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Bondholders should price in Eskom ‘status quo’, Brown dismisses privatisation option

Lynne Brown

Lynne Brown

Photo by Duane Daws

5th August 2014

By: Terence Creamer

Creamer Media Editor

  

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Public Enterprises Minister Lynne Brown described the debate around the privatisation of Eskom as “misguided”, while an analyst urged Eskom bondholders to price in the “status quo” rather than to anticipate any near-term break-up of the State-owned electricity utility as speculated in a leading South African newspaper on Tuesday.

The Business Day reported that Cabinet was considering the sale of some of Eskom’s power stations to private investors as part of a plan to deal with the company’s financial crisis – a crisis that has arisen as a result of weaker-than-expected sales and tariff increases that Eskom said were not yielding an adequate rate of return.

Following the newspaper report, yields on Eskom bonds surged, with Bloomberg reporting that yields on Eskom’s $1-billion of bonds due in August 2023 increased 34 basis points to 6.16% by 13:40, the most since they were issued in August 2013.

However, Nomura’s Peter Attard Montalto said in a note that the “market reactions are overdone” and that the more likely short-term scenario was for increased shareholder support, particularly in light of “current political and ideological divisions”.

On Sunday, Communist Party general secretary Blade Nzimande, who is also Higher Education Minister in President Jacob Zuma’s Cabinet, made a hard-hitting statement condemning those “vultures (including some within our own movement)” pushing for the privatisation of Eskom.

“Eskom is a critical component of the developmental state that we seek to build. It is a critical element in taking forward a second radical phase of the National Democratic Revolution,” Nzimande said.

Attard Montalto wrote in his note that the governing African National Congress was unlikely to accept a break-up of Eskom or private sector involvement “without a policy conference and elective conference agreement, which would mean such a policy could not be implemented before 2017”.

“We think the government is likely to take a multi-faceted approach to increasing shareholder support – some additional equity injections, some increased guarantee structure, maybe some additional cash or even equity input from the Development Bank of Southern Africa or Industrial Development Corporation, as well as increased tariffs.

“The government and Eskom are running out of time to make a public declaration of intent on the issue – they need to do that by the end of September to fit into the next ratings cycle. This is the issue the market should be focusing on in our view, as it will have much broader implications than just Eskom,” Attard Montalto added.

Brown told a Joint Parliamentary Committee on Energy and Public Enterprises in July that an intergovernmental task team, comprising the Department of Public Enterprises, the Department of Energy the National Treasury, was working with Eskom and the National Energy Regulator of South Africa “to formulate a solution to the immediate challenges that Eskom is facing”.

“A draft report with options has been shared with us, and we are going to be receiving the final proposal soon after which we will take this to the Cabinet subcommittee and Cabinet, ideally before end of September,” Brown reported.

In a direct response to the break-up report, Brown argued that the “debate should be about the long-term resolution to the country’s energy challenges” rather than privatisation.

Brown said the end-state of the electricity situation did not mean the fragmentation of Eskom. “Eskom is critical for government to implement its developmental agenda. And it would be a grave mistake to privatise this critical player in the economy.”

She added that, to her knowledge, “Cabinet has not discussed the matter of privatisation and there is no need to unnecessarily raise temperatures around this matter”.

Eskom confirmed in late July that it faced a near-term liquidity challenge and revealed that it would become cash-flow negative by June 2015.

The task team and the utility were investigating alternative sources of funding, including additional borrowing options.

Eskom also reiterated that financial sustainability could not be achieved through efficiencies and savings alone, as it faced a R225-billion revenue shortfall and the prospect of R47-billion in lower-than-expected sales.

Edited by Creamer Media Reporter

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