Converting Eskom’s debt to equity is ‘lightbulb’ answer

THE proposal to convert debt owed by Eskom to shares in the hands of its creditors is the most plausible and sustainable idea to fix what is broken at the electricity supplier.

Converting the debt into equity would have the immediate effect of eliminating the high interest payments due to creditors and release government funds for more pressing social services, while ensuring an income stream for the fiscus.

Done correctly, it could be a catalyst and model for future state engagement in business.

This model could be replicated across the suite of state-owned companies, starting with SA Airways and Denel.

In the half-year to September 2017, Eskom paid R15.7-billion in interest to investors holding R540-billion of its bonds and other debt instruments.

It pays more than R40-billion in interest and finance costs to its lenders each year.

Eskom’s own projections show it will spend about R215-billion on interest payments in the years to 2022.

But the utility has since earned itself further credit downgrades, making the debt more expensive, and inflating the future interest payments to more than R250-billion by 2022. This is money due to commercial lenders such as Barclays Africa, Standard Bank, Citibank and JP-Morgan. Eskom also owes money to statecontrolled lenders such as the Development Bank of Southern Africa (DBSA) and the Government Employees Pension Fund (GEPF).

Ordinarily, these lenders would want to maintain their lucrative position, which guarantees an income stream above normal lending rates. There is not much gain to be had by converting their debt into equity. Eskom’s debt has been a cash cow for them over the years, and it places them at the head of the queue should the pawpaw really hit the fan.

But in the national interest, and for the sustainability of Eskom, most of the commercial lenders would accept a conversion to equity. This would significantly improve governance and make the utility more responsive to the society it is meant to serve.

It would also introduce commercially-minded owners to the entity, and the improvement in corporate governance would serve to eliminate corruption and theft.

Should the debt be converted to equity, this money would be available for further incomegenerating activities, and to pay dividends to investors and taxes to government.

The GEPF’s current exposure to Eskom, through the Public Investment Corp, is R95-billion, while the DBSA is owed at least R15-billion. This means easily 20% of the new equity would stay in government hands.

Back in 2015, Eskom issued 83 billion new shares, in exchange for a R23-billion cash injection and a R60-billion debt conversion to equity. Total equity today is R183-billion.

This, together with the shares owned by government, would ensure an overwhelming stake of about 85% would vest in government hands.

Obviously, for any conversion to be attractive to private-sector players, there would be no limitations on the trading of the stock. Which takes us to the next level of Eskom’s evolution towards sustainability: there would have to be a ready and efficient market on which to trade the stock. Welcome to the JSE and the New York Stock Exchange.

Now, if government is serious about providing a better life for all and delivering on the Freedom Charter’s promise of the people sharing in the country’s wealth and resources, what better way than to set aside a significant minority stake for the benefit of the youth and the poor?