Eskom’s debt is a double-edged sword
The dilemma surrounding the government’s bid to restructure Eskom: Either the state puts pensioners’ retirement savings on the line, or a critical state utility faces the prospect of failure.
Public Enterprises Minister Pravin Gordhan remains silent about details of the government’s intentions to recapitalise Eskom after signing a social compact on behalf of government with unions and business to save Eskom from collapse. Could the government finally be on the way to getting its hands on SA’s retirement savings to rescue the ailing utility?
One of the government’s biggest challenges — and one seemingly impossible to fix — is Eskom’s unprecedented R480-billion debt. The debt has not only been a drag on consumers who have had to endure inflation-plus tariff increases for electricity for more than a decade, but is exacerbating the instability of Eskom’s old generation fleet. With poor maintenance and over-reliance on open-cycle gas turbines, which operate on (expensive) diesel, Eskom’s power plants are running at full capacity on average only eight months of the year.
Against this backdrop, Eskom may be given a lifeline after talks between government, business, labour and civil society, culminating in a “social compact” which was signed by all parties on 8 November at the 25th Annual National Summit of the National Economic Development and Labour Council. An essential part of the compact is reducing Eskom’s debt, possibly using the country’s retirement savings via the Public Investment Corporation (PIC) and others.
Gordhan released a statement about compact, but it was surprisingly thin on details about recapitalisation efforts.
Considering Eskom’s dire financial position, there are legitimate concerns on the one hand about using retirement fund members’ savings to fix an ailing business. On the other, SA Inc simply cannot afford to have Eskom fail — or the entire country risks economic devastation.
Fasken pension funds lawyer Rosemary Hunter says that using retirement savings to bail out Eskom is of course a concern, but what else can the government do?
“It has to keep the lights on to keep the economy going and to avoid a jobs bloodbath. If it goes pear-shaped it will cut the defence, health, education, etc budgets. So we will all hurt. But what is the alternative?”
Hunter says that as a general principle, everyone who has income has to support more people. But if the economy tanks and we are all deprived of income-earning opportunities, we all starve.
It’s still unclear whether the compact will result in new thinking about selling off equity to retirement funds or raising capital through bonds. Either way, there are tough questions:
For example, Ian Scott , portfolio manager of fixed-income funds at Momentum Investments, says if Eskom is raising new capital through new bond issuances, there is no way that the government will be in a financial position to guarantee the scheme. This means that retirement savers will be on the line.
Eskom posted a staggering R20.5-billion loss for the year to March 2020, driven by existing finance charges of R31.2-billion for bondholders, so if refinancing means significantly reducing existing finance charges, while at the same time addressing the issues around the functioning of Eskom, improving governance and rooting out inefficiency, there’s a chance that this might work. But one will be hard-pressed to find another ailing state-owned company that has achieved such a turnaround.
The second option is that the government sells an equity stake in Eskom. Here things get really tricky. For starters, any investment manager worth his salt will require a higher return than a debt investor due to the risk they assume. Dividends are not guaranteed, so how then will the PIC and others justify the investment as it will need to show returns to members? Furthermore, Eskom’s revenue is too low to support interest payments, so tariffs will need to be significantly revised. There are too many uncertainties facing Eskom for any fund manager, fulfilling their fiduciary duty, to consider this option.
Furthermore, Business Maverick has learnt that Eskom’s current debt holders have a negative pledge and “change-of-control” clause in their contracts, which effectively means that the government’s shareholding cannot drop below 50% without their consent. Any equity proposal will have to be compelling for Eskom’s current bond holders if it meets this threshold.
Hunter believes that we just have to trust and demand that Eskom’s new management will use the money wisely and repay it with reasonable interest so that retirement funds can continue to pay benefits of reasonable value, taking into account the amounts contributed to it by employers and public sector employees and returns earned on the investment of those assets — including investments in Eskom bonds.
A retirement fund does not, and cannot be expected to, promise the stars. But it can and must demand that investee entities use the loans granted to them by the GEPF wisely, with due regard for the interests of its investors including the GEPF, its members and the state as their employer. The promise of longer-term growth in the greater economy must be worth the risk taken now. Stronger governance and accountability must be part of the social compact if any investment is to succeed and Eskom is to avoid the mistakes of the past.
Eskom declined to comment. BM/DM
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