors: Rashaad Amra, Brandon Ellse, Seán Muller

Enquiries: smmuller@parliament.gov.za

Any errors or omissions are the responsibility of the authors 

Additional slides

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SOE debt and debt guaranteesNT definition of contingent liability: “A government obligation, such as a guarantee, that will only result in expenditure upon the occurrence of a specific event” SADC countries agreed a threshold of 60% for net debt and contingent liabilities, which is also what IMF recommends for SA. In the past NT has indicated preference for self-imposed target of 50%.Main form of contingent liabilities are debt guarantees to state-owned entities (SOEs), particularly state-owned companies IMF Article IV consultation 2014:A contingent liability shock where 75 percent of the government’s guarantee commitments— estimated at 14 percent of GDP in FY2013/14—is realized would increase debt to 72 percent of GDP, slightly above the high risk thresholdAsset sales and debt guarantees resolve different problems - as discussed further in PBO report on SOE funding

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Contingent liabilities

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Competitive neutralityLiterature on SOE financing produced by IFIs increasingly focuses on ‘competitive neutrality’The idea that state support to SOEs should not benefit those

enterprises relative to actual or potential private sector competitors

In SA: Incremental adoption of some principles (e.g. debt guarantee fees,

market-related interest on loans, etc)Recent PRC recommendations relating to economic regulation

Unclear how/whether this principle is compatible with developmental state orientation With regard to current Appropriation Bills, Eskom has not actually paid interest or guarantee feesImportant question then: what mechanism is ensuring accountability

for public funds?

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Eskom forecasts of supply statusEskom has useful website providing information on monthly forecasted supply, demand and expected shortfalls:

http://www.eskom.co.za/Whatweredoing/SupplyStatus/Pages/Supply_Status2.aspx

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