Unexpectedly, Cosatu's new plan for Eskom, which will use government pension money to take on the utility's debt, has been welcomed by the presidency and business.

But investment experts have warned that it may be the first step on a slippery slope of prescribed assets.



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Eskom is in a debt death spiral – it owes R450 billion, equal to almost a tenth of the size of the South African economy. It is not generating nearly enough cash to fund its debt repayments.



For some time, Eskom’s former chief restructuring officer Freeman Nomvalo has been working on plans to deal with the debt. This reportedly included swapping Eskom debt for government bonds, and was scheduled to be released this week.

Then Cosatu threw a bit of a spanner in the works with its own debt proposal, discussed at the National Economic Development and Labour Council (Nedlac) last week, and which president Cyril Ramaphosa – and even business leaders - have welcomed, unexpectedly.

It was speculated that Ramaphosa could announce a new plan for Eskom's debt - based on a "pact" between business and labour following the Cosatu proposal - at the state of the nation address (SONA) on Thursday evening. But on Tuesday, Cosatu told Bloomberg that more time was needed for consultation.

What is Cosatu’s plan?

It wants the Public Investment Corporation - which manages money on behalf of the Government Employees’ Pension Fund (GEPF) - as well as the Industrial Development Corporation and the Development Bank of Southern Africa to take on R254 billion of Eskom’s debt.

In exchange, Cosatu outlined 26 “fundamental” conditions for the funding, including:

A proper staff audit must be conducted to determine if and where Eskom is bloated. "This must include what services are still being outsourced and if they should be outsourced," Cosatu says. But no Eskom employees must be retrenched.

Those who have looted from Eskom must be arrested and their assets seized.

Coal suppliers and IPP generation contractors must be forced to reduce their prices.

Eskom must be able to generate its own renewable energy.

A comprehensive debt recovery plan be implemented to recover the billions owed by departments, SOEs, municipalities, communities (including Soweto) and consumers at large. “There must be no exceptions. Treasury must simply deduct monies owed to Eskom by departments, SOEs and municipalities from their budget allocations and directly transfer it to Eskom,” Cosatu says.

A single payment account be established for all consumers to pay Eskom directly – bypassing municipalities.

The free electricity allocation to indigent households should be increased.

There must be worker representation on the Eskom Board.

All buildings in SA must be required to install locally produced solar panels over a 5-year period.

The debt will be moved to a special purpose vehicle. Cosatu doesn't see the PIC earning anything (including interest) from taking on the Eskom debt.

What would that mean for government employees?

Cosatu proposes that – via the PIC and the GEPF – a portion of civil servant pensions will be invested in a new Eskom “vehicle” which will house a large chunk of its debt. But even if the pension funds lose money on the Eskom "investment", this should in theory not affect civil servant pension payouts.

That’s because civil servant pensions are “defined benefit” – meaning they are guaranteed a specified level of pension payouts. (As opposed to most private sector funds, which are “defined contribution” – and don’t have any guaranteed benefits.)

So government – read: taxpayers – will have to cough up if the pension funds lose money and can’t cover the guaranteed pensions.

“This will create fiscal problems down the road, and place a big burden on future generations,” warns Olga Constantatos, credit and equity process manager at Futuregrowth, a fixed-interest asset manager.

Will Ramaphosa announce a reworked version of the Cosatu plan in SONA?

Probably not. Ramaphosa is reported to be “favourably disposed” to Cosatu’s proposal, according to his spokesperson, but said he doesn’t want to undermine the investment mandates or fiduciary duties of the PIC, the IDC and the Development Bank.

Meanwhile, according to reports, neither the GEPF nor the PIC have been approached about the scheme.

The GEPF and the PIC have a fiduciary duty to assess whether taking on such a large chunk of Eskom debt is in the best interest of their members, says Constantatos.

“Cosatu’s plan is a negotiation tract – but as a plan it’s totally unworkable,” says director and head of capital markets research at Intellidex Peter Attard Montalto.

What are the biggest problems with the Cosatu plan?

One of the main problems is that it will effectively introduce prescribed assets – which means that government will (for the first time since apartheid) force pension funds to invest in certain assets.

“If the PIC is forced to invest in Eskom, your private pension fund could be next. It’s prescribed assets by the backdoor – and could be the start of a slippery slope where retirement money is tapped to bail out state-owned enterprises,” Constantatos told Business Insider SA.

Pension fund savings are not Cosatu’s money to fiddle with, Montalto said.

He also believes that by bailing out Eskom using pension fund money, this will create perverse incentives for other state-owned enterprises to also try to go the same route.

Also, setting up the special vehicle to host the debt will also have considerable costs, partly because of the fees that investment banks consultants will charge, says Montalto.

Importantly, Eskom’s debt is just part of its massive conundrum – and not even the most urgent issue.

Montalto says Eskom still has some time to deal with its debt. It may require a bank bridge-to-bond (an interim facility) soon, but thanks to a large government bailout this fiscal year and next, the big crunch will only come at the end of March 2021. “Cosatu has overplayed the emergency of the situation somewhat, we need action in the coming fiscal year time frame,” Montalto says.

Eskom’s operational problems are as important and urgent to solve as its debt, says Constantatos. Its costs are too high and it is in desperate need of restructuring.

“If you bail Eskom out (via the PIC) – what will stop it from gearing up again? You can’t solve the debt problem without solving the other problems.”

Montalto also wants to see immediate action to allow private companies to generate electricity to feed into the grid, as well as the restructuring – and perhaps selling off – of its generating assets

How else can Eskom’s debt problem be solved?

A variety of remedies – in combination – have been proposed in the past.

One of the plans was the creation of a new vehicle to host Eskom's debt, which would be managed by Treasury. Government could also directly take over Eskom’s bonds - which in theory would lower the cost of repayments, given that Eskom pays a higher interest rate than government.

This would allow the utility some breathing space to fund the maintenance work that will help it keep the lights on. In the end, taxpayers and tariff payers will have to be prepared to shoulder the utility’s debts, Montalto said.

Thirdly, Eskom could secure “green” funding from development finance institutions in Europe. Loans of between R150 billion and R200 billion – at discounted interest rates - could be given to Eskom in return for moving away from coal-based power generation and decommissioning coal stations.

Then there is the option of renegotiating terms with Eskom debt holders – it helps that most of its bonds are in South African hands, with the PIC already owning a fifth of Eskom bonds. This could involve lowered rates and stretching bond terms.

But Futuregrowth, one of the biggest local investors in bonds, with some R194 billion of assets under management, says it has not been contacted yet about any debt plan for Eskom.

Compiled by Helena Wasserman

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