In the wake of the much discussed 16% pa increase in the tariffs of Eskom, glancing through their financial statements, it struck me that their funding model seems to be funding capital projects from profit – totally out of line with sound business practice.
This practice is unacceptable as it has in the main the following impact on consumers:
1. To obtain the required cash flow for capital projects Eskom needs to pay companies tax – in this case to its shareholder, the government, at a rate of about 28% of operating profit. In order for Eskom to receive the net cash flow required for their capital projects, the consumers are in effect thereby levied an additional tax.
2. As the consumers are also paying VAT on consumption, the effect of the above is that VAT is also inflated by an additional +- 28% – again payable to Eskom’s shareholder.
3. The above taxes are being funded by consumers, and in the case of the public at large, include the poor, unemployed and low income earners that would not normally have to pay income tax – now being subjected to tax.
Generally accepted business practice is that capital projects should be funded by capital funding obtained from shareholders by way of share capital, loans, bonds, etc. The resulting capital assets are then amortised over their useful lives through income absorption, which is in effect the case at Eskom.
With the current funding model the consumer is in effect paying off on existing capital assets – through amortisation – as well as having to inject capital for uncompleted and future projects and in the process paying the additional taxes to the shareholder. It is obvious that this funding model is very unfair.
As an alternative I believe the following model should be considered and refined to achieve the outcomes as listed below:
1. Convert a part of the tariff into compulsory loan capital. This can be done on the basis of bond certificates [similar to the UK Premium Bonds], where the monthly interest – or part thereof – is pooled and drawn on a lottery-type basis, or could also be accumulated. The terms of the bonds can be worked out to cover the requirements of capital projects and could be converted into shares at a later stage.
2. The company thus avoids the 28% tax
3. The consumer tariff can be decreased by the saving in tax
4. The consumer saves on VAT related to the 28% tax
5. Consumers become stakeholders in Eskom on a broad basis in line with broad based equity requirements
This is a rough picture of an alternative funding model, which I believe could be workable and a lot fairer to consumers than the existing model.