What can be sold to prop up Eskom?

2014-09-21 15:01

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Economists say state might dispose of its key assets to ease utility’s massive funding gap

Telkom, Broadband Infraco, Alexkor and SA Express are among the state-owned assets that could be sold to prop up Eskom, which faces a R225?billion cash crunch.

Speculation is mounting after government’s announcement on Sunday that it had found a solution for the utility’s funding gap. This included an equity injection to be funded by leveraging “nonstrategic government assets”.

Peter Attard Montalto, an emerging markets economist at investment bank Nomura, who estimated Eskom’s current funding needs at R5?billion?–?and R20?billion in the medium term?–?in Business Report this week, told City Press these were “guesstimates based on our current understanding of Eskom’s balance sheet and what sort of tariff increases might be possible, as well as Eskom’s debt to equity and debt to revenue targets it wants to hit”.

One possibility available to government is to sell off part of its holdings in telecommunications companies Telkom and Vodacom, of which it owns 39.79% and 13.91%, respectively. These are worth R11.6?billion and R26.8?billion, respectively.

“I named Telkom and Vodacom because they are listed equities and it would be easy to turn a sale around in two months,” said Attard Montalto.

But political economist Mzukisi Qobo does not see government selling its stake in Telkom, given its role in blocking an offer from South Korea’s KT Corp for 20% of Telkom.

“I seriously doubt they will dispose of Telkom,” he said. “It doesn’t make sense.”

Another possibility is Broadband Infraco, which has a 12?800km national fibre-optic network and is a provider of backhaul connectivity. Government owns 74% of the company, with the rest owned by the Industrial Development Corporation. In this year’s annual report, the corporation stated its stake in the company at R364?million, valuing government’s share at R1.4?billion.

“Broadband Infraco or Alexkor, even SA Express, could all be partly spun off, but that would require an [initial public offering] and a process that, given the state of the economy and these companies and the regulatory framework of their sectors, might well take six months,” said Attard Montalto.

“These could well be possible over the long run, but the liquidity of Telkom and Vodacom seems attractive.”

Qobo said other measures the state could look at to fund Eskom would be to issue a bond or partially float some of the state-owned companies, much like the Chinese model.

China has partially listed some of its state-owned companies such as petroleum company Sinopec, in which it holds 75.8%.

This might just be the medicine South African state-owned enterprises need, especially after the Treasury this week told Parliament’s portfolio committee on public enterprises that 40% to 50% of these enterprises were in the red.

“I think they will implode if not significantly restructured,” said Qobo.

But the rescue package for Eskom, widely expected to be fully set out in Finance Minister Nhlanhla Nene’s medium- term budget policy statement next month, might do little to avert a credit rating downgrade for the power utility.

Ratings agency Standard & Poor’s (S&P) indicated this week it needed more information on the government package after the bailout announcement?–?based on recommendations from an interministerial committee set up to find solutions for Eskom’s R225?billion cash crunch?–?to avert a credit rating downgrade to “junk” status.

Ravi Bhatia, S&P’s primary analyst on South Africa, said more details were needed before the agency could make a decision on Eskom’s CreditWatch.

“We would need details on the package?–?on how big the equity injection will be, as well as details on debt metrics,” he said.

Nene said on Monday that government had identified the assets it would leverage for the equity injection, but that it was “too early to disclose what they are”.

He did not say if assets would be sold, used as security, or used in other ways to raise funding.

S&P placed Eskom on CreditWatch in June, meaning there was a 50% chance of a downgrade within 90 days.

This expired yesterday.

The Eskom bonus

Government will give Eskom an equity injection by ‘leveraging’ nonstrategic government assets, and allow it to borrow R50?billion from existing guarantees.

It will also apply a raft of other nonfinancing measures, including cost savings at Eskom, refining energy policy, and supporting the utility’s application to the National Energy Regulator of SA for tariff adjustments.

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