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Eskom: Secured lender or state utility company?

Value of its staff home loan book exceeds that of its coal supplies.

There is a very significant line item on Eskom’s balance sheet which has nothing to do with the generation, transmission and distribution of electricity. As at financial end March 31 2013, Eskom’s secured employee housing loan book sat at a notable R7.926 billion. This is in the same league as its debtors book relating to large local power customers (R9.957 bn) and it dwarfs its coal inventory at R5.3 bn.

In the six months after year end, the home loan book has moved up to R8.3 billion, an increase of close to R400 million, and 18 500 staff members (40% of the 46 600 workforce) have employer-granted home loans. At most recent year end, the average loan balance was R800 000 (weighted average loan of 0.01% of total loan book). Eskom has indicated it wants to increase this loan book to more than R10 billion in the next few years and finance home loans to 55% of its workforce.

Current loan rates available to employees are on average 0.5% below prime and average loan terms are 27 years – contrasting with most homeowners who would get prime plus 1 or 2 % in an arms-length transaction with a commercial bank, with a usual term of 20 to 25 years.

Eskom home loans are available to employees right across the spectrum, all the way up to the most senior of staff. The latest year-end balance sheet shows two Executive Management Committee home loans outstanding – a loan of R4.4 million to Thava Govender (Group Executive Generation), whose annual package was R4.5 million; and the other to Dan Marokane (Group Executive Technology & Commercial, and Acting Group Capital) who earned R4.5 million and owes R4.6 million on his home loan. Outgoing CEO Brian Dames repaid his loan in full during the 2013 financial year.

Terms of these Exco home loans appear to be more favourable than those of mainstream staff – with interest rates for this level of seniority disclosed at 6.75% (reduced from 2012 when it was 7.25%) and maximum terms of 30 years.

The size and terms of the Eskom home loan book will no doubt irk South African consumers and businesses who have been subject to punitive and ongoing tariff increases and an unstable electricity supply. Eskom is well known for being a very generous payer and its average salaries should enable employees to independently access their own home funding in the open market.

A recent Credit Suisse report shows that average monthly wages in the broad electricity sector are at R30 600, way higher than mining (R15 000), manufacturing (R13 500) and financial services (R16 000). Eskom appears to pay above its sector norm, and last year there were media reports highlighting average earnings of around R633 000 per employee based on information disclosed when Eskom was applying for tariff increases, with average annual salaries expected to be R820 000 in 2017/18.

It seems like what was a once admirable initiative – to ensure that lowly paid employees who would not qualify for bank loans can purchase their own homes, and at favourable interest rates – has gone way beyond the mark. It is a noble cause to assist with home ownership at the lower end of the scale, especially during these tight lending conditions – but the concept has been extended up the ranks to encompass staff who obviously do not require financial assistance.

Eskom does not give details of borrowing limits in relation to annual salary, whether employees can access further funding from their home loans in a rising property market, or whether they can have more than one home loan. Taxpayers and electricity customers would hope that Eskom is not funding holiday homes or investment properties or equity access that is used for other asset acquisitions such as personal vehicles.

Another unsatisfactory observation on the home loan book is that there are loans outstanding which relate to staff who have left the company. Eskom indicates that on termination of employment, bond holders – be they managerial or non- managerial – are given three months in which to transfer the home loan to an alternate financial institution. If this is not done, the home loan continues with Eskom, but a ‘significant penalty interest rate’ is levied. Eskom does not indicate what this penalty rate is.

Eskom confirms that there are ex- employees, both non-managerial and managerial, who, despite this penalty interest rate, choose to keep the loan facility with Eskom. “In terms of legislation, as long as the ex- employee continues to service the loan, EFC (an Eskom finance subsidiary) is unable to take any action to terminate the facility. Should the ex- employee however default on repayment, the process to foreclose is commenced and the end result would be disposal of the property to recover any outstanding loan amount.”

This means the Eskom Group gets involved in dramas such as bad debt collections, as well as the consequences of non-payment including foreclosure, repossession and public auction. As at March 2013, there was R152 million of the R7.926 billion in arrears, with R88 million of this older than two months. The bulk of the arrears should logically relate to ex-employees, as current employees would have their monthly repayments taken straight from payroll.

Eskom explains the origin of its home loan initiative, which is facilitated through its subsidiary Eskom Finance Company SOC (Pty) Ltd (EFC). Started in 1990, it was a joint venture with the large SA commercial banks, aimed at providing Eskom employees with access to housing and home ownership through competitive housing loans. Operating in over 330 different sites across South Africa – many of which are remote with underdeveloped housing sectors – employees could then tap into normally inaccessible funding, and furthermore benefit from a “group” interest rate (versus an individual risk based rate). In 1998, Eskom took complete control of the home loan book, buying out the banks, so it could manage funding of this book in a more cost effective way.

In assuring that there is no reckless/preferential lending activity, Eskom highlights that EFC is a registered Financial Services Company, governed by all applicable legislation. “Lending criteria and granting of home loans are governed primarily by the National Credit Act which requires that a means or affordability test is done prior to the granting of any credit. These rules are strictly applied.”

Over the years the home loan book has become a weighty issue for Eskom, and in 2006 Cabinet decided to dispose of EFC. The first step in this strategy was the securitisation of a portion of the home loan book in play at that time. But since then, there has not been further progress and Eskom Treasury continues pumping money into EFC. Eskom says it “continues to engage with the Department of Public Enterprises in finding an optimal and cost effective solution to the future positioning of EFC”.

*Judy Gilmour is a freelance corporate writer and chartered accountant.

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