How do you solve a problem like Eskom?
What does it mean when President Cyril Ramaphosa talks about a new funding model for state-owned enterprises (SOEs), as he did in his state of the nation address?
And what does it mean when Eskom talks about converting debt into equity, as CEO Phakamani Hadebe has been doing?
There’s no question something radical has to be done to stop the constant drain on SA’s public finances that these enterprises have been over the past decade or more.
The IMF has calculated that “transfers”, in other words bailouts, to SOEs have averaged 0.8% of GDP annually in the past eight years and cumulated losses have averaged 0.4% of GDP over the period.
And apart from the cash that the government has had to transfer to rescue ailing enterprises is the much larger and ever more high-risk issue of the guarantees the state has made available to them, which now represent well over 18% of GDP and have come close in recent months to being called, both by South African Airways (SAA) and by Eskom.
But Eskom dwarfs the others. Over the past dozen years the government has had to inject hundreds of millions of rand, or even in some cases a few billion, in entities such as Broadband Infraco, SAA, the South African National Roads Agency and South African Post Office. But of a total of more than R100bn of equity injections over the past decade Eskom accounts for R80bn. It also accounts for by far the bulk of the guarantees.
And these have been at fairly serious risk of being called in recently because of Eskom’s liquidity crisis, in a context in which bankers would no longer lend to it and it had lost access to the market, particularly the unsecured credit market for the short-term commercial paper that it had relied on for working capital. Eskom’s credible new board has made it possible to change all that and there are all sorts of behind-the-scenes talks going on, but its debt to equity ratio is still way over the level that would make private sector lenders comfortable to lend to it, hence the pressure to restructure the balance sheet by turning debt into equity.
In theory, that’s privatisation by stealth. Converting loans to equity would make the bond holders and other lenders to Eskom into shareholders of one sort or another, and bankers are trying to come up with ways to do this. In practice, however, it’s really mainly the Eskom debt held by the Public Investment Corporation (PIC) and Development Bank of Southern Africa that seems to be on the table. The PIC holds R95bn in Eskom debt, which is why it stepped in recently with a controversial R5bn in shortterm liquidity assistance to protect its investment. The development bank holds a further R15bn.
Figures being bandied about in the market are that as much as R100bn of debt could be converted to equity. That could potentially give these entities an equity stake of as much as 25% to 30% in Eskom. That equity could be in the form of preference shares on which Eskom might start paying interest or dividends once it has the income to do so, but in essence swapping debt for equity would mean it no longer had to foot the interest bill.
At an average cost of debt of about 10%, that would relieve Eskom of about R10bn a year in interest payments, which is not that meaningful given that Eskom’s monthly interest bill is now R2bn to R6bn.
Crucially, though, the conversion would make Eskom’s balance sheet palatable to the markets, unlocking access to the liquidity it needs.
For PIC beneficiaries, who are members and pensioners in the Government Employees Pension Fund (GEPF), this is all very bad news, which is why the public sector unions are rightly protesting and demanding to be consulted. It may be justifiable in the national interest, but they lose the returns they were earning on that Eskom debt. Ultimately, if that means the GEPF is underfunded, taxpayers would have to fill the gap.
The more fundamental issue, however, is that the balance sheet restructuring is no more than an expensive short-term fix. It’s no good fixing the funding model unless Eskom also fixes its business model. That means taking a scalpel to its cost base, to tailor it to a changing energy environment in which sales and revenues will be lower, even once the economy picks up.
The National Energy Regulator’s reasons for its 5.2% tariff decision, which should be out soon, will give a flavour of where the regulator believes Eskom must cut costs, whether by closing power stations or delaying capital spending to cut costs in the longer term, even if this means paying penalties in the short term. If breaking up Eskom somehow is an option, that too should be probed.
The same applies to other financially fragile SOEs. Fixing their operations and finding them viable business models is the issue that underlies whatever funding issues they have. If they are not viable, the IMF’s recommendation is they should be liquidated.
But a more fundamental issue that Ramaphosa’s new team might want to think about is the extent to which some of what these enterprises are required to do and to subsidise should be on the government’s own income statement, the national budget, not on their own income statements and balance sheets. If they must undertake unprofitable activities in the national interest, that should be the product of proper, transparent, policy processes and it must be clear who’s paying.
ESKOM’S DEBT TO EQUITY RATIO IS STILL WAY OVER THE LEVEL THAT WOULD MAKE PRIVATE SECTOR LENDERS COMFORTABLE TO LEND TO IT