Johannesburg - How do you privatise Eskom without privatising Eskom? By getting state-owned entities to swap their loans to Eskom of more than R100bn for shares.

This is what Eskom’s new interim CEO, Phakamani Hadebe, and acting chief financial officer Calib Cassim are hoping for.

Presenting the beleaguered power monopoly’s financial results this week, former banker Hadebe’s go-to phrase was “restructure the balance sheet”.

What he means is getting large public sector creditors such as the Public Investment Corporation (PIC), the Development Bank of Southern Africa (DBSA) and the Industrial Development Corporation (IDC) to convert their existing debt into shares.

Hadebe stressed that this was still “just an idea” and it has not been discussed with creditors, but it is an idea he keeps returning to.

“I like this option,” Hadebe told City Press during an interview at his office in Megawatt Park this week.

To a large extent, it is the most obvious alternative to a straightforward bailout Eskom otherwise requires, he suggested.

“What is the probability of government giving us cash? Of course we’ll make an effort, but I don’t think so. What other options are there? What is the probability of government taking a percentage of our bonds and converting it into equity? The probability is very small,” he said.

For the existing sole shareholder to convert bonds into equity would really just be debt relief. That is where the big local development financiers come in.

They already own a mountain of Eskom debt. The PIC has about R90 billion in Eskom bonds and the DBSA has a R15bn loan exposure to Eskom. That is more than a quarter of the utility’s fast-growing R367 billion in debt.

“What is the probability of the PIC, the IDC and the DBSA converting bonds?” asked Hadebe. “I may be totally wrong, but if there are government entities willing to take equity, I think that will be considered. I think it will be politically palatable.”

However, he acknowledged that the same would not be true if they tried to introduce a major private funder such as JP Morgan as a shareholder of Eskom.

But just because they are in the public sector does not mean these prospective shareholders won’t expect dividends.

“We would just have to show them that our business strategy will give them returns that will justify them buying in,” said Hadebe.

Cassim agreed that the shareholders would expect a dividend. He and Hadebe, however, seem to hope that the IDC and the DBSA can be persuaded that Eskom is within their developmental mandate.

“The IDC is huge and we are financing the industrial sector, so we can make noises about that. Maybe it will make sense to them,” said Hadebe.

“With the PIC, they will have to determine if the return they get from bonds … is less than what they would expect from equity. They would have a say about who is on the board, and a say about who the chief financial officer and the CEO are. They will become a shareholder just like everyone.

“There is a small element in the PIC that seeks to aid government, but they won’t buy something that won’t bring a return.”

Between Eskom getting “corporatised” in 2001 and starting the new build programme, it did pay the government dividends. Between 2003 and 2006, it paid out R2.76bn and then instituted a dividend moratorium to conserve money for building power stations.

The PIC told City Press this week that any changes to its status as a bondholder of Eskom would “have to be considered and approved by the PIC board and the PIC’s clients, in particular the Government Employees’ Pension Fund”.

The same applies to any additional funding requests from Eskom, said PIC head of corporate affairs Deon Botha by email.

“The PIC continues to engage with Eskom about our investment in the utility to ensure that our clients’ interests are protected,” Botha said.

It's all about cash

The R6.5 billion profit Eskom declared this week is largely immaterial. The real financial metric you need to look at is the cash flow, said Cassim.

Eskom’s cash balance fell from R20bn at the end of March to R8.5bn at the end of September.

On one hand, Eskom’s revenue is stagnating due to lower demand for power and low tariff increases. On the other hand, it is facing growing cash outflows as the massive build programmes at the Medupi and Kusile power stations progress. In the six months it has just reported on, Eskom used R7.5bn to pay back loans and R15.7bn to pay interest.

As the new stations get completed, Eskom loses the ability to capitalise interest, thereby adding the interest to the debt rather than paying it.

“The challenge is that you cannot continuously keep on adding debt to this balance sheet ... the question is, when does this debt peak? It can only peak if you recapitalise the balance sheet, or the cash from operations become sufficient to start repaying that debt,” said Cassim.

The latter option is highly unlikely. With the National Energy Regulator of SA giving Eskom a 5% tariff increase, the utility has to somehow get its cost to increase by less than 5% if it wants operational cash flow to improve.

“Let’s start with primary energy,” said Cassim. “About 80% of coal I assume is already part of a long-term contract that you can’t in a short space of time renegotiate. I can’t see which mining house would want to give away their profits. The remaining key cost item is staff costs. We know historically what the wage settlements have been. Eskom on average settled at consumer price index plus two or three. Getting that to inflation or below inflation is easier said than done,” he said.

He has rejected recent suggestions that Eskom should just cut its losses and stop building the Kusile Power Station, which is half-finished. The penalties from contracts with suppliers on the building site would make that uneconomical and the new stations are replacing more efficient old ones anyway, he said.