- Eskom’s financial turnaround faces challenges as it struggles to recover R95 billion in unpaid electricity bills from municipalities, threatening its recovery plans.
- Despite improved investor sentiment, concerns over rising municipal debt and a potential 36% tariff hike remain key hurdles for Eskom’s long-term financial stability.
South Africa‘s Eskom Holdings has garnered praise from investors for its recent financial turnaround as it edges closer to posting its first profit in nearly a decade. However, there is growing concern over the company’s struggle to recover approximately R95 billion in unpaid electricity bills from municipalities nationwide. This issue threatens to undermine its recovery and prospects.
As of November, Eskom’s arrears amounted to R95.4 billion, and they continue to grow as municipalities fall behind in collecting revenue from their customers. This escalating debt could jeopardise Eskom’s plans to spin off its distribution unit, which it views as critical for boosting efficiency and attracting investment.
The issue of municipal debt has cast a shadow over Eskom’s recent progress. Once regarded as a symbol of dysfunction due to years of rolling blackouts, the utility has kept the lights on for nine consecutive months, offering hope to a power-starved economy. This improvement has positively impacted investor sentiment, with lower premium demands for Eskom bonds. Yet, many investors remain concerned about the mounting unpaid bills.
Olga Constantatos of Futuregrowth Asset Management expressed alarm over the growing debt. “The municipal debt problem is of ongoing — and growing — concern,” she said. “Immediate and decisive interventions are required, and the government must make some tough trade-offs, which has historically been challenging.”
The issue is a significant concern for the South African government, which assumed office last year with a mandate to tackle corruption and stimulate economic growth. While the National Treasury introduced a debt-relief program for municipalities in 2023, uptake has been slow, and many councils continue to struggle with enforcing necessary credit controls to collect enough revenue to settle Eskom’s bills. Municipal payment levels have declined from 90% two years ago to below 85%, a worrying trend.
Despite these challenges, investors have remained mainly optimistic about Eskom’s future. In the latest quarter, funds such as State Street Liquidity, JPMorgan Investment Management, abrdn, and Thrivent Financial increased their holdings in Eskom’s 2028 bonds. This confidence has been reflected in the lower yield premiums investors demand for Eskom’s dollar-denominated debt, which are now at their lowest since the bonds were issued in 2018.
Franck Bekaert, an analyst at GimmeCredit, said Eskom is progressing toward a sustainable business model. “Although significant challenges remain, we believe Eskom is on track to meet its debt obligations,” he noted. However, Bekaert cautioned that Eskom’s long-term financial viability, without state support, hinges on implementing a “cost-reflective tariff path” in the coming years.
Eskom’s request for a 36% tariff increase for the 2026 financial year has sparked public outrage. Many have already struggled with a 600% increase in electricity costs since 2006. The government has expressed concern that such hikes could exacerbate energy inequality and is considering measures to keep prices in check. The National Energy Regulator of South Africa is expected to announce its decision on Eskom’s tariff increase application by the end of January.
As Eskom navigates these financial challenges, the company’s ability to resolve the municipal debt issue will be crucial in maintaining investor confidence and ensuring the long-term sustainability of its operations.