Eskom has a problem, a R20-billion problem
Floundering power utility Eskom says its situation is dire and it needs R20-billion to keep the lights on until March.
Eskom has a funding plan which requires about R20-billion until March from various sources, deputy Eskom spokesperson Dikatso Mothae told the Mail & Guardian.
Its financial distress has risen in recent weeks since the National Energy Regulator of South Africa (Nersa) turned down a request for a 19.9% tariff hike and granted it only 5.23%. It is also having difficulty raising more money elsewhere.
“Funding in local and foreign markets has been difficult due to concerns of governance,” Mothae said.
These concerns arise from the failure of Public Enterprises Minister Lynne Brown to appoint a new board, which bond investors deem necessary. Brown made two appointments to the board in December and has promised four more but, by Eskom’s own admission, the current board does not address the governance issues.
Meanwhile, two executives tainted by corruption scandals, Matshela Koko and Prish Govender, returned to work in the past two weeks after they were cleared during internal hearings that critics claim were a sham.
Koko faced six charges related to an alleged failure to declare a conflict of interest in Eskom’s dealings with Impulse International, a company in which his stepdaughter, Koketso Choma, was a director and shareholder.
The company was awarded Eskom contracts worth nearly R1-billion.
Govender was accused of paying R500-million to Gupta-linked company Tegeta Management Consultants without a contract or evidence of work done.
But Mothae said Eskom was confident a funding plan could still be implemented with the co-operation of key participants.
“We also have government support and we are utilising that in terms of the balance of the government guarantees,” she said.
But, even with government guarantees, it is not clear whether bond investors are prepared to fund Eskom because of its compromised minister, board and key executives.
This means Eskom might have to approach Finance Minister Malusi Gigaba for the R20-billion — just to get it to March. Eskom spokesperson Khulu Phasiwe told the SABC this week that the situation was “dire”.
Gigaba is already facing a R50-billion fiscal hole from 2017-2018 because of an underperforming economy and rapacious state enterprises, most notably SAA.
He is also having to find a mooted R12-billion to fulfil President Jacob Zuma’s free university education promise, which he made at the ANC’s elective conference in December.
Treasury spokesperson Mayihlome Tshwete declined to comment and referred all inquiries to public enterprises, whose spokesperson, Colin Cruywagen, said the department was in discussions about the utility’s liquidity with the treasury and Eskom.
“In light of Nersa’s tariff increase, it’s clear that Eskom needs to relook [at] the business to further reduce costs and increase revenue,” he said.
He added that Brown had instructed the board to expedite this and address all the governance issues to unlock access to the debt markets.
Business Leadership South Africa (BLSA) told Brown the decision to reinstate the two executives showed her “poor grasp” of the governance crisis and of the utility’s potential threat to the economy.
“BLSA has learned with great shock and utter dismay that Minister Lynne Brown had approved the decision to appoint Matshela Koko and Prish Govender. This decision is similar to the illegal reappointment of Brian Molefe as CEO [chief executive officer].
“As well as retaining Zethembe Khoza as chairman of the board of Eskom, by returning both Koko and Govender, Brown has failed to meet the country’s as well as Eskom’s investors’ and regulators’ expectations of high governance standards, and undermines the two new members of the board she appointed last month,” it said.
The National Union of Metalworkers of South Africa (Numsa) described the board’s decision to reinstate the two executives as “showing the middle finger” to the people.
“It seems the disciplinary process was a mockery and an insult to all those who believe in good corporate governance and transparency in the running of state-owned enterprises,” the union’s Irvin Jim said.
Koko’s lawyers have since sent letters to Numsa and BLSA warning them against disparaging a disciplinary process that they say was “conducted properly and in compliance with the rule of law as well as Eskom’s internal processes and procedures”.
According to Nedbank’s Dennis Dykes, Eskom needs to appoint a completely new board to indicate to investors that it is committed to a turnaround.
“If you retain most of the board, it’s difficult to imagine that they are going to do anything differently. It’s almost like a vote of confidence for what they have been doing, which is clearly not what investors are thinking,” he said.
Energy analyst Chris Yelland said Eskom, in general, had a liquidity target of R20-billion at all times to pay for basic day-to-day operations. This would be cash in hand or equivalents it could convert into cash at short notice.
Yelland said Eskom could pursue four sources of capital.
The first would be to raise money in the capital markets. But the parastatal itself has acknowledged that the perception of poor governance has make this difficult.
The second option would have been increased revenue from its customers but the tariff increase granted by Nersa was much lower than what Eskom requested.
The third would be for the parastatal to tighten its belt and cut costs, such as slowing down its build programme, which was intended to supply new power by 2014, Yelland said.
The final option was a capital injection from Eskom’s shareholder, the government.
“[But] they have made it clear that they don’t have the money.”
Yelland said, if Eskom failed, the government would have no choice but to intervene.
“Eskom is too important to the economy to be allowed to fail. If Eskom fails, the whole country fails, and government cannot allow that.”
That would leave the government with options such as restructuring the utility, selling off some of its assets or making the political decision to allow other shareholders into the business.
“Any other shareholders would be seen as the partial privatisation of Eskom. But the shareholders could, for example, very well be the Public Investment Corporation and even the Industrial Development Corporation.”
Adding to the uncertainty is the board’s decision to postpone the release of Eskom’s interim financial results, which were supposed to be released in December, to an unspecified date early this year. It said they were being delayed so the utility could assess the effect of the lower-than-expected tariff increase and to allow newly appointed board members an opportunity to review the financials.
Elena Ilkova, a Rand Merchant Bank credit analyst, said this date was of greater importance to the local bond market than anything else.
“Without the financial results, it is very difficult for lenders to consider providing additional funding to any borrower. This is why the release of financials is usually well scheduled and known in advance so investors can keep adequate attention to the developments in the underlying business,” Ilkova said.
Mothae said the intention is to release the results before the end of January. Given concerns about the utility’s liquidity, she said salaries would be funded from the normal cash flow and “[Eskom] will be able to cover salary requirements going forward from our operations”.
Tebogo Tshwane is an Adamela Trust trainee financial reporter at the Mail & Guardian
This article has been amended to correct errors introduced during the production process. The original version wrongly attributed the following statement to Eskom’s deputy spokesperson Dikatso Mothae: “Floundering power utility Eskom says the situation is dire and it needs R20-billion to keep the lights on until March”. The M&G apologises unreservedly for this error.