Recapitalisation a key issue to ending Eskom’s woes

Private-sector commentators have previously called for the sale of a portion of Eskom, or the introduction of suitable external shareholders. (Madelene Cronje, M&G)

Private-sector commentators have previously called for the sale of a portion of Eskom, or the introduction of suitable external shareholders. (Madelene Cronje, M&G)

A broad package of solutions will probably be needed to boost the country’s power utility, according to Eskom’s senior general manager, Caroline Henry.

She said talks with the government about a long-term, sustainable solution to shore up Eskom’s balance sheet were wide ranging and not limited to a cash injection.

Henry was speaking after Eskom’s financial director Tsholofelo Molefe was quoted last week in Business Day as saying the embattled company needed a R50-billion crutch from the government to stave off cash flow difficulties.

She was adamant that Eskom’s cash flow is stable, which is in line with a media statement issued by Eskom last week saying it has sufficient liquid assets to meet its needs.

Henry said that “recapitalising Eskom in some manner or form” is at issue.

She said the government could allow Eskom to pursue other avenues that would “give us equity on the balance sheet”, such as bringing partners into the business or allowing the company to issue preference shares.

Sale of a portion
Private-sector commentators have previously called for the sale of a portion of Eskom, or the introduction of suitable external shareholders, other than the government, to refinance the company or introduce greater operational efficiency.

The national treasury did not appear to rule out this option this week, saying: “The proceeds from the sale of a portion of Eskom’s existing assets would generate proceeds that could be retained by the company to strengthen its balance sheet. Strategic partners in specific projects could also bring technical expertise to enhance the operation and management of these assets.”

But treasury reiterated “government has no scope to give Eskom cash” because of its expenditure ceiling. The National Energy Regulator of South Africa’s (Nersa) tariff decision of 8% last year left Eskom with a R225-billion funding gap over the five-year multiyear price determination (MYPD) period.

This is compounded by a R40-billion gap from disappointing electricity sales and the running of expensive peaking power plants to keep the lights on.
Eskom said in its interim results that the costs to run these plants increased by 231%.

Anton Eberhard, a professor at the University of Cape Town’s graduate school of business, said that at the heart of Eskom’s woes is its new-build programme.

“Nersa’s tariff cut certainly took Eskom out of its comfort zone. If Eskom was not in the middle of a large [capital expenditure] and debt-servicing phase, it could probably have managed the next few years,” he said.

“But now its balance sheet is stressed and Medupi is hugely over-budget and more than three years late. Interest during construction is escalating and Medupi is not yet earning revenue.”

Other issues
He said there are other issues such as the deteriorating performance of Eskom’s existing coal fleet, its inability to supply new demand and generate revenue, and its reliance on expensive peaking plants because it had not built enough new generation capacity in time.

Eberhard is against the state borrowing more to aid Eskom, saying the state has more pressing needs and its own fiscal and debt stresses.

“Eskom should be able to finance its needs through tariffs plus debt,” he said.

Although annual adjustments will be made to the regulatory clearing account (RCA) to deal with unexpected but prudent expenditure, this will not be enough, he said. The RCA allows for the recovery of funds prudently incurred during an MYPD period.

He said: “In the end consumers will pay because they don’t have a choice of alternative suppliers. If there was competition in electricity supply and there were more private generators, then private investors would bear the cost of overruns, not consumers.”

Eskom denied that it is looking to reopen the most recent tariff application to request an increase.

Current cost overruns on its peaking plant would be recovered through the MYPD3 RCA process, it said.

Eskom has borrowed only R122-billion against the government’s R350-billion in guarantees.

Potentially increasing these guarantees has been touted as a way to further support Eskom.

But, Henry said, although useful, the guarantees have to be treated as a safety net, because they have an impact on cash flow when these loans eventually have to be paid back.

Eskom has been finding many ways to manage the shortfall in its revenues, including through internal efficiencies, deferrals and a cessation of activities, but this will not reduce its commitments to the new-build programme, Henry said.

Eskom said the current focus is on improving its balance sheet to ensure that it maintains an investment-grade credit rating.

Adrian Saville, the chief investment officer of Cannon Asset Managers, said the government has the space to assist Eskom.

Until Medupi and Kusile come on line, economic growth will “remain hamstrung”.

Cannon has estimated that bringing the two power stations on line could add 1% growth to the economy.

The department of public enterprises did not respond to requests for comment.

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