Eskom considers selling assets as it faces battle to shed unsustainable debt

● Hard calls and tough decisions lie ahead for the new Eskom board’s members, who have to find a solution to the crippling debt that is threatening the sustainability of the state-owned power utility.

Jabu Mabuza, the newly elected Eskom board chairman, said on Thursday it was still too early to say which assets the group would sell and to whom because there were still a number of options Eskom was looking at to help it get rid of its unsustainable debt burden.

“It would be wrong for me to say, yes, we will sell this asset [there] or bring in somebody here. We need to say, are there funders who are prepared to come into projects, which is what is currently happening,” Mabuza said.

At its 2017 interim result presentation on Tuesday Eskom announced that the business had reached a debt of R367-billion and that in order to reduce it, it was looking at the option of converting debt to equity for its lenders.

However, economist at Pan-African Investments Iraj Abedian said although converting debt to equity was a way out for the business, it all depended on the willingness of the lenders.

The prospect of converting debt to equity would only be feasible if Eskom’s proposals were compelling enough for its debt holders to buy into it, he added.

Mabuza said “some of the debt may be project-specific” while other debt may be for the group as a whole.

In reference to converting debt to equity in specific projects, Abedian said at the Medupi and Kusile projects, for example, the Public Investment Corporation’s R95-billion exposure to Eskom was out of line with the original cost estimates.

Initially Medupi and Kusile were going to cost Eskom R60-billion and R70-billion respectively, but due to the cost escalation in the building of the two power stations as a result of corruption and construction delays, a lender will project costs using the market price — not Eskom’s cost escalation — which means converting debt to equity will be a complex process and the PIC could end up having a full shareholding in either of the projects.

The book value of Medupi and Kusile is two times more than its initial costs. Medupi and Kusile power plants were commissioned in 2007 and 2008 respectively. Medupi has now cost between R120-billion and R135billion and Kusile has cost between R140billion and R160-billion.

“This means never mind privatisation, it will need a different term. So these are the issues,” Abedian said.

Mabuza said institutions that had Eskom debt varied, and therefore converting debt to equity would be different for each.

The Development Bank of Southern Africa holds R15-billion of Eskom’s debt.

The balance is held by the Industrial Development Corporation and banks such as Barclays Africa, JP Morgan and Standard Bank.

The utility was engaging with about 12 lenders, Mabuza said.

Roger Lilley, an energy analyst at EE Publishers, said Eskom could be turned around and run as a successful business, but making the decision to convert debt into equity would give the lenders stakes either in the entire group or in certain projects and the only person who could make such a decision was the public enterprises minister.

“Mabuza will have an uphill challenge because cutting costs is never easy or comfortable. I do hope that it will happen but I also think some political changes also need to happen so that there is less interference and that the utility is allowed to do what it needs to do,” Lilley said.

The difference between Eskom and Telkom, he said, was that the government had announced that it wanted to shed some of its shareholding in Telkom whereas it had not indicated the same intentions for Eskom.

“Therefore, how long it takes to find a solution depends on the willingness and cooperation they get from their shareholders,” Lilley said.

Eskom has in the last decade depended heavily on the National Energy Regulator of South Africa’s (Nersa’s) tariff increases and the government’s bailouts.

However, Mabuza and new acting CEO Phakamani Hadebe said they will be putting a stop to Eskom’s reliance on borrowing and on Nersa.

For the 2018-19 financial year Nersa increased Eskom’s tariff to 5.5% after its last request for a 19.9% increase.

Mabuza and Hadebe have been called in to Eskom to do three things — find a solution to its liquidity issues, deal with its governance issues and restore investor confidence in the business.

They have already started to deal with the utility’s governance issues and to engage with lenders and will now turn to the company’s liquidity problems.

We need to say, are there funders who are prepared to come into projects, which is what is currently happening Jabu Mabuza Eskom board chairman