Tag: bailout

Consumers lose again in Eskom-NERSA clash

Source: OUTA 

Eskom’s urgent application filed recently to recover one of the R23bn bailouts in 2021 is understandable but it is harsh news for struggling consumers and businesses.

There is no way to win in this situation.

It’s the latest move in the legal battles between the inept regulator, NERSA, and the utility struggling with unsustainable debt.

In July 2020, the high court ruled that NERSA was wrong to consider the R69bn government bailout to Eskom (R23bn a year for Eskom’s 2019/20, 2020/21 and 2021/22 financial years) as revenue instead of as an equity injection, and that this resulted in a significantly lower Eskom electricity price increase allowed for these years. The court ordered this to be added back to the electricity price.

We note that NERSA conceded and acknowledged that it erred in this regard in the court proceedings leading up to the judgment against it. We further note that the judge ordered the error be rectified through appropriate tariff increases during the 2021/22, 2022/23 and 2023/24 financial years.

NERSA was subsequently granted leave to appeal, not in respect of its self-acknowledged error, but to challenge the judge’s authority to prescribe the manner and timing of electricity price increases to rectify NERSA’s mistake. NERSA believes it should have the right to decide how much the prices should increase and over what period in refunding Eskom, taking into account the effect on customers and the economy. NERSA’s appeal – which is still pending – effectively suspended the court order.

Eskom’s interdict this week calls for R23bn – one year’s bailout – to be loaded onto the 2021 price (the allowable revenue), so that it does not lose another year of this. It will add about 10% to the price increase from April 2021, in addition to the 5.22% already granted. In terms of the court order, it will increase the price from the already approved 116.72c/kWh to 128.24c/kWh.

OUTA believes that NERSA has demonstrated a serious lack of competence and judgment in its misappropriation of R69bn as revenue instead of equity in making the Multi-Year Price Determination (MYPD) for the 2019/20, 2020/21 and 2021/22 financial years. While this has a negative impact of Eskom’s cash flow and sustainability, we also believe that the application of Eskom’s tariff increases following the court’s ruling in their favour will be a blow to an already over-burdened South African consumer and the economy as a whole.

The past decade of NERSA’s lack of leadership and political meddling has failed to hold Eskom’s past leadership to account for the utility’s soaring costs, borrowings and false asset revaluations. This is now playing out in very technical and costly court challenges that are having negative consequences on both Eskom and the public at large.

OUTA believes that NERSA may be wasting more time by opposing Eskom’s interdict to have one of the three R23bn bailouts loaded onto the 2021 price, as this may lead to more bailout requests from Eskom to prevent it defaulting on its loans.

Eskom effectively lost the R23bn a year for 2019/20 and 2020/21, due to NERSA’s ruling. OUTA believes this ship has sailed and that this situation provides NERSA and Eskom with an opportunity to reach a compromise on writing off at least part of the outstanding R46bn, in a way that takes into account the interests of Eskom, customers, taxpayers and the economy.

By Barbara Friedman for CapeTalk

Eskom’s new spokesperson Sikonathi Mantshantsha has acknowledged that the power utility’s workforce is bloated.

Speaking to CapeTalk radio, Mantshantsha – who was once the utility’s biggest critic – said that after the board changed in 2018, and many of those fingered for mismanagement or wrongdoing were axed or resigned, Eskom had a thorough look at the organisation’s make-up.

“The outcome was that as Eskom, we alone are not able to service this debt of R450-billion. We need the government to come in and pitch in some money.”

This resulted in Minister of Finance Tito Mboweni allocating R69-billion of the budget in three installments per annum. A staff audit was conducted and the outcome was that Eskom had 16 000 people more than was needed.

“The government said OK, don’t touch them. Focus on the power stations,” says Mantshantsha.
“The final call comes from the shareholder in all businesses. And in this case, the shareholder is the government.”

 

By Lameez Omarjee for Fin24

The Development Bank of Southern Africa has committed R3.5bn to SAA, business rescue practitioners have confirmed.

