As Eskom pursues its back-breaking 60 percent tariff increase, analysts are exploring alternative financing methods.

Chris Gibbons:
As load shedding continues and Eskom pursues its 60 percent tariff increase, more and more people are considering alternative financing methods. One is Professor Chris Harmse, chief economist at Dynamic Wealth; he believes that Eskom should use the bond finance route. I spoke to Harmse earlier on today about the concept, how it would work and why it would be an attractive option.

Chris Harmse:
Because it is an option that has been used all over the world. Let's just see, at this stage, the current plan of funding will give a dilemma. We talk about an increased fee of 60 percent this year, increase of 40 percent next year and maybe another 40 percent the year after that. The effects we all know will be devastating, we are just calculating our model you know, that inflation for a 60 percent increase will definitely go up by about 2.5 percent. We know that interest rates will go up, economic growth seems to us will come down immediately by about 0.5 percent up to 1.6 percent in the next four to five years. Company profits definitely are going to suffer from this. The big danger given the current account deficit that it can lead to portfolio outflows, the exchange rate will depreciate and it's a vicious circle. So it seems that we cannot go down that line. The alternative is where government has to do its part as a normal fiscal way in solving the problem because if government start to issue what we call electricity bonds, we've had it previous years and it's not only in South Africa, at this stage we checked this morning it has been used as long-term funding for the long-term benefit of the country and it is a well-known principle right over the world.

The US municipalities are offering electricity bonds and countries like Thailand and all the Asian developing countries use that as a way of building their infrastructure and it is well known in Europe. Of course we know it will increase government expenditure and the government at this stage would like to have a surplus on their budget and not the deficit. We argue that there are some room in government finance to do this thing properly. At this stage we know there is a surplus but we also know that government can go to a deficit of about three percent of the GDP without losing international credibility because the purpose of the deficit is capital expenditure which is also healthy economic policy. The bonds may be long-term bonds maybe 10 year bonds with a normal coupon value just like the R157 of let's say 11 percent and it can also be issued domestically as well as internationally. We have done our calculations this morning, foreign debt as percentage of the GDP is 23 percent, it is from the lowest of all the emerging economies, we can pick it up to 40 percent without losing credibility and we think this should be the way to go. Of course together with this government has to announce some or other saving increase in policy to counteract the effect that it may have on the balance of payments but we know that Trevor Manuel already last week spoke about that. We have done our calculations again; if government increased its expenditure by issuing the bonds because you have to pay interest on this and if he increases his expenditure away from the current surplus of about one percent to a deficit of around two percent, not even three percent they can spend an extra R60-billion's only in this book year towards the facility. So we really think that is the way to go. The government has a responsibility, we know it was a lack of infrastructure expenditure in the past but we still believe that that is the way to go.

Chris Gibbons:
Now, would this be simply to fund the capital expenditure side of the equation but what about the under recovery on running costs and I ask that because surely we need to match the type of financing, the type of debt, with the type of cost, short term with short-term and long-term with long-term.

Chris Harmse:
Yes of course, but you know the short-term running cost of Eskom, it is a way that Eskom will have to deal with so they can also look at that type of cost around that is not necessary that one has to issue bonds for that but I think the bulk of it, and this is what Eskom has asked, Eskom argued that the 60 percent increase is for their infrastructure development and we argue by issuing the bonds at least one can back that side of the story.

Chris Gibbons:
The voice there of Professor Chris Harmse, chief economist at Dynamic Wealth.


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