The National Treasury confirmed on Monday that consideration was being given to the possibility of private investment in Eskom as part of efforts to improve the electricity utility’s financial sustainability.

“Consideration is also being given to ring-fencing and selling stakes in Eskom’s noncore businesses or power stations, as well as into Eskom’s business as a whole,” the National Treasury said in response to an Engineering News Online enquiry.

Earlier, Finance Minister Nhlanha Nene said that government would consider private equity injections into the utility, while maintaining a majority shareholding, describing Eskom as the “most pressing risk” facing the country.

The National Treasury insisted there was a need “to explore all options so that South Africa can have a financially sustainable Eskom in the long term and resolve its energy challenges”.

“Partnering with strategic investors from the private sector would enable the company to harness technical expertise to improve the performance of the power system. Another key benefit would be that the cash that Eskom would receive immediately, can be used to strengthen the company’s financial position ensuring it is able to continue to play its strategic role,” the National Treasury explained.

It did not comment directly on the prospect of a partial listing of the State-owned company (SoC) as hinted to by African National Congress (ANC) secretary-general Gwede Mantashe, who indicated that consideration could be given to the so-called “Chinese model”, of listing a portion of an SoC, but retaining a majority interest.

Goldman Sachs chairperson and CEO Lloyd Blankfein mooted a similar approach during a recent visit to South Africa. He argued that South Africa should consider taking a cue from China’s “hybrid system”, where SoCs remained controlled by the central government, but where shares in the companies were also floated on stock exchanges, subjecting them to stock exchange discipline and transparency.

The National Treasury stressed that it remained government’s intention that, in line with the White Paper on Energy, Eskom continued to play a leading role in electricity supply and that the State retained control of the utilty.

But alternatives were being explored, owing to “Eskom’s constrained balance sheet and government’s constrained fiscal position”, cautioning that the alternative was for electricity tariffs to be increased significantly, or for taxpayer to be funds injected into Eskom.

Together with the possibility of private investment in Eskom, a continuing increase of private generation capacity, through independent power producers (IPPs), was also being explored.

“Government’s IPP programme has been successful. A total of 5.2 GW has already been procured through the first four bid windows of which 2.5 GW have already reached financial close,” the National Treasury said, adding that the average cost of electricity procured through the programme had reduced in each of the three bid windows.

The Coal IPP programme, it said, would add an additional 2.5 GW.

Government would also consider amending regulations so that the private sector could build generating capacity to meet its own requirements and supply the surplus electricity to the grid.

“This option means that Eskom doesn’t invest capital building additional power stations to generate electricity yet the electricity is still made available to power the economy.”

REACTION

A bank economist canvassed on the possible private investment options cautioned that government still needed to complete an analysis of the options, which meant that it was likely to be some time before there would be any movement.

“The announcement was only made the other day and they’ve set no timeframe for the completion of the preparatory work, so it’s too early to say whether they will opt for one model of sale rather than another,” Absa Capital principal economist Peter Worthington said.

He added that one benefit, in addition to the cash, could be the injection of private-sector expertise and oversight into Eskom’s operations. “We would ideally like to see potential private sector partners bring technical skills to the table as well as money.”

Nomura’s Peter Attard Montalto added that it was difficult to interpret recent statements of various government and ANC leaders as they were all seemingly tangential to one another.

“There are two issues here – one is equity stakes and the other is spinning out individual generation plants for them to be run by private sector under State majority ownership,” he told Engineering News Online, adding that he did not think Eskom would become a JSE-listed entity.

Attard Montalto said that, besides the obvious political obstacles to a listing, it was “difficult to see how any private fund would likely be able to buy a zero-dividend stock that government would probably place some requirement that they could never sell; or only sell domestically to other pension funds maybe.”

It would also be extremely difficult to value the shares, which might be why a Public Investment Corporation (PIC) purchase of Eskom shares had been floated.

The “simplest” way to raise capital in the short term, he argued, was to sell Vodacom and other State stakes that have no social use being on government’s balance sheet, even if the PIC had to be the buyer.

If private pension funds did take positions in Eskom, Attard Montalto said “it will be interesting to see if it’s the first example of the long discussed ‘required holdings’ framework for local funds on infrastructure”.

On a possible sale of stakes in power stations, he also saw difficulties. “For a proper public-private partnership on individual plants  . . . investors would look for strong feed-in tariff clarity and certainty, better certainty over energy policy in the long run and how they might be affected by guarantees of the Eskom parent”.