In a statement issued on Tuesday afternoon, business rescue practitioners Les Matuson and Siviwe Dongwana said stakeholders can continue flying SAA now that required funding has been secured.

“Stakeholders of the airline should now have comfort that the rescue process is on a significantly sounder footing, and that passengers and travel agencies and airline partners may continue to book air travel on SAA with confidence,” they said.

Earlier on Tuesday Bloomberg reported that government may have received funding from DBSA, which would be government guaranteed. Treasury, the DBSA and SAA would not comment at the time.

When SAA was placed into business rescue, by order of President Cyril Ramaphosa, in December 2019 – both government and creditors committed to jointly provide R4bn.

Local commercial banks had provided R2bn in post-commencement financing – in addition to existing exposures to SAA. However, by mid-January government still had not been able to keep its end of the bargain.

In recent weeks government has managed to obtain the balance required to meet short term liquidity requirements of the airline until the business rescue plan is published. Fin24 understands that the plan will be finalised in February.

“Discussions held with financial institutions have been fruitful with the Development Bank of Southern Africa offering to provide the next tranche of PCF, for a total amount of R3.5bn, with an immediate draw-down of R2bn.

“Furthermore, funding for the restructuring phase after the plan is adopted is being considered by potential funders,” said the business rescue practitioners.

The airline has been facing a liquidity crisis and earlier this month, had to cancel flights in order to save cash.

Following speculation that the airline was going to fold, the Department of Public Enterprises issued a statement on Sunday January 19, 2020 assuring the public of its commitment to saving the airline.

“We are determined to contribute to the Business Rescue process so that we could minimise job losses and give birth to a rejuvenated SAA that all South Africans could be proud of. Collective effort is needed to make SAA as a premier African airline and Star Alliance member,” the Department of Public Enterprises (DPE) said at the time.

R5.7bn bailout for e-tolls

By Tom Head for The South African

Gauteng motorists, we’ve got some bad news: e-tolls have been given the kiss of life by the government, who have promised to cover Sanral’s debts.

When the people talk, politicians should listen. However, it would seem there have been some spectacular crossed wires in Gauteng. The much-maligned and financially crippled e-tolls system will now live to fight another day, after Transport Minister Blade Nzimande confirmed Sanral would receive a R5.7 billion bailout.

The roads agency have been plunged into fiscal despair by the ill-conceived tolls, which have failed to bring in the revenue previously forecast. It has left Sanral with debts soaring above R10 billion, but thanks to the deep pockets of the ANC, their money woes have effectively been halved.

Why Sanral have been bailed out
Nzimande explained the decision via a statement on Monday afternoon. He says the bailout is to help ensure that the department can meet “payment terms” with its investors. The move was labelled as a “strategic intervention” to help prop-up the Gauteng Freeway Improvement Project (GFIP).

“As a result of Sanral’s toll network experiencing financial difficulties, and to ensure that Sanral complies to its payment terms to investors, as well as to maintain the toll network across the country, funds were transferred from the non-toll network to the toll network. However, the department is working to resolve the issue of the GFIP speedily.”

E-tolls: Where is the money coming from?
The money has been taken from the Medium-term budget appropriation. It’s important to note that this money was not taken from the Treasury. Instead, money that was set aside for mid-term spending back in October 2018 will now go towards the e-tolls system, which continues to fail upwards.

Despite several promises from local government – including Gauteng Premier David Makhura, who vowed to rid the system from the province – it seems that national structures of the ANC have had the final word.

 

Government unbundles SAA

By Odwa Mjo for Times Live

South African Airways is one of several troubled state-owned entities that are undergoing restructuring.

On Monday, Reuters reported that SAA CEO Vuyani Jarana confirmed that the airline would be split into three units, just over a week after President Cyril Ramaphosa announced that Eskom would be split into three units.

Here’s what you need to know:

SAA will be split into three business units: domestic, regional and international. Each unit will have its own management.

The unbundling could also involve the sale of Air Chefs, which is the airline’s catering unit.

The splitting of units is part of SAA’s turnaround strategy to revive the airline that has been operating at a loss since 2011.

