For a number of years Barclays saw a significant share of its global profits come from its South African
operations through Absa. Other banks such as Investec have been so profitable that executives like
Hendrik Du Toit command income of R78 million in the 2015 financial year. It isn’t just the
financial services sector that has boasted such impressive figures for shareholders. Alan Clark of
SABMiller earned around R150 million in the same year. Whitey Basson has attracted the wrath of
unions over his multi-million rand earnings in the retail sector. South African private sector has done
very well financially. So when a sector that hoards between R750 billion and R1 trillion claims that policy
uncertainty is cause for their caution, you need to really question that.
Between 2005 and 2015, private sector revenues have more than doubled by rising from just under
R3 trillion to just over R8 trillion. Stats SA data reveal other interesting points such as fact that
manufacturing and trade are far ahead of mining and quarrying in terms of booked revenues. It is worth
noting that there are special policy actions (incentives) that account for strong performance by the
manufacturing sector. So claims that policy uncertainties discourage investment are flawed because the
hard-facts disagree with this claim.
The proposed Private Security Industry Regulation Amendment Act will force private security companies
in South Africa to have at least 51% of their shareholding sitting in local hands. It is because of this that
Tyco have sold ADT to Fidelity Security Group for R1.9 billion. One can expect the likes of Chubb and G4S
to follow suit, perhaps not to the extent that Tyco have.
BMW, Ford and Mercedes have each recently committed a few billions in investment to exploit the government’s Automotive Production and Development Programme (APDP). Investment in the automotive sector remains a result of a deliberate drive by the government to prop up the manufacturing sector. It is perhaps not surprising that the sector is one of the top 2 performers from a revenue perspective. Side-note, Sipho Pityana and the company that owns eNCA and eTv (HCI) would be very familiar with the very good efforts of the government in this space. Pityana has Izingwe Automitve Investments while HCI have Formex Industries that have benefited from the Department of Trade and Industry’s incentives for the automotive sector.
Again, policy uncertainty is an excuse. The private sector cash deposits are either idle money sitting in the hands of businesses that lack innovation OR a calculated strategy to force government to ditch it’s jewels and help the monied make easy cash from under-valued SOEs.
A recent Treasury report puts the total amount of borrowing plus accrued interest for Eskom at R168.5 billion
against the guarantee of R350 billion. Gordhan recently told a business breakfast that the amount
utilised is now at R200 billion. The guarantee was increased by R174 billion to the current R350 billion in
2010 by Gordhan himself. Reasons given for such a large guarantee was that Eskom had to build large
enough capacity to cater for the country’s power-generation needs. The two new power stations
(Medupi and Kusile) are built to generate an additional 9800 MW to the current 21000 MW. Power
generation capacity is being increased by nearly 50%. Moreover, in 2010 when the guarantee was
increased by Treasury, DG Lungisa Fuzile said the additional 9800MW would enable Eskom to service
whatever debts it incurred against the guarantee. To put this in context, Eskom has only used up just
over half of the guarantee that Treasury has made available for borrowing for capacity building
purposes. The modern adage that says speed limit is not target may have to apply in that using up the
full guarantee needn’t be a target. One would also hope that Treasury didn’t grant the guarantee it did
without having done the numbers.
Stern University in New York boasts one of the best professors in the finance world (Aswath
Damodaran) with a special focus on business valuation. So let’s borrow their PE approach to compute a
quick calcuation for a power business. As at January 2016 they put the PE ratio for a power business at 21.34.
PE ratio tells an investor how many years it would take them to break even on the money they pay for a
business, if profits remain similar. So if the PE method is applied to Eskom, given it’s R4 billion nett profit
in the latest financial year and a PE ratio of 21.34 it would cost 21.34 multiplied by 4 billion to give us a
valuation of R85.36 billion. But Damodaran would view EBITDA (Earnings before interest, taxes, depreciation and amortisation) as more appropriate given that there has been so much investment done by Eskom. So we would have to use the R31.97 billion profit before tax and depreciation to arrive at a PE valuation of R682 billion. As at March 2016, Eskom financial statements puts the group’s total equity at R180 billion while assets related to it’s operations are R521 billion.
Eskom war room, a grouping of senior government officials and business leaders pushed for Eskom to
partner with private entities. Energy analysts such as Chris Yelland tell business media there would be
“plenty” of private-sector investor appetite to purchase Eskom power stations or shares. Former bank
CEO and venture capitalist Michael Jordaan also campaigns strongly for sales of state-owned entities.
Christo Wiese has also spoken in favour of Eskom part-sale. In the 1990s government considered the sale of
up to 30% of Eskom to private investors. If this view were to prevail, at PE valuation of R682 billion,
R204.7 billion would be enough to buy parts of Eskom. But deal-makers do not operate this way. One
would expect the cost to be much less. Attempts would be made to undervalue the entity so that
“investors” would literally get it at a steal. The pun in this statement is intended. The debt that Eskom
has taken-up to enable it to generate 50% more power will be used as
leverage to drive it’s price down. The Treasury wars on SOEs will also be used to suggest that Eskom is
being badly run, that it is possibly bloated and could do more with less, positioning buyout as rescue
rather than investment. South Africans will be told that tax-payers are cutting their losses by selling
critical assets at criminal prices. To make matters worse, institutions such as Future Growth have taken a
strong position against the viability of the likes of Eskom by announcing that they will not be funding the SOEs
that are currently in the market for funding. So we have an Eskom that is being isolated by would-be
funders including Treasury. Do not think that this is not deliberate and doesn’t have root in some
I have presented the numbers showing how private sector thrives under the current government and it’s
policies. I also presented the facts that show how investment to SA continues to be attracted by deliberate
government programmes. I then presented the financial position of Eskom and the thinking
behind Treasury’s provision of guarantees to it, thinking that appears to have been forgotten by the very
Treasury in 2016. I provided an excuse for economic hyenas to undervalue Eskom using it’s measly R4
billion profit and investment attractiveness (or lack thereof). I provided counter-argument against such a
fundamental error given the infrastructural investment, should the situation arise. It is now up to the
concerned reader to check up on these facts and demand accountability from all involved in what is
coming. SOEs are under siege and Treasury seems a willful player in this plot.