Release:
Eskom could pay R120 billion more – Frost & Sullivan
Eskom has embarked on a very ambitious expansion program as a result of its under investment in generation, transmission and distribution infrastructure over the past two decades. However, the progress of this initiative will increasingly be in the balance due to the effects of the global financial crisis.
Consulting company Frost & Sullivan points out that there are two factors that will put additional pressure on Eskom’s ability to meet its goals. The first is the weakening of the rand, and the second is the lack of funding available for developing countries due to the decreased liquidity in international markets.
“The rand has lost more than 36% (on a monthly average basis) against the dollar since January 2008,” points out Frost & Sullivan’s energy programme manager Cornelis van der Waal. “If we assume that 40 per cent of the Eskom build program will be spent on imported goods and equipment, the cost of the project could escalate to beyond R420 billion. This is an increase in the cost of the project of 22.3 per cent. Obviously Eskom has put measures in place with their suppliers to stabilise the price of the equipment, but this could be offset by the currency depreciation.”
Van der Waal notes that a significant portion of the funding needed for the programme will go towards imported turbines, boilers, switchgear, transformers and so on. All this equipment is quoted on the international market in dollars or euros.
On top of this, Eskom has to face the prospect of raising money on an international market that is currently risk-averse and generally low on liquidity.
“Even if the international banks are interested in investing in projects in developing countries, their ability to do so has been reduced significantly,” says Van der Waal. “As a result, the risk premium that banks and financial institutions will require will increase further, making the cost of borrowing capital even more expensive – where it is even available at all.”
Even on the original cost estimate of R343 billion, Eskom would need to raise R150 billion on international financial markets. This is taking into account government’s loan of R60 billion, as well as the amounts Eskom will be able to raise through its own cash flows and on the local market.
Financial institutions will however only lend money to institutions that have healthy credit ratings. Eskom has to date struggled to convince NERSA that it requires significant price increases in order to guarantee the healthy cash flows that will facilitate regular loan repayments. As a result, the rating agencies have indicated that they believe Eskom will struggle to pay back the large debt it plans to make.
“The cost of borrowing is increasing for Eskom and thus the company will have to borrow less and still pay more interest,” explains Van der Waal. “With liquidity challenges on top of the credit rating reduction, the cost of debt could potentially increase by between two and five per cent.”
Practically, this means Eskom could have to pay an additional R50 to R120 billion in interest.
There are however also some positives that can result from the crisis. The long lead times on critical equipment such as turbines could decrease, hence reducing overall project times. However, this will not happen immediately and will probably only become a reality in 12 to 18 months.
“A second potential benefit could be that companies that are currently constructing power plants could see a reduction in input costs as the prices of steel and cement decrease on the back of lower demand,” adds van der Waal. “Again, the impact of this will most likely only be felt in 6 months from now.”
Van der Waal also suggests that the potential exists for investors to disinvest from turbulent markets in Europe and America and seek investment opportunities in economies that have not been as severely impacted by the credit crisis. However the likelihood of this occurring is low.
Frost & Sullivan, the Growth Partnership Company, partners with clients to accelerate their growth. The company’s TEAM Research, Growth Consulting and Growth Team Membership™ empower clients to create a growth-focused culture that generates, evaluates and implements effective growth strategies. Frost & Sullivan employs over 45 years of experience in partnering with Global 1000 companies, emerging businesses and the investment community from more than 30 offices on six continents. For more information about Frost & Sullivan’s Growth Partnerships, visit https://www.frost.com.
Contact:
Patrick Cairns
Corporate Communications – Africa
P: +27 18 468 2315
E: patrick.cairns@frost.com