Plans to refocus on Eskom debt when Covid-19 dust settles

Cosatu’s proposal to relieve Eskom of R250bn of its debt using state pension funds was at the centre of earnest discussion at Nedlac.
To be sustainable and financially independent from government Eskom needs to get its debt burden down to R200bn. Image: Waldo Swiegers, Bloomberg

Efforts to address Eskom’s R450 billion debt burden have taken a back seat to the government’s focus on fighting the Covid-19 pandemic. 

“We cannot say that we have a debt solution and as soon as we settle down on the [Covid-19] related issues we will be able to give direction on what should happen to the debt,” Minister of Public Enterprises Pravin Gordhan said on Wednesday.

He was responding to questions in a joint parliamentary committee briefing where Eskom management provided an update on the utility’s recovery plan and its progress in the unbundling process.

The power utility, which has been described as the lifeblood of South Africa’s economy, produces 90% of the country’s electricity and has made progress in meeting some of the early targets related to its separation into three separate entities (generation, distribution and transmission).

It has also made progress in meeting key elements of the turnaround strategy, but still faces challenges – including an unreliable generation fleet, declining revenues and an outdated business model – and cannot service its debt.

The R250bn question

Eskom chief executive Andre de Ruyter said in a separate briefing last month that the utility would have to achieve a debt balance of R200 billion in order for it to be financially sustainable and not require assistance from government. 

Read: Big challenges remain but Eskom is making progress

Prior to the lockdown, government was in advanced discussions with business and labour social partners in the National Economic Development and Labour Council (Nedlac) about the feasibility of using money from the Public Investment Corporation (PIC) and two development banks to relieve Eskom of R250 billion of its debt through a special purpose vehicle.

The discussions, spurred by a proposal from trade union federation Cosatu, unfolded quite rapidly, reaching an “advanced” stage in March before the Covid-19 pandemic hit South African shores. 

Just last week the idea of the PIC being involved in Eskom’s bailout resurfaced, when PIC board chair Reuel Khoza was interviewed by eNCA. Khoza said the investment management firm, which holds R90 billion in bonds in Eskom, had developed a discussion document that proposes, among other things, converting the bonds into equity. 

Read: PIC proposes converting Eskom bonds into equity – chairman

With regard to Cosatu’s proposal, Gordhan said the broad framework for the R250 billion bailout is close to finalisation and that Nedlac partners will meet “within the next week or so to see if we have an adequate meeting ground” on some of the issues in the proposal.

Last year Gordhan appointed the chief executive of the South African Institute of Chartered Accountants (Saica), Freeman Nomvalo, as Eskom’s chief restructuring officer to interrogate the utility’s debt burden and collate proposals on how to deal with it. 

On Wednesday Gordhan told members of Parliament that those proposals, as well as anything new that has been put forward with regard to tackling Eskom’s debt, will be interrogated. 

Internal trading

Speaking on Eskom’s restructuring De Ruyter again emphasised that the entity is “not moving slowly” by opting for a divisionalisation or corporate reorganisation strategy as opposed to a full legal separation as initially proposed by the Department of Public Enterprises (DPE) in its restructuring roadmap. 

According to the roadmap, the complete legal separation of the three divisions would have been completed by December 2022, but Eskom’s own timeline – which will be the baseline moving forward – only sees full divisionalisation being achieved by March 2022, with a date for legal separation yet to be confirmed. 

“This approach allows us to prototype and road-test the three divisions before we go to a legal unbundling, and [this] will derisk the legal restructuring programme,” said De Ruyter.

Eskom has appointed different boards and divisional management directors for generation, transmission and distribution, and has developed divisional financial reporting structures.

De Ruyter said Eskom is working with the DPE to develop a market operator and a central purchasing agency to allow the transmission division to act as a buying agent for electricity generated by independent power producers. 

At the moment Eskom has internal power purchase agreements in place between its transmission division and 27 power stations in its generation division.

“We are running an energy market internally in order to simulate what will be required once the full nationalisation and restructuring has taken place,” he explained.

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How is it, when you have only 200 billion debt, then you are financially sustainable, after 250 billion debt went on a trip with a special purpose vehicle?

Poor smoke and mirrors. Eskom has at least R450bn of debt, maybe more as it climbs every day. Note that sales are declining, expenditure is the same or increasing as they try and fix ANC sponsored shoddy work, still pay “BEE” suppliers for rocky coal and keep a bloated, overpaid workforce.

But the article to me implies Eskom can only fund around R200bn, at best. The Gupta types didn’t care about this.

The billion ZAR question. Now what?

Splitting the business, bla bla is just deckchairs on the Titanic that will sink SA.

“Cosatu’s proposal to relieve Eskom of R250bn of its debt using state pension funds was at the centre of earnest discussion at Nedlac” and the terms “special purpose vehicle” make me smell a rat.

Hopefully cosatu will explain to state pensioners per signed letter that R250bn of their pension fund is dumped into the eskom dt-hole – which still does not guarantee that overstaffed eskom will be successful in any near future – next year eskom has a new excuse

The thing about debt is that it doesn’t go away unless you are one of the furtunate ones in the tiwnships to have been continually had debt written down thereby forcing the others that pay to pay your debts on your behalf.

They can use Cosatu members’/ Cosatu affiliated members’ pension savings built into the GEPF. As long as they leave the rest of contributors’ savings alone.

Invest where you work. Buy what you make, I sold my soul to the company store……

Excellent idea Henry. It’s time the theoreticians at Cosatu had some skin in the game instead of playing fast and loose with other people’s money. The trade unionists with their Communist/Socialist leanings always think ‘The State’ has endless money to fund their ideas. Truth: ‘The State’ has NO money – except that which they extort in the form of taxes from people who actually work hard and are productive. So, Cosatu, put your money where your mouth is.

I heard about a guy yesterday (can’t mention names) who buys COVID-19 protective equipment for R500 from a supplier and sells it to the Government for R2,100. That is just one reason why Eskom’s (and Government in general’s) debt is completely out of control. But somehow, this is called a “victory for transformation”.

Cosatu wants to use old people’s pensions to fund the salaries of the excess workers at Eskom.

Having a trade unionist in charge of the ANC’s economic policy and another trade unionist in charge of Trade and Industry is like appointing a rugby coach for a soccer team – no clue of what to do.

Crazy, these unions propose to pay their salaries with their pensions. Except that the COSATU boss’s pensions are probably safe some where else, but their cashflow of union dues is secured.

End of comments.

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