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Good news for Eskom: World Bank says South Africa will save it

Highlights

  • Lender encouraged by government support for power utility
  • Eskom secured $4 billion in World Bank loans in 2010

The risk of South Africa’s struggling state power utility going bust doesn’t appear to faze one of its biggest creditors: the World Bank.

The Washington-based lender agreed to lend Eskom Holdings SOC Ltd. $4 billion almost a decade ago to boost its generation capacity and avoid a repetition of rolling blackouts. Mismanagement and construction cost overruns have seen the state of the utility’s finances going from bad to worse since then, forcing the government to bail it out. Details of a 230-billion rand ($16.2 billion) rescue package are due to be unveiled soon.

“We are encouraged by efforts of the government of South Africa to support Eskom and assurances that it will not allow it to fail,” the World Bank said.

Under its Eskom Investment Support Project, the World Bank agreed to lend the utility $3.75 billion, including $3.1 billion to help it complete its new Medupi coal-fired plant, $260 million for wind and solar power projects and $485 million to develop a railway to transport coal and other projects. Eskom has drawn down 82% of that funding, and 21% of a separate $250 million loan to boost green energy production.

World Bank Help

Eskom has withdrawn most of the $4 billion of funds provided.

While construction of the 4,764-megawatt Medupi project is running years behind schedule and way over budget, the World Bank said it was “assured by Eskom’s commitment to complete the project,” and that it continued to work closely with the utility on its implementation.

S&P Global Ratings Director Ravi Bhatia has warned that rescuing Eskom will put the government’s already stretched finances under even further strain. Investors such as T. Rowe Price Group Inc. say they are approaching the utility’s turnaround period with caution and see this as a time to hold the utility’s debt rather than buy it.

Reviving South Africa’s lacklustre economy is contingent on the government keeping Eskom afloat and it will make the money available even if the budget deficit widens, according to Deputy Finance Minister David Masondo.

“If Eskom is in trouble the economy will significantly decline,” Masondo said in an interview on Monday.

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