(Adds details, background, analyst comment)
CAPE TOWN, Dec 4 (Reuters) - The World Bank has agreed in principle to lend South African power utility Eskom [ESCJ.UL] up to $5 billion for an expansion programme that is crucial for the mining sector, a senior IFC official said on Thursday.
However, the official at the World Bank’s private sector arm, the International Finance Corporation (IFC), did not expect a final deal within the next six months, as an agreement needed to be reached with the government about how to back the loan.
“An in-principle agreement has been reached,” Saleem Karimjee, IFC manager for southern Africa, told Reuters in an interview at Cape Town.
“Eskom will raise finances from the World Bank, and numbers to the extent of $5 billion over five years have been discussed, so that has been agreed in principle.”
State-owned Eskom, which provides 95 percent of the country’s power, has been rationing electricity since January, when the national grid nearly collapsed, forcing mines to temporarily shut down and costing Africa’s biggest economy millions of rand.
Chronic power shortages, caused by years of underinvestment coupled with surging demand, have unnerved foreign investors already anxious about fallout from the global crisis and a possible shift in economic policy after elections due next year.
Eskom plans to spend a total of about 343 billion rand ($33.34 billion) over five years on new power plants, but faces an uphill task given the global credit crunch and a Moody’s downgrade on its own rating.
Economists said securing $5 billion from the World Bank will send a signal South Africa can press ahead with its plan to spur growth through infrastructure investment despite tight credit markets.
The big foreign exchange injection might also be good news for the rand, which has been under pressure in part due to a big current account deficit, although some analysts noted much of the cash would leave the country to pay for equipment.
“Generally it means that South Africa is going ahead with its infrastructure expansion regardless of what happens in credit markets and regardless of interest rates,” said George Glynos, economic analyst at ETM.
Karimjee’s comments came a day after a treasury official told Reuters that Eskom, the government and the World Bank were in talks about the loan.
“The details of to what use will the funds be put, how will they be structured, this is only beginning now”, Karimjee said.
“We can’t really say the World Bank will help Eskom build this power station or that power station.”
He said the August downgrade to Eskom’s credit rating from A1 to Baa2 meant it may need the government to guarantee the utility’s borrowing.
“So, it becomes a three-way discussion with Treasury, which has not borrowed from any Bretton Woods institutions for a very long time. So in a way, a new relationship is being formed,” Karimjee said.
Eskom has already secured a $500 million 20-year loan from the African Development Bank (AfDB) and some 60 billion rand from the government, but is still far short of its funding target.
The utility has said it would raise further funds from capital markets, higher power tariffs or loans with development agencies such as the World bank and the AfDB. (Additional reporting by Stella Mapenzauswa; Writing by Rebecca Harrison; Editing by Andrew Macdonald)
Our Standards: The Thomson Reuters Trust Principles.