There is much market scepticism about whether there is any appetite among private investors for a minority stake in the R142-billion Kusile power station project, which is being built by South Africa’s embattled power utility, Eskom.
Some describe it as the most expensive coal-fired power plant being built anywhere in the world, on a megawatt-for-megawatt basis. Others say that the offer of a minority position in a venture where none of the construction risks can be mitigated makes a transaction near impossible.
Yet others warn that government and Eskom will have to extend guarantees and price promises that will make the project all the more onerous for taxpayers and consumers.
For the first time since unveiling the plan last year, Eskom will test these theories directly by undertaking international and domestic roadshows during May to gauge the appetite among a “confidential” group of potential strategic equity partners (SEPs) for a position in its already delayed project.
Financial director Paul O’Flaherty told Engineering News last week that, while he was fully alive to the criticism surrounding the proposed sale of a 30% to 49% equity stake in the Mpumalanga-based project, it was premature to say that there definitely was, or was not, appetite for the Kusile project.
“There are some obvious complications in [attracting private participants into] Kusile,” O’Flaherty admitted.
The fact that the contracts had been placed and that construction was under way meant that there was “construction risk” for any equity partner.
“So we need to reconfigure [Kusile] into a legal package that we can go and sell,” he explained, noting that Credit Suisse had been appointed specifically to deal with the matter.
He said that the roadshows would enable the utility to assess appetite, as well as the “15 or so requirements” to unlock the transaction, and dismissed market speculation that the project’s cost had climbed beyond the R142-billion figure that had been stated publicly.
The cash-strapped utility hoped to raise R40-billion from the sale to an SEP in order to close a R90-billion funding gap between now and 2017.
The utility indicated earlier in the week that the funding gap was R190-billion. But that figure included the capital necessary for projects that were not yet committed, and might not even be built by Eskom.
“Our true funding gap is R90-billion,” O’Flaherty said, adding that his attention was being given to closing that immediate gap – defined as “the total cash shortfall resulting from capital expenditure that is not offset by the profitability of Eskom and its [currently] secured funding agreements”.
Credit Suisse had been appointed transaction adviser on the Kusile sale, which was a key element of a broader funding strategy that was being developed by Eskom together with JP Morgan.
JP Morgan had also received a mandate to study alternative equity injection proposals, particularly should there be no takers for the Kusile stake.
O’Flaherty said that, while he needed to follow prescribed approval processes (which included gaining sanction from the Eskom board, Public Enterprises Minister Barbara Hogan and the National Treasury), he expected to be in a position, by June, to begin pursuing some of the funding solutions being interrogated.
There were “literally 50” solutions under study, with the launch of a global medium-term note programme (GMTNP) to raise capital on the global bond markets being the “lowest-hanging fruit”.
Eskom expected to list a GMTN in either the US or Europe during the second half of 2010 (possibly in June), with O’Flaherty indicating to Engineering News that the US looked “very attractive”.
Another possible solution lay in converting some R60-billion of a larger R176-billion National Treasury guarantee into “quasi- equity” to improve the capacity of Eskom to borrow.
This could be done by creating a special-purpose vehicle, owned by government, which invested equity into Eskom, to be recovered through the payment of dividends over a long time horizon. Such a reconfiguration of the debt/equity on the utility’s balance sheet could enable Eskom to borrow beyond the constraints of its current balance sheet.
One option not being considered was the cancellation of Kusile altogether, which O’Flaherty argued would carry severe penalties for both Eskom and the country.
“We realise that we have a big funding gap to close. We are looking at ways to close it, and we are most definitely not sitting idle.
“In fact, we are working flat out on the funding model,” O’Flaherty concluded.
Business Shows Energy Urgency
Meanwhile, South African business’s official energy champion, Jayendra Naidoo, has revealed that he is prioritising the creation of an outcomes-orientated partnership with government that could, besides other things, provide impetus to a plan to deliver 5 000 MW of short-term power relief for the country’s supply-stressed national grid.
Speaking following a recent Business Leadership South Africa (BLSA) board meeting, which focused on South Africa’s prevailing electricity challenges, Naidoo stressed that the electricity crisis was not a “side issue” but the “main issue” confronting business and society as a whole.
Naidoo has also been appointed energy champion for Business Unity South Africa (Busa) and not only for BLSA, which comprises 50 of South Africa’s leading listed companies, as well as 30 others, including multinationals and State-owned enterprises.
South Africa’s reserve margin is chronically low, at between 5% and 8%, and is likely to remain constrained in spite of Eskom’s R460-billion-plus build programme, which is deemed insufficient to restore the targeted reserve margin of between 15% and 19%.
“There is little question that there is a need both for more power between now and 2030, and for better use of the power we have,” Naidoo said, stressing that there was also a need to restore efficiencies at Eskom, which would continue to occupy a central position within the country’s electricity milieu for many years.
The 5 000-MW offer, which was presented to Energy Minister Dipuo Peters at a Busa meeting in April, comprises savings and new supply options, covering renewable energy, cogeneration and conventional power production, dubbed “own production” by the Energy Intensive User Group members pursuing such developments.