The world’s richest ‘not for profit’ organisation
Opposition politicians reacted angrily when they first learned that Chancellor House, an African National Congress (ANC) investment vehicle, had secured a 25% interest in Hitachi Power Africa. Why are they so angry? Here’s a brief history of events to ‘cl
The two contracts are worth R38.5bn, and experts estimate Chancellor House’s revenue stake through its 25% stake in Hitachi Power Africa (and the latter’s 60% holding in the Hitachi consortium) totals R5.8bn. As details of the deal emerged the ANC promised to instruct Chancellor House to divest its stake in Hitachi – but nothing happened. In the wake of shocking 2009 Eskom results and the subsequent spat between new Eskom chair Booby Godsell and outgoing chief executive Jacob Maroga the ruling party is under renewed pressure to terminate the relationship. Early indications are it’s difficult to walk away from the trough.
Nobody to blame
Media statements by senior ANC cadres suggest the party is divided on the issue. On Sunday 11 April 2010, ANC Treasurer General Matthews Phosa promised (for a second time) that the party would instruct Chancellor House to sell its interest in the consortium, adding that the transaction be complete in six to eight weeks. Days after his comments appeared in the media, ANC secretary general Gwede Mantashe reiterated the party’s ‘nothing untoward about the deal’ stance, insisting that the Chancellor House board would make such decisions with total autonomy. How the ANC can call shots at state-owned institutions by pushing through cadre deployments, and yet have absolutely no influence over their own investment arm?
It seems a few billion rand dilutes business ethics too. Hitachi Power Africa’s management is adamant they’ve done nothing wrong. They aver their R35.8bn contract to install boilers at Eskom’s Medupi coal-fired is the ‘cleanest’ business deal in history. The company denies paying Chancellor House any fees other than dividends. Hitachi Power Africa chief financial officer Robin Duff told Business Report: “We have not paid them anything in fees or in any other form. This would not happen without the shareholders’ approval. And this has never been discussed with the shareholders.” Hitachi said they weren’t concerned about Chancellor House’s political affiliation because “distributions made by the Chancellor House Trust would go to natural people only.” We can’t argue with the logic, except to say the ANC was most likely instrumental in appointing trustees and identifying these beneficiaries – not to mention the massive conflicts of interest in the Eskom tendering process. We’ll spell it out: ANC fundraiser on board of Eskom awards two massive contracts (the second without completing a tender process) to a consortium in which the ANC holds a significant stake.
How much would you pay for R50m over eight years?
The most bizarre fact emerging from the recent Hitachi press conference is their admission that Chancellor House paid “about R1m” for 25% of the business. Was this the best this high-powered executive could come up with given the long-term media scrutiny around the transaction? He was unable even to furnish accurate price details for the sale of a 25% stake in his business!
We spoke to Dawie Roodt, economist at the Efficient Group to try and make sense of the transaction. How much, we asked, would he have paid for a 25% slice of a business with a 60% share of R35.8bn on its order book? The traditional method of valuing a business is to consider its future income streams. Roodt estimated conservatively that the R35.8bn project should generate net earnings of approximately 10%, or R3.58bn over the project life. If we assume the project completes in ten years time that equates to R358m each year. And valuing the business on a conservative 4 times price to earnings multiple gives us a value for the company (assuming it only has one project on its books) of R1.42bn, or around R200m for Chancellor House’s 25%.
But hold on. Hitachi’s chief executive says Chancellor House will probably only receive dividends totalling less than R50m over the next eight years. That changes things a bit! Let’s assume these dividends are paid out equally over 10 years. A quick net present value calculation suggests R35m would be closer to fair value for the Chancellor House stake. Of course – under this scenario, the 25% stakeholder should be asking serious questions about where the rest of the profits disappeared to. Unless – and this is a possible scenario – the purchase price of Chancellor House’s 25% share is funded out of future profits. This is common practice in BEE deals.
Has corruption fuelled Eskom’s coal obsession?
Whichever way you spin the Hitachi Power Africa / Chancellor House transaction you’re left with a bad taste. The conspiracy theorists are enjoying a field day. They want to know whether Eskom’s obsession with coal-fired power has anything to do with the ANC’s stake in Hitachi Power. They also want to know why government has been so reticent in approving private power projects. Industry insiders say there are billions of ‘green’ power dollars waiting for the go-ahead to invest in alternative power generation projects.
As South Africa’s power production nears January 2008 crisis levels it’s clear we haven’t addressed the major issues around power. The state power utility says it ‘sells’ 5% (or 9% depending who you believe) of its power at special rates through long-standing contracts? Can we really believe Public Enterprises Minister Barbara Hogan’s claims that only two companies benefit from such deals? And if these special deals aren’t of much concern, as the minister seems to think, then why did Eskom lose R9.5bn due to derivative-based power supply tariffs to mining giant BHP Billiton’s Hillside and Mozal aluminium smelters?
“Cancel the contracts and our electricity crisis is at an end,” said The Independent Democrat’s spokesperson Lance Greyling. Agreed! If Eskom scraps these below-cost deals, charges market rates for cross-border electricity arrangements, eliminates electricity and cable theft, and implements a serious programme to curb electricity consumption at private homes and corporations, Medupi and Kusile could be put on hold indefinitely.
Editor’s thoughts: There are a number of problems with political party funding in South Africa. The most obvious is that parties don’t have to declare sources of funding. Another is that funds intended for political parties can be channelled via numerous connected parties: associates, trusts etc. Do you smell a rat with the Chancellor House deal? If you have strong views on the topic, please share them below, or send them to gareth@fanews.co.za
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