Business Day reported on Monday that the airline had secured a R3.5bn loan it needed to continue staying afloat until June.

Last week SAA was ordered to pay competitor Comair R1.1bn to settle an anti-competition case.

In 2018 the airline requested a R21.7bn bailout from the government, but only received R5bn. Business Day reported that finance minister Tito Mboweni is expected to announce some kind of financial assistance for SAA on Wednesday in his 2019/20 budget speech.

PIC may not be willing to bail out Edcon

By Ann Crotty for Financial Mail

The PIC is so fixated on its own survival it’s probably not in the mood to consider the survival of other chronically poorly managed entities, even those in the private sector.

It’s been almost 12 years since private equity firm Bain thought it would be a brilliant idea to spend R25bn taking one of the country’s most successful clothing retailers private, load it up with tax-deductible debt and pocket lots of profit.

Read more here: https://www.businesslive.co.za/fm/fm-fox/2019-02-07-edcon-bondholders-trapped/

Edcon Holdings is making progress toward securing R3-billion in funding need to keep the South African clothing retailer afloat for another three years, according to Business Day.

The Public Investment Corporation (PIC), Africa’s biggest money manager, may provide R1.8-billion to assist the company. In addition,  landlords may contribute another R700-million in reduced rent, and Edcon’s banks about R500m, they said.

Meanwhile, according to an article by MoneyWeb, Edcon aims to take the following steps in a bid to downsize:

  • Reduce the size of its Edgars store in the Johannesburg CBD by a third
  • Close down its big Melrose Arch store
  • Reduce its footprint at shopping centres across the country
  • Reduce regional footprints in centres such as Mall of Africa, Eastgate and Gateway
  • Continue with closing smaller stores across the country (115 have been closed to date)
  • Downsizing several stores
  • Continue to reduce retail space – in 18 months, Edcon has already downsized by 7%
  • Reduce space nationally by 5% – 7% per year over the next few years

Edcon is one of the country’s biggest employers. It has 1 200 stores which employ approximately 30 000 permanent and casual workers.
Over 100 000 jobs are supported by the company when clothing suppliers and other service providers are included.

 

Are Eskom’s prices too low?

Source: Fin24

Eskom’s balance sheet has been providing a subsidy to consumers over many years, but this is not sustainable anymore and has reached a breaking point, the state-owned power utility said on Monday evening.

Eskom continues to share the rationale for its average annual electricity increase application of 15% for the fourth Multi-Year Price Determination (MYPD4) and Regulatory Clearing Account (RCA) balance application for 2018 made to the National Energy Regulator of South Africa (Nersa).

Nersa’s public hearings on the application continue and the latest one took place in Rustenburg for stakeholders in the North West.

“The main cause of the required price increase is the phasing-out of the current price subsidy, which does not preclude the subsidisation of specific targeted customer categories in future,” said Deon Joubert, Eskom’s corporate specialist for finance.

“Eskom is cognisant of the potential impact of the increase in various sectors, but it finds itself in a very difficult financial position… however, an objective analysis indicates that its debt situation is mainly or more than 80% a function of having had to take responsibility for the build programme, without the electricity price responding as was required.”

Eskom argued that, while higher tariffs are bound to dampen demand, a reluctance to raise prices towards cost-reflectiveness will deny Eskom the ability to fund investments and maintenance required to sustain an adequate security of supply.

“An inadequate security of supply has more negative repercussions to economic growth and social welfare than a tariff increase,” said Eskom.

Looking closely at unit costs, a World Bank analysis concluded that Eskom’s unit costs are very low relative to other sub-Saharan Africa utilities, Eskom said in a statement.

It found that Eskom’s unit cost was the 3rd lowest.

“Similarly, Eskom’s average price is very low relative to other sub-Saharan Africa utilities – but they are all pricing their electricity at unsustainably low levels and are thus in – or heading to – significant financial difficulties,” said Eskom.

The report calculated that 81% of the gap between Eskom’s current price and its costs is due to under-pricing, Eskom said.

