/ 6 December 1996

Eskom equity fears

The Minister of Public Enterprises is seeking direct control over Eskom’s equity, raising concerns of a backdoor attempt at nationalisation. Max Gebhardt reports

THE Ministry of Public Enterprises has set the ball in motion to bring Eskom under direct government control, despite admitting that such a move could raise doubts among foreign investors over the government’s commitment to privatisation.

Documents leaked to the Mail & Guardian reveal that Minister of Public Enterprises Stella Sigcau plans to amend the Eskom Act early next year to allow her ministry to gain direct control of Eskom’s equity.

In a memorandum prepared by the ministry for Cabinet, Sigcau, together with the ministries of Finance and Mineral and Energy Affairs, seeks to amend the Eskom Act in the second quarter of the 1997 parliamentary session to finalise the ownership issue.

She maintains that the ownership of the equity rests with the government, which is entitled to receive payments from Eskom out of the accumulated reserves.

According to the minister’s memorandum, the ministries of Public Enterprises and Finance are in agreement with “the minister’s [Sigcau] policy to convert Eskom into a limited liability company and [to remove] the tax exemption”.

The ownership of net equity, payment of dividends and taxation will be dealt with simultaneously through the incorporation of Eskom into a limited liability company, the memorandum states.

Eskom does not have share capital and as a result equity consists of accumulated reserves through retained earnings from the sale of electricity. At the 1995 financial year-end, Eskom’s accumulated reserves stood at R18-billion.

The present Eskom Act, according to Sigcau, is not clear as to what the state is entitled to in respect of this equity.

“It’s necessary [to change the Act] because as things stand at the moment, Eskom is not vested within the government. Therefore legislation is necessary to place the entity under government control and this should happen early next year,” Sigcau told the M&G.

Eskom’s equity, she said, will not go into government coffers; instead it will be left to act as a cover for Eskom’s international debt. According to Eskom’s annual report, its net interest-bearing debt stood at R27- billion at the 1995 financial year-end, of which R5,6-billion is foreign debt.

“There’s no backtracking on privatisation; this is part of the commercialisation of Eskom to make it more competitive,” says Sigcau.

The minister said this was not a move by government to nationalise Eskom, therefore foreign investors have nothing to fear.

“We can guarantee that in writing if necessary,” she adds.

However, her memorandum acknowledges that although there is nothing technically wrong with the plans to amend the Act, there are certain problems associated with such an approach.

“By emphasising ownership and taxation, the government could send the wrong signals about its transformation objectives for Eskom. This could be misunderstood by Eskom’s foreign lenders as a move towards nationalisation, which could potentially bring certain foreign loans into jeopardy,” the memorandum says.

This view is echoed in a letter to the minister from Eskom chairman Dr John Maree. He says that although the Eskom Act is silent on the issue of ownership of Eskom’s net equity, it could be argued that the state would be able to lay claim to its equity under the principle of “owner of last resort”.

But, Maree warns, any legislation to make this claim more transparent will in reality be viewed as nationalisation and would in all probability solicit negative responses not only from large consumers and stockholders in South Africa, but also from the international investor community.

“Investors could probably call in their loans if Eskom’s present position is fundamentally changed,” Maree writes.

Sigcau is also seeking to bring Eskom’s tax status into line with that of other state enterprises. The electricity generator is presently exempted from paying companies tax.

This amendment will be addressed by incorporating Eskom into a limited liability company in terms of the Companies Act, according to the minister’s memorandum.

But Sigcau says this is being done purely to introduce a proper system of corporate governance at Eskom. She says no decision has yet been taken as to what the dividends received will be used for – though in all likelihood funds will be channelled back into the industry and not the fiscus.

Eskom, she adds, would pay tax like any other company.

Adding to the confusion surrounding the interpretation of any amendments to the Eskom Act, a senior government insider says this move by the minister could be seen as the forerunner to selling off sections of Eskom next year to boost foreign confidence in the privatisation process.

But a representative for the ministry said any talk about the privatisation of Eskom was premature at this stage.

The prevailing sentiment, however, is one of concern at the direction the minister is taking. One industry insider who has been privy to the process believes there are serious worries at the difficulty the government will have in convincing overseas investors that this is not an attempt at nationalisation.

He said Eskom management is also concerned that by being forced to pay tax and dividends it could hamper its electrification projects and any added costs would have to be passed on to consumers in the form of higher tariffs.

“Eskom doesn’t want any of these changes; it is willing to go forward but only within specifically laid-down rules,” he adds.

Eskom had not responded to M&G’s questions at the time of going to press.