There is a broad consensus among government, business and labour in South Africa that Eskom urgently needs to be relieved of a huge chunk of its R450 billion debt burden. But the final restructuring model implemented should not compromise the stability of the financial sector.
This is the hardline that business has taken in its deliberations with social partners at the National Economic Development and Labour Council (Nedlac) where the Congress of South African Trade Union’s (Cosatu) drastic proposal to take R250 billion off of Eskom’s balance sheet in order to save the economy from possible collapse was being fleshed out this week.
The identified funders for Cosatu’s proposed bailout are the Public Investment Corporation (PIC), which manages R2.2 trillion in assets largely belonging to state pension workers, the Developmental Bank of Southern Africa and the Industrial Development Corporation.
At least 7.7% of the PIC’s R2.2 trillion would go towards the R250 billion debt relief package while the rest would be covered by the developmental institutions as well as private pension and retirement fund managers. The proposal, which Cosatu stresses is not a blank cheque, comes with a number of conditions, including no job losses and Eskom retaining its SOE status.
The discussions at Nedlac, which began on Monday, will see the social partners emerge with an agreement that is expected to be presented by President Ramaphosa in the State of the Nation Address on Thursday and subsequently be used to inform Finance Minister Tito Mboweni’s budget later in February.
Fear of junk
Eskom’s debt has ballooned in recent years due to a myriad problems including cost overruns from its new build programme which has been marred by corruption and years of maladministration and looting.
Cosatu has previously been against the use of state worker pensions to bail out Eskom, however, emboldened by a change in leadership following Ramaphosa’s election in May and concern at the absence of a concrete plan to steer the monopoly energy provider’s ship around when Mboweni presented the mid-term budget presentation in October Cosatu was propelled to act said the federation’s parliamentary coordinator Matthew Parks.
Eskom provides over 90% of the country’s energy but its inability to meet energy demands due to an ageing, unreliable and under-maintained fleet has led to billions of rand lost to an economy that has not grown by more than 2% since 2013.
“It was a huge wake-up call for us, we did not see a plan to save Eskom and to save the economy and that scared us,” said Parks. “We have been very nervous of Moody’s and we realised that the rating agency would give us until the budget speech before they drop us.”
Moody’s is the last rating agency to hold South Africa’s sovereign debt above junk status despite the state’s inability to halt the deterioration of its finances and the slow implementation in structural reforms. In addition to having a robust macroeconomic policy framework, Moody’s has credited the country’s “deep, stable financial sector” as the main factor behind South Africa retaining its investment-grade rating.
Protect ‘world-class financial sector’
It is this that business is not willing to compromise on.
Business Unity South Africa’s vice president Martin Kingston has said industry agrees with Cosatu that Eskom’s debt burden is too high and in its current form and structure the utility will not be able to service the repayments.
Kingston also agrees that an amount of R250 billion in debt-relief is an appropriate estimate of what needs to be removed from the utility’s balance sheet, but that Eskom would need to be restructured into a fit-for-purpose entity, or set of entities, that are capable of settling the residual debt.
The process of splitting the company is already underway.
Kingston said the social partners agree that financial resources need to be mobilised to action this proposal, either from the public sector or private sector but in a way that “the financial sector is not compromised in South Africa”.
“What we mean by that is, if we are, for example, accessing funding from pension or retirement funds it has to be within the mandate of those funds, be it the PIC or the private sector,” Kingston explained.
In addition, Kingston said, the process should not undermine the fiduciary responsibilities of trustees and those who have governance responsibilities, or in any way impair the risk-adjusted returns for those funds and, ultimately, for the beneficiaries. What is also critical is the assurance that there will be no resultant undue or inappropriate concentration or contagion risk.
“We have said all of that needs to be preserved because it will ensure the financial services sector in South Africa remains robust in the context of and in line with current regulation,” said Kingston.
“Because we think we have a world-class financial services sector and we are not prepared to compromise or prejudice that.”
The PIC and GEPF
While Cosatu’s bailout plan has been in the media since January following its proposal at the ANC’s Lekgotla and discussed at Nedlac — where it has been accepted as a credible solution — both the PIC and its biggest client, the Government Employee’s Pension Fund (GEPF), have said they have yet to receive a proposal or be consulted on the matter.
In a letter sent on Thursday responding to the Democratic Alliance’s member of parliament Geordin Hill-Lewis, the PIC’s acting chief executive Vuyani Hako said the PIC had only seen news articles about Cosatu’s plan but was not “privy to any document from Cosatu that proposes a recovery, restructuring or refinancing of Eskom’s existing debt” nor has it engaged with the federation.
“Investment decisions by the PIC must be consistent with the mandates of its clients. These mandates are drafted taking into account asset and liability studies and are approved by the Financial Sector Conduct Authority,” cautioned Hako.
“Any approach to the PIC about the possibility of investing in, or swapping investment instruments, must take into account the prescripts of these investment mandates [and] must be supported by a credible business case and be geared towards delivering sustainable returns for the PIC’s clients,” he added.
Kingston explained that there were many players to consider in this plan and the discussions would not take place only at the level of the GEPF or PIC but should start at the level of the fiscus by virtue of the fact that the fund is a defined-benefit fund.
In other words, the deliberations at Nedlac where key role-players in government, labour and business are involved are meant to result in a framework that will govern how the social partners can address the financial and operational challenges at Eskom and identify the financial and human resources that will be needed to alleviate the pressures.
Once the modus operandi is worked out, in this instance, the GEPF, as a possible source of funding, will be approached in the same way as any other fund.
Beyond dealing with the R250 billion Eskom issue, Kingston said social partners had also discussed infrastructure projects where funds will be ring-fenced for so-called impact investments which will have economic returns for the funds and social returns for the economy.
“The private sector is willing to consider those and they need to be creditworthy by definition, they need to be properly designed and structured and implemented and the business community is saying it is prepared to help design the structure for these projects and to fund them,” said Kingston.