In its presentation, Eskom looked at how its actual and projected electricity price from 2010 to 2024 compared to external references.

“On analysis, it became evident that similar to Nersa’s future price path, the various MYPD price paths Eskom requested would plateau once prices reached levels reflective of prudent and efficient costs – which Eskom calculated to be midway between Nersa’s previous upper- and lower price boundaries,” said Eskom.

140 000 jobs at risk as Edcon flounders

Source: Business Live

A few weeks ago, the FM reported that Edcon, an iconic SA retail brand that began life in 1929, was facing an imminent cash crunch. This weekend, news emerged that Edcon had written to its landlords, asking for a two-year “rent holiday” of 41% for all its 1 350 stores.

The reality may be less dramatic than the “Edcon crashes” headlines suggested, partly because its stores are still open and trading. But there’s no denying that these are dire times for SA’s largest clothing retailer.

That’s not surprising. Last month, CEO Grant Pattison admitted to the FM that new funding was needed. “The current process we’re under is looking for shareholders, new and old, to inject new capital into the business,” he said.

Now, a letter dated December 11 and sent to Edcon’s landlords spells out details of how this new “restructuring plan” will work.

What is apparently on the table is that the retailer’s existing funders would convert R9bn of their debt into equity, while injecting another R700m. Then, the Public Investment Corp will inject another R1.2bn into Edcon.

For this to happen, the lenders have stipulated that Edcon’s 31 key landlords (like Hyprop and Growthpoint) must agree to the two-year “rent holiday”. This would equate to R1.2bn worth of support, for which Edcon plans to give the landlords a 5% stake.

It’s a tough call for the landlords, especially since Edcon plans to shut a number of stores until 2022. But if they reject this deal, Edcon could end up defaulting on leases anyway.

The bigger issue is whether bailing out Edcon will create a stronger retailer able to compete, or whether it will be akin to an SAA bailout — where the money vanishes up a chimney, with no value created. It’s a tough call, since Edcon has been shrinking every year. Since 2012, it has lost 22% of its clothing and footwear market share; it once held more than 50% of the sector.

Disturbingly, there aren’t too many specifics on the turnaround plan. There are promises to close some stores and improve trading densities (sales per metre), get more stock through its tills, expand its financial services side (credit and insurance, primarily) and reduce IT costs.

There’s nothing ingenious in that, though. And it’s one thing to put those goals on a PowerPoint presentation, another to make it happen.

Still, the letter to landlords contains some interesting revelations.

First, it says that since March, advisory firm Rothschild & Co has been trying to sell Edcon, but has found no takers. It adds that unless there is a further “intervention”, liquidation is “highly likely”. Fortunately, Pattison seems to have a plan, likely to be announced in the next few days, to prevent that. Which is just as well, considering the 40,000 employees who would be affected.

Of course, Pattison hasn’t helped himself by repeatedly bungling the communications around Edcon.

He denounces the reports as “misleading”, without saying exactly what was wrong. At the same time, he admits that when asked to comment by the Sunday Times, he declined.

There has been a consistent pattern of refusing to comment, then blaming the media for publishing what happened, when greater introspection might have been the wiser approach.

Unfortunately, it goes hand in hand with Edcon’s years of displaying a profound lack of respect for customers and, it seems, staff.

Hopefully, a much stronger Edcon will emerge from the ashes, one that can restore the principles and market position it once held, selling things that people actually want to buy.

How the ANC broke Eskom

Source: MyBroadband

Eskom was once so successful that it was supplying more than half the electricity in Africa.

However, years of corruption, incompetence and political meddling has brought Eskom to its knees, and it is now begging for bailouts to stay afloat.

The company’s growing debt burden, which already exceeds R400-billion and can grow to R600-billion in the next three years, means it is technically bankrupt.

So bad is the situation that former Finance Minister Nhlanhla Nene said Eskom is the single biggest risk to South Africa’s economy.

The image below provides an overview of how Eskom changed over the last 10 years:

Image credit: MyBroadband

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