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27 Jul 2018 00:00
Power struggle: Eskom cannot be left to collapse because it would be catastrophic for the country but views on how it should be rescued have not yet been agreed on. (Marco Longari/AFP)
The idea of using state workers’ pension money to bail out ailing Eskom has again resurfaced, after its latest financial results revealed the unrelenting stress it is facing.
ANC treasurer general Paul Mashatile reportedly told the Cape Town Press Club on Tuesday that the party is proposing that, along with splitting the utility into generation, transmission and distribution arms, the Eskom debt held by the Public Investment Corporation (PIC) be converted into equity.
This idea has been mooted before but unions warned that PIC money cannot be used to bail out looted state-owned entities and any proposal would require labour’s participation in these discussions.
Investment industry experts argue that the move would be questionable given Eskom’s “broken” state and in the face of other options to stabilise its finances, such as asset disposal.
The PIC manages R1.9-trillion on behalf of the Government Employees’ Pension Fund (GEPF) and social welfare funds such as the Unemployment Insurance Fund.
Through the PIC, the GEPF holds about R86-billion in Eskom bonds and bills, according to the fund’s most recent financials. Eskom’s debt securities and borrowings amounted to R388-billion as of March 31, according to its annual results.
“We must be open for engagement … as labour is the biggest stakeholder in the PIC,” said Dennis George, the general secretary of the Federation of Unions of South Africa.
But in a statement on Thursday, welcoming a commission of inquiry into the PIC, labour federation Cosatu warned the ANC and the state that it would strike if worker funds were used to “massage the looting done by government”.
“If they want to talk about the PIC they must come to us as workers because they will not impose any decision on us about the workers money,” Cosatu said.
Cosatu’s parliamentary co-ordinator Matthew Parks said Cosatu did not want to see state-owned entities collapse, particularly Eskom, given the threat it poses to the economy and the role it is expected to play in national development.
“But you cannot use public pension money to bail out looting,” he said.
Cosatu might, however, be more open to a proposal that would result in the PIC rather than a private firm becoming an equity partner because labour could potentially have a greater say in protecting workers’ jobs, he said.
The PIC’s primary goal was to ensure a good return for state pensions and a move that would see the PIC take up equity “sounds like yet more short termism”, Parks said.
Eskom’s results revealed a R2.6-billion loss at group level, which includes its subsidiaries.
Eskom noted in its financial statements that it was not generating enough cash to meet its operational requirements and service its debt, and that it must borrow to pay its debt and for investment.
Last year, former finance minister Malusi Gigaba suggested that PIC funds be used to prop up ailing state-owned entities. It was at a time when investors stopped lending because of concerns over corruption. Unions condemned the idea at the time.
The PIC’s head of corporate affairs, Deon Botha, said although the PIC did hold Eskom bonds “no decision has been taken to convert this bond exposure into equity”.
The GEPF also said it had not taken any decision to convert its Eskom bond exposure into equity.
Labour unease over a perceived threat to workers’ pensions did not stop the ANC at its elective conference in December from deciding to investigate the introduction of prescribed assets. This would require all pension funds, private and government, to invest a part of their money into state projects.
Adrian Saville, the chief executive of Cannon Asset Managers, said that if the proposal had been made 20 years ago when Eskom was financially sound, it might have been more acceptable.
“Today you are proposing putting money into something that is fragile, and by definition pension funds have to be prudently allocated,” he said. “So [it’s difficult] to reconcile prudent allocation with putting money into what … is a financially broken state-owned enterprise.”
The risk that Eskom poses not just to the economy but also to the national fiscus is potentially catastrophic. The government has guaranteed R355-billion of its debt and, should Eskom default, the government would be called upon to pay lenders.
“Having Eskom fall over is a far more horrendous outcome … than obliging the government pension fund or any other pension fund to fund the [power utility],” said Saville.
He said there were other ways to improve Eskom’s balance sheet such as selling the company or selling assets such as land.
Despite political opposition to privatisation, the notion of converting debt to equity was essentially “changing the ownership structure of Eskom. This is a case of bringing in a new or different shareholder. Because this is the PIC, I think it’s more palatable.”
Meanwhile, Eskom must borrow money to make it to the next financial year. It aims to raise about R72-billion for the current financial year and is confident that investor appetite for its debt is improving, citing the$2.5-billion loan agreement signed with the China Development Bank on Tuesday as signs of this.
“Both local and international financial markets have demonstrated an improved appetite for Eskom’s credit,” said acting chief financial officer Calib Cassim.
The deal means Eskom has secured 62% of its funding requirement.
But Grové Steyn, the managing director of Meridian Economics, questioned whether investor sentiment had turned around as it remained to be seen how Eskom’s plan to raise R20-billion from international bonds plays out.
Eskom’s new board is reviewing its business model to respond to global changes in the energy industry.
In its review, Steyn said, Eskom had to consider ending its reliance on “the coal model”, procuring more renewables and cost cutting, including retrenchments.
The primary question was not how to fix Eskom but how to fix the power sector, he added.
“A key aspect of this will be to remove the transmission function from Eskom to create an [independent transmission, systems and market operator]. This will be an important step towards creating the environment we need to exploit the opportunities for cheap renewables in South Africa.”
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