Eskom could raise funds with Denel model

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Denel experienced a highly successful turnaround in the early 2000s, which involved restructuring and forming partnerships with four international companies in "associated" Denel businesses.

The holding company remained 100% state-owned.

Consensus in the African National Congress and the government is building for a partial privatisation of Eskom or capital- raising exercise as a way out of the company's financial troubles.

The listing of Eskom, which would be an alternative to the sale of equity, is not seen as a favourable option given the weakness of Eskom's balance sheet.

Addressing Parliament's select committee on public enterprises last week Public Enterprises Minister Lynne Brown and acting director general of the department Matsietsi Mokholo put forward the Denel example as a growing possibility, in the context of the need to re-capitalise state-owned enterprises.

Brown told the committee the government had to find "creative ways" of raising capital for state companies. "State-owned companies are operating in an environment where the performance of the economy has been below expectations, the fiscus is under pressure and the electricity grid is constrained.

"However, policy frameworks are taking shape to respond to this state of the economy and set these entities on the road to financial stability. This would also require the government recapitalising the companies to put them on the path of financial independence," said Brown.

Mokholo said capital raising for state-owned companies would need to be informed by individual company needs rather than a blanket approach. However, she put forward Denel as "an example of the successful public-private partnership which the Department of Public Enterprises wants to offer the country".

The "government retained its 100% stake in Denel as a holding company, while it allowed private sector participation in the company's divisions like aviation, aerostructures and land systems. This is essential to ensure the state retains control of the company. "At divisional level, Denel allowed the divisions to look for strategic partners to unlock funding and ensure the company strengthens its international footprint," she said.

Denel's associate companies include Rheinmetall Denel Munitions (49%), Turbomeca Africa (49%), Airbus DS Optronics (30%), Tawazun Dynamics and the recent 100% acquisition of what used to be BAE Systems Land Systems SA. At present Denel has an order book of R32bn over the next 10 years.

The Denel model is one of the institutional models the Department of Public Enterprises will elaborate on in an overarching piece of legislation for state-owned companies which will be presented to the Cabinet lekgotla in July.

The legislation would have three dimensions, Mokholo said. First, it would set criteria for state ownership, which at present is decided "more by default than design".

Second, it would look at the variety of options of state ownership.

"Not everything has to be 100% state-owned. The government might decide to keep a holding company fully owned, while acquiring strategic equity partners at divisional level or it might decide to have a strategic partner at holding company level," she said.

The third aspect of the legislation would be to look at how decision-making would take place in a partly privatised state entity.

"We would need to allow room for the private sector to make decisions and we would have to look at the mechanisms for (how) this would be done," she said.

In the case of Eskom, there has been some wider discussion within the government over the sale of equity in Eskom power stations. However, if the Denel model were to be followed, it would be likely to involve a sale of a stake in either the transmission or generation business as a whole, rather than individual power stations.

Source: Business Day