Excellent board to steer Eskom from disaster
MCKINSEY HAS BEEN TRYING TO PAY BACK THE MONEY … BUT CAN’T GET ANYONE IN ESKOM TO .… DO THE PAPERWORK
It takes some reckoning to see how close Eskom has pushed the entire government to the brink of financial collapse. This is no piddling South African Airways (SAA) or SABC.
The Eskom balance sheet is 33 times the size of both of those parastatals combined. Eskom imploding would be similar to 42 SAAs or 146 SABCs collapsing simultaneously.
In March 2017, Eskom owed lenders R355.4bn. Of that, R254bn is guaranteed by central government. Such numbers on their own are meaningless. But consider that the public-sector borrowing requirement for the past financial year was also R254bn and it becomes clear that a call on the Eskom guarantees would double the budget deficit. That would push the borrowing requirement from 5.8% of GDP to 11.6%. That could be raised only by massively increasing interest rates. The economic fallout would be catastrophic and rapid.
Eskom has to meet coupon payments on several of its issued bonds at the end of this week. By my calculations, it is due to pay about R850m and will have another sizeable amount to pay in February. It has no way of meeting that. It has to spend more than R2.7bn every month on employee benefits and reportedly struggled to meet those in December. And it has massive obligations to meet for its capital expenditure programme, all while operating cash flows are negative.
The bond market has been closed to Eskom. No lender will take it seriously. It had budgeted to raise R71.7bn in the current financial year, R22.5bn from the bond and money markets. It hasn’t been able to do that.
In the past few weeks, Eskom was attempting to raise $1bn in international markets but has so far failed. Short-term facilities have dried up too — no bank wants to touch Eskom, both for fear of being accused of facilitating corruption and because of the credit risk. It hasn’t been able to get shortterm cash from the banking system since September. Instead, banks are demanding that short-term facilities be repaid.
That’s no surprise when Eskom hasn’t been able to produce its financial report for the six months ended September. While nothing has been said officially, it seems that Eskom is in a stand-off with its auditors, which are refusing to declare it a going concern unless the government steps up with a serious financial injection.
Because Eskom could not produce the financials in the required three months, the JSE has warned it may suspend its listed bonds at the end of January. That may trigger instant redemption clauses, depending on the details of covenants attached to the bonds.
And Eskom has not bothered to collect the one pot of cash it could easily obtain: R1bn that McKinsey has said it will pay back to the utility in fees it collected through dubious work in 2016. McKinsey has been trying to pay back the money for two months but can’t get anyone in Eskom to arrange the paperwork to do it. The consulting firm has ring-fenced the amount and could transfer it in an instant. It looks, however, as if Eskom has been resistant because if it accepts that it should be paid back the R1bn, it would follow logically that Trillian, which worked alongside McKinsey, should also pay back the R600m it owes.
Trillian is a Gupta front, and Eskom still seems loath to move on that money. It suspended Suzanne Daniels, Eskom’s head of legal and compliance, when she wrote to McKinsey and Trillian demanding repayment.
But a new dawn broke this past weekend. The chairman was fired and a new board put in place. It is genuinely excellent under chairman Jabu Mabuza, who chaired Telkom during its dramatic turnaround. The rest of the board is also very strong. To name just four members: former MTN CEO Sifiso Dabengwa, electrical engineer and former Department of Energy director-general Nelisiwe Magubane, Imperial CEO Mark Lamberti and energy policy guru Rod Crompton.
Acting CEO Phakamani Hadebe was an outstanding CEO of the Land Bank, which he turned around in dramatic fashion, including tackling deep systemic corruption, after being seconded by the Treasury. He went on to Absa, where he was widely expected to become head of the corporate and investment bank but was passed over in 2017.
He and the board have been instructed to appoint a full-time CEO and chief financial officer within the next three months and to suspend everyone involved in corruption.
Before the Land Bank, Hadebe was head of asset and liability management at the Treasury, so he will know just what has to be done to get Eskom back on its feet to enter the capital markets once again.
The new board is the best possible step that could be taken to saving Eskom, and the government with it, from further disaster. I hope it signals the approach of the Ramaphosa era: characterised by the appointment of highly competent and independent-minded leaders for all our institutions to enable SA to deliver on its potential.