Eskom’s rescue plan must ‘not threaten financial sector stability’

Busa’s Martin Kingston stresses that any bailouts to the utility have to be within the mandates of those funds.
VP of SA's business lobby, Martin Kingston. The plan is expected to be announced by President Cyril Ramaphosa during his State of the Nation Address. Image: Moneyweb

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.

Read: Cosatu wants Eskom deal to be announced at Sona

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.”

Read: Moody’s leaves South Africa teetering on brink of ‘junk’

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. 

Read: Eskom: Gordhan open to pension bailout

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. 

Framework first

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. 

Read: Eskom’s plan: Structured and deliberate

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.



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“… by virtue of the fact that the fund is a defined-benefit fund.”

This is all smoke and mirrors. It’s easy to offer up the pension pot when it’s the taxpayer who will pay for any eventual shortfall.

Only problem is that, according to a recent report by SARS, 97% of ALL income tax is being paid by fewer then 3 million people (out of a total population of almost 58 million). This tiny minority of taxpayers are also paying the bulk of all other taxes: VAT, corporate, CGT, DWT and and and.

Bottom line: there is simply no way that this overburdened minority can then cough up the cash once one-eighth of the PIC’s money has vanished into the black hole that is Eskom. So GEP’s ‘defined benefits’ are simply going to disappear. Think about that if you have a GEPF pension.

There should be some form of reciprocity as part of the bailout process. It should be a transaction, not a donation.

The GEPF should demand policy changes similar to what the IMF would demand. The IMF is the only alternative. The ANC goes to the pension fund because they don’t like the prerequisites from the IMF.

The GEPF should demand the implementation of free-market policies, a return to the rule of law and property rights, the abandonment of BEE and the Mining Charter, scrapping of the minimum wage and labour laws, abolishment of the redistributive rates and taxes regime and a smaller government.

Without these prerequisites, the money will simply disappear into the BEE gravitational hole. SOEs are wormholes that suck savings out of pension funds to spit it out at the opposite and at BEE contractors.

The GEPF is not bailing out Eskom. They are bailing out the BEE contractors who are stealing from Eskom.

As someone pointed out on SAFM; the GEPF does not belong to “government” (the ANC regime) or any union. Its trustees will either have to be convinced, bribed or strong armed into providing the loot. If they attach conditions an obvious one they will not be allowed to attach is to reduce the bloated staff complement or their bloated salaries. Hence it is pretty much doomed to just be a bailout that taxpayers will eventually be asked to cough up for.

I assume that the R250 billion is currently invested somewhere. So will R250 billion of asset sales be dumped on the JSE or somewhere else? What will the effect of that be?

Correct. The GEPF does not have sufficient liquid assets to enable this donation. They would have to dump R250E9 of value and exchange it for something of little or no value.

Gosh…..! Looks like the ZAR/US$ exchange rate is going to break through R15 anytime soon today…

….how right I was, breaking through R15/USD during late morning session.

And against the GBP, the ZAR at current levels, just need to depreciate a further 3,5% to break through R20/Pound. (…what a convenient figure to do off-the-cuff conversions from UK online websites…”add a zero & X2″ to arrive at ZAR equiv.)

….above R20/GBP will be like “Deja Vu 2015/2016” all over again!

There is no question that Eskom must be saved. Otherwise the economy of South Africa is finished. The solution that Cosatu seems to have come up with could work, in my view. IF:

1. One form of debt is not replaced by another. Eskom just cannot service anywhere near its current level of level of debt. So the funding would therefore have to be in the form of equity. That means bringing on new, possibly private, shareholders (including COSATU). And the shareholders; be they the state or private, would not see any return unless Eskom made a distributable profit. It bears repeating that Eskom cannot afford to pay interest. That is a fact. So no point in just rearranging the deckchairs, then.

2. The management of Eskom is competent, objective, honest and open to accepting electricity generated in the private sector without red tape and the type of obstructiveness we have become used to.

3. Crony contracts must be eliminated very rapidly. [The ANC should “expropriate them without compensation”.] Long-term coal supply contracts should only be inked with reputable, reliable miners on a competitive, cost + capex plus a reasonable margin basis – the old model, which worked really well, in effect. There should be absolutely no, shall we say, “privileged” treatment of “certain” tenders. This type of corrupt practice is what got us to where we are now. IT MUST END FORTHWITH.

4. Governance must be strong and transparent and government interference for political gain or other nefarious agendas must never be allowed.

On this basis, it may be possible to turn Eskom, in my view. But it will require a change of mindset by the ANC, which has thrust South Africa into this diabolical crisis situation.

The alternative to a solution like this is ultimately an economic meltdown, ever growing unemployment, even more crime, civil unrest and widespread violence. There is, therefore, really no other realistic choice, is there? So let’s get it done before it’s too late. ENOUGH TALK and PROCRASTINATION.

Dream on Steve, dream on. But when you wake up, you will yourself in a socialist cadre-deployed BEE hell in Africa.

If Eskom cannot afford to service its debt then how is it going to service its equity? If the equity is not serviced then who in their right mind would invest? Let us phrase this in another way: If Eksom gets a capital injection then this begs the question as to what they will do with the money. If for example, they managed to raise R450E9 in equity, then they could be debt free if they used this cash to pay off their debt. In such a scenario we ask ourselves what is the present value of the future cash flow that would accrue to these investors? This would obviously depend on the level of management skills and constraints e.g. BEE to which the entity is subject. Even with expert management skills and no BEE, inefficiencies, rampant theft etc, the present value of the cash flow, accruing to the new equity holders, would not be anywhere near R450E9. Thus the [new] equity holders would be making a small fortune by starting with a large one. This is ill advised from an investment perspective. Oddly enough the Chunnel on completion, was faced with a similar dilemma. An entirely functioning entity (far more so than Eskom) that was bankrupt and could not service its debt. In such cases the company’s assets needs to be distributed to the debtors. The debtors will get a haircut but the equity holders lose all (these are the rules). Only then under private management will the remnants of Eskom become a wealth creating entity.

Exactly and Frans Cronje says pretty much the same. It is just another bailout.

Eskom is not too big to fail it is too big, full stop. The thing should be dismembered honestly and openly (ha ha, imagine the ANC doing that!!). Sell off the generation units and open the market to IPP’s to tender to provide power at every level; big business, municipalities and households. Again, openly, no BEE or AA bribery for pals and cadres.

Never happen I know and hence, no hope for the SA economy.

Hi Steve.
You seem to forget we are living in Africa. Your comments would work in a proper working economy not in a Socialist state.

The unions are just trying to save their own skin as usual. If they truly felt the need to assist SA’s economy, they would willfully resign!

My concern is that it is stated that the COSATU loan is given on condition that there must be no job losses. One would expect that from a trade union, its their job to protect workers. But how can one accept a loan under those conditions? If ESKOM is considerably overstaffed and selling too little electricity to carry staff costs the debt will increase with time. ESKOM will again have an unmanageable loan in no time.

No amount of money will have saved vessel Titanic from her destiny.
Ones the course is set by a unknown forge, we al go to the place named destiny. Eskom can only be saved from outside human resources. The inside have been proven not capable.

End of comments.





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