Alec’s bolt-hole

Finweek English Edition - - Nothingsacred - Er­win’s tax by stealth to pro­vide Eskom with a R60bn loan rather than as eq­uity

IF IT WERE NOT SO costly and so dam­ag­ing, the awe­some in­com­pe­tence of the De­part­ment of Pub­lic En­ter­prises (DPE) and its Min­is­ter, Alec – he of the sab­o­tag­ing bolt and “hu­man in­stru­men­tral­ity” – Er­win would be hi­lar­i­ously funny. Er­win ap­pears to be­lieve he’s the rein­car­na­tion of Harry Op­pen­heimer, parad­ing around as a vi­sion­ary busi­ness leader while his charges, such as Eskom and SA Air­ways, swal­low up bil­lions af­ter bil­lions of our tax­pay­ers’ hard­earned money.

He punts the old com­mu­nist line that it’s the State that’s best able to lead growth, which harks back to this drivel recorded in Fred­erik van Zyl Slab­bert’s book The Other Side of His­tory from a 1989 com­ment by Er­win: “You fat cats have had your chance. When we take over there will be no private prop­erty, in­dus­try will be fully na­tion­alised and the state will be the only in­stru­ment of eco­nomic de­vel­op­ment.”

Talk about fat cats? He’s cre­ated more fat cats than any Gov­ern­ment min­is­ter in the his­tory of the na­tion. Take, for ex­am­ple, de­parted Eskom CEO Thu­lani Gcabashe, who meekly ac­qui­esced to Gov­ern­ment’s view that Eskom didn’t need to em­bark on a sub­stan­tial ex­pan­sion of ca­pac­ity against the clear and un­equiv­o­cal ad­vice of Eskom’s own plan­ners.

For that pusil­la­nim­ity Gcabashe earned R13m in 2005 as we hur­tled to­wards na­tional black­outs, soar­ing elec­tric­ity costs, huge bor­row­ings and fur­ther im­posts on the mid­dle classes to sub­sidise the poor, which is noth­ing but tax by stealth. In defence of mul­ti­mil­lion rand pack­ages for ex­ec­u­tives at pub­lic cor­po­ra­tions – in­clud­ing fat bonuses for abysmal per­for­mance – Er­win prat­tles on about those all be­ing “mar­ket-re­lated”. What­ever his tal­ents might be, and I fail to see any, they don’t ex­tend to the abil­ity to op­er­ate in and make judge­ments in the mar­ket.

For ex­am­ple, a study of the ca­reer of Gcabashe will sug­gest he was in no way qual­i­fied to run an en­ter­prise of the size and com­plex­ity of Eskom. He isn’t worth even 10% of what he was paid to lead a util­ity once re­spected world­wide for its com­pe­tence. I should have been lucky enough to have had Er­win as a boss. Good heav­ens, I ac­tu­ally made prof­its.

An as­pect of cor­po­rate gov­er­nance with which Er­win ap­pears not to be familiar is the pol­icy that ex­ec­u­tives of a com­pany are rarely per­mit­ted to hold di­rec­tor­ships in un­re­lated en­ti­ties. As a CEO I sat on boards such as MNet and Ra­dio 702 as a rep­re­sen­ta­tive of the com­pany. Any di­rec­tor’s fees went to my em­ployer, not to me.

For ex­am­ple, when MNet was floated non-ex­ec­u­tive direc­tors were given 100 000 shares each which, in my case, I handed over to the com­pany pen­sion scheme on the prin­ci­ple that were I not the CEO of a com­pany own­ing shares in MNet, I wouldn’t have been on its board.

It was there­fore en­cour­ag­ing to learn that Khaya Ngqula, CEO of SA Air­ways, an­other over­paid cadre, ap­pears to have scaled back his out­side in­ter­ests, serv­ing now as a nonex­ec­u­tive di­rec­tor of only two op­er­at­ing com­pa­nies: the large, black-owned World­wide African In­vest­ment Hold­ings and Party De­sign, an events de­sign and decor com­pany. There were re­ports that he sat on up to 38 dif­fer­ent boards, which made you won­der when he could at­tend to the trou­bled af­fairs of SAA, a large part of which con­sists of plead­ing for more bil­lions from the saga­cious, shrewd, bril­liant and far-sighted Er­win.

Which brings us to the is­sue of the re­cent down­grad­ing of Eskom by Moody’s, the rat­ing agency. That comes at an in­op­por­tune mo­ment for Eskom, strug­gling un­der the bur­dens cre­ated by the ab­surd re­fusal of the Mbeki ad­min­is­tra­tion to heed the ad­vice of Eskom’s plan­ners, who pre­sciently ad­vised a decade ago that ca­pac­ity was run­ning out.

Stung by the prospect of hun­dreds of mil­lions in ad­di­tional in­ter­est costs, Eskom is now court­ing the World Bank, the African De­vel­op­ment Bank and ex­port credit agen­cies for af­ford­able debt with which to fi­nance some R340bn of ex­pan­sion.

Per­haps its down-rat­ing – which was quite se­vere and con­tained a warn­ing that the bot­tom might not have been reached – might have been avoided if Gov­ern­ment had ear­lier in­di­cated it would back Eskom’s bor­row­ings and, per­haps more im­por­tantly, be­cause it’s al­ways backed those bonds, it had said it would pro­vide our R60bn to Eskom as eq­uity rather than as loans.

One em­ploys the word “ours” ad­vis­edly. We, the tax­pay­ers, own Eskom and we’re thus its only share­hold­ers. How­ever, Eskom must re­coup its costs from our rates: so the more it has to re­pay to the State, the higher its rates are go­ing to be. It was the State that screwed this is­sue up. Now the State wants us to pay not only swinge­ing in­creases in rates, but fur­ther in­creases brought about by the costs of the bur­den of R60bn in new debt that could just as well have been in­jected into Eskom as eq­uity.

Again, it’s no more than tax by stealth and the Gov­ern­ment should be ashamed of it­self for re­sort­ing to such sub­terfuge, par­tic­u­larly as it was, by its own ad­mis­sion, its own in­com­pe­tence and neg­li­gence that led to the Eskom cri­sis in the first place.

It wasn’t pos­si­ble to ob­tain com­ment from Moody’s on how it might have viewed Eskom had Gov­ern­ment pro­vided its fund­ing by way of eq­uity rather than debt. But sim­ple in­vest­ment the­ory would sug­gest that any com­mer­cial en­tity would be able to show bet­ter ra­tios and have a bet­ter per­for­mance out­look if it were fi­nanced by per­ma­nent cap­i­tal rather than by debt – which has to be ser­viced and re­paid.

Quite sim­ple, re­ally, Alec. As are you.

STEPHEN MUL­HOL­LAND stephenm@fin­week.co.za

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