South Africa’s Nene Says Open to Partners for Eskom Plants

Aug 26, 2014 2:04 am ET

(Adds comment from Cosatu in seventh paragraph.)

Aug. 26 (Bloomberg) -- South Africa is open to private investors helping to finance power plants built by Eskom Holdings SOC Ltd. to plug a funding gap faced by the state power utility, Finance Minister Nhlanhla Nene said.

The government may give Eskom new debt guarantees or convert subordinated loans into equity, Nene, 55, said in an interview at Bloomberg’s Johannesburg office yesterday, the first time he has addressed the issue in detail since taking up his post three months ago.

“There is also the issue of trying to see whether the extension of some of the infrastructure build program can’t be taken up jointly in partnerships with the private sector,” he said. “We think it is worth considering that.”

Eskom is building two coal-fired power plants and considering a third to address a shortage of power in Africa’s second-largest economy, which relies on electricity to tap the world’s biggest platinum and chrome deposits. The Johannesburg- based utility wants the government to help fill a 225 billion- rand ($21 billion) cash-flow shortfall in the five years through March 2018 and avoid its credit rating being downgraded to junk by Standard & Poor’s next month.

Eskom currently has the capacity to generate about 42,000 megawatts of power, about two-fifths of the power-production capacity in all of Africa.

Even so, a near collapse of the over-burdened power grid in 2008 shut down most of the country’s mines and smelters for five days and led to several months of scheduled power outages in major cities. Since then Eskom has paid some of its biggest customers to reduce usage at times and this year restarted planned power cuts at times of heavy consumption.

‘Politically Impossible’

The Congress of South African Trade Unions, the country’s largest labor grouping and an ally of the ruling African National Congress, has said it will oppose Eskom’s privatization. “We remain opposed to privatization and public- private partnerships,” Patrick Craven, a spokesman for the labor federation, said today by phone.

On Aug. 5, Public Enterprises Minister Lynne Brown dismissed a report in Johannesburg’s Business Day newspaper saying the cabinet is open to selling parts of the state-owned entity.

“A wholesale privatization, though increasingly favored by a Treasury concerned about South Africa’s fiscal and debt outlook, is politically impossible in the near term,” Anne Fruhauf, southern Africa analyst at New York-based risk adviser Teneo Intelligence, said in Aug. 21 note to clients. “Partial privatization, perhaps under another name, is an increasing possibility, not because it is an ANC priority but because it is becoming a financial necessity.”

While demands from state-owned companies, especially Eskom, did “pose a bit of a challenge” to the National Treasury’s budget-deficit reduction plans, the government has to ensure constraints to growth are addressed, Nene said.

Nuclear Energy

“We are looking at the sustainability of Eskom’s balance sheet,” he said. “I think we are making progress. The infrastructure program is one of those that, because of its role in achieving our growth targets, is one of those we would protect.”

Eskom supplies about 95 percent of South Africa’s electricity, with more than 90 percent of that coming from coal. The government’s integrated resources plan envisions 9,600 megawatts of nuclear energy being added to the national grid to reduce reliance on the fuel.

“The government has been very clear that nuclear just forms part of our energy mix,” Nene said. “The sequencing becomes very important. We are focusing on what we can afford, we are focusing on what can be implemented within the shortest possible period of time.”

The government may have no option than to seek private funding to address electricity-supply constraints, said Anton Eberhard, a professor at University of Cape Town’s Graduate School of Business.

“They can’t raise more debt because they don’t have the cash flow,” Eberhard said in an Aug. 19 phone interview. “So the issue then is going back to the shareholder for more equity and that’s on the cards, it’s been discussed, but there’s very little wiggle room there because of the fiscal constraints faced by National Treasury.”

--With assistance from Rene Vollgraaff, Amogelang Mbatha, Antony Sguazzin and Andre Janse van Vuuren in Johannesburg.