As the government’s plans to increase investment in electricity generation and transport infrastructure dramatically begin to take shape, a monumental capital-raising challenge is developing.
And it is becoming clear that the fiscus will have to make a substantial contribution — something Minister of Finance Trevor Manuel has so far only hinted at.
The programme announced by Minister of Public Enterprises Alec Erwin on Wednesday requires funding of R165-billion over the next five years, and figures for a second round of proposals, dealing with Transnet, South African Airways, Denel and the pebble bed modular reactor, are still to come.
Transnet requires the most radical surgery. Its R72,7-billion in assets are already encumbered by R63,6-billion in debt and poor operational performance in some key divisions. It needs to spend R37-billion to reverse its capital expenditure backlog and bring rail and port infrastructure up to date. R21-billion in “growth leading” investments to build truly sophisticated infrastructure are expected to follow once the basic rescue plan takes effect.
According to Erwin, the first phase will be financed “with the balance sheet as it now stands, with some adjustments”. What this means, according to the Department of Public Enterprises, is that the majority of the money, at least R29-billion, or R6-billion a year, will come from cash flow in the rail, port, and pipeline businesses.
“When we talk about the balance sheet we mean the core operations,” the department’s Edwin Ritchkin explains: “The National Ports Authority is decreasing its tariffs, and Spoornet, Petronet, and Port Operations won’t increase prices faster than inflation. Based on those assumptions we think they can generate free cash flow of R29-billion to R34-billion over five years.”
Given that the Transnet group generated cash of R3,1-billion from operations last year, this means “non-core” operations have been draining about two-thirds of the company’s cash. SAA is the obvious culprit, but Ritchkin stresses that other companies in the group are just as cash-hungry. The government, he concedes, will have to find funding to restructure and dispose of these companies, which have significant accumulated debt and massive outstanding liabilities.
“Our vision is to create a really, really enhanced logistics system and to get management focus on that, we’ve separated out the non-core assets,” Ritchkin says.
Eskom has a slightly simpler path. It is expected to provide 70% of the new power generation capacity and will have to raise R84-billion, an amount equivalent to nearly 90% of its existing asset base. Private companies, probably multinationals, will be asked to bid for the remaining 30% of capacity, and to invest R23-billion.
Eskom has a strong balance sheet, and has sharply raised investment spending in recent years. Nevertheless, an increase from last year’s R6-billion to R16-billion a year for five years will require bond markets to maintain a healthy appetite. It will also require the government to pick up some of the tab.
“We are aware of the risk of over-burdening the bond market. The last thing we want to do is push interest rates even higher. We will announce our more detailed plans at the end of the year, or early next year,” Ritchkin says.
Manuel has said recently that a balance needs to be found between social spending and growth enhancing investment. Next week’s Medium Term Budget Policy Statement will be closely watched for further clues.