South Africa's Eskom to look at Islamic bonds as funding source

JOHANNESBURG: South African power utility Eskom will look at new funding opportunities such as Islamic bonds to finance its capacity expansion projects as it battles to keep the lights on in Africa's biggest economy, the company said on Wednesday.

A lower than hoped for rise in power rates has left state-owned Eskom with an expected revenue gap of 225 billion rand ($22 billion) over the next five years.

The utility had applied for a 16 percent hike in power rates over the next five years, which translated into revenue of 1 trillion rand over the period, but was granted an 8 percent annual hike.

"There is no doubt that the associated decrease in projected revenues will materially affect operations, including ability to obtain funding for future capacity expansion," Eskom said in a report for its financial year that ended in March.

It said funding for the next 12 to 18 months would be sourced from issuance of domestic and international bonds, export credit agency-backed financing, development finance

institutions and the domestic commercial paper market.

"New opportunities from alternative funding sources and products such as Islamic funding (sukuk), preference share-type funding and project-based funding will also be explored," the company said.

Eskom also said it expects continued demand for inflation-linked paper to support its funding model as investors look to hedge against inflation at the upper end of the Reserve Bank's 3-6 percent target.

Eskom currently needs 300 billion rand for capacity expansion and it said nearly 83 percent of this had been secured.

The utility, which provides 95 percent of the power to Africa's biggest economy, has been walking a tightrope for five years as it tries to bring long-overdue power plants online after the grid came close to collapse in 2008.

But the utility said on Monday the first power from its new Medupi plant would only hit the grid in the second half of next year, a delay of at least six months caused by labour unrest and "underperformance" by contractors.