Legal threats set to stymie unions’ Eskom plan

GEPF says any funding it gives Eskom must comply with its investment mandate.
Image: Waldo Swiegers, Bloomberg

A plan proposed by South Africa’s biggest labour group to get pension funds and state lenders to refinance part of the state power utility’s gargantuan debt faces hurdles that may be impossible to overcome.

Under the Congress of South African Trade Unions’ so-called social compact, Eskom’s R454 billion of debt will be cut to R200 billion, with the balance transferred to a specially created entity. That will be funded by the Public Investment Corp., which manages civil servants’ pensions, private retirement funds, the Development Bank of Southern Africa, the Industrial Development Corp. and other investors.

While the government and lobby group Business Unity South Africa have welcomed Cosatu’s plan, the main opposition Democratic Alliance and trade union Solidarity have threatened court action because they say it’ll put workers’ savings at risk. The Public Servants Association, which represents more than 237,000 state employees, has also voiced opposition to the proposals. The standoffs could take years to resolve.

Cosatu, which is part of the nation’s ruling alliance and represents 1.8 million workers, has also said the rescue plans hinges on Eskom and the government agreeing to a range of preconditions that will be legally problematic to meet.

Here are some of the potential sticking points:

Investment mandate
The Government Employees Pension Fund has said any funding it gives Eskom has to comply with its investment mandate, provide adequate returns and be repaid, and it will only be able to assess if those criteria can be met once the Cosatu plan is finalised. The GEPF has already invested 84 billion rand, or 18% of its assets, in the utility’s bonds, and it wouldn’t be ideal from a prudential perspective to have an excessive holding of a single asset, Abel Sithole, its principal executive officer, told lawmakers. The PIC manages the GEPF’s assets.

State guarantees
Cosatu wants the government to guarantee any investment workers make in Eskom, a commitment that has the potential to place further strain on state finances and undermine the case for South Africa to retain its sole investment-grade credit rating from Moody’s Investors Service. The state currently guarantees more than 60% of Eskom’s debt.

Investor opposition
Private investors in Eskom’s bonds including Futuregrowth Asset Management, South Africa’s biggest specialist fixed-income money manager, are vociferously opposed to any attempt to prescribe to them how to invest their clients’ money.

A lengthy legal battle is likely to ensue should the government try and force them to help fund Eskom.

Job security
The unions say their investment in Eskom is contingent on the utility not firing workers. But Eskom has more than 46 000 staff, or about a third more than it says it needs, and their numbers ideally need to be reduced for it to reverse losses currently running at more than 20 billion rand a year.

The unions also want Eskom to reduce its tariffs and increase the amount of free electricity it supplies to indigent households, a move that would compound its financial woes.

Contract renegotiation
Cosatu is calling for contracts signed with independent renewable-energy producers to supply the national grid to be renegotiated because it says prices are excessive. It’s also calling for Eskom’s coal-supply deals to be revisited with a view to cutting costs. More legal tussles would be in store if the utility were to renege on those agreements.

Plant overhauls
The unions wants Eskom’s coal-fired power stations that are reaching the end of their lifespans to be refurbished so they can use gas and other forms of fuel, so as to preserve jobs. The utility has said that option isn’t financially viable.

Municipal financing
Eskom supplies part of its output to municipalities, which sell it on to consumers and businesses at a mark-up, but all too often don’t pay their bills. Cosatu wants all customers to pay Eskom directly, a change that would require South Africa’s entire municipal-funding model to be overhauled.

© 2020 Bloomberg L.P.

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Good article.
Raiding pension funds is not going to happen easy. There will be a lot of resistance from members.

Whether they use pension funds to bail out the government or not, the net effect for pensioners will be the same. To understand this conundrum, we should ask ourselves this question – would it have made any difference to the current situation of pensioners in Venezuela or Zimbabwe if they bailed out the government?

If the GEPF bails out the ANC, for that is what they will do, whether they get a government guarantee or not, is irrelevant, they will have a shortfall to fund the pensions. The government is on the hook for any shortfall anyway, so there is an implicit guarantee already. That is not the point though. It comes down to unfunded liabilities of the government.

How does any government “fund” unfunded liabilities? By devaluation of the currency of course. What is the implication of devaluation? The loss of purchasing power for pensioners.

Therefore, it does not matter whether Cosatu uses their pensions to bail out the Tripartite Alliance (themselves in other words), or not. The net effect is the same. They will be bailing themselves out with the purchasing power of their pensions. Heads- the pensioners lose, tails- the ANC wins.

“If socialists understood economics they would not be socialists” FA Hayek.

Cosatu wants,demands, call for etc forever but they contribute nix.Except overpaid entitled workers. In any case-GEPF money all ultimately comes from the private sector taxpayers so stuff Cosatu-the taxpayers must decide.Not some fatcat union official driving a fancy car.

The trade unions always want to have their cake and eat it. Bailouts with absolutely no job cuts. Problem is, if they are allowed to have their way, there will be no cake left to eat. How come they don’t understand that?

End of comments.

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