Cosatu is correct about PIC funds and Eskom

The Congress of South African Trade Unions’ (Cosatu) proposal to deploy R250 billion of Public Investment Corporation (PIC) managed funds to reduce electricity utility Eskom’s debt has set the cat among the pigeons.

Criticism of the proposal ranges from the likelihood of the cash injection serving as a disincentive for Eskom reform, exacerbating the state’s financial liabilities since government employee pensions are a defined benefit scheme, with the state bearing responsibility for pay outs in the event of the Government Employees Pension Fund’s failure to meet its obligations.

Yet another criticism is the danger of moral hazard – simply put, Eskom is unlikely to honour its side of the bargain.

In fairness, it is difficult to ignore this argument in the light of the goings-on in the State-Owned Enterprise (SOE) sector.

It is also argued that Cosatu’s proposal lacks a “detailed vision on just how funds raised through pensions of public servants will ever be returned with interest or just how the SOEs in question will be returned to profitability”.

While they may sound appealing, the critics appear oblivious to the gravity of the electricity situation and the vital need to restore security of energy supply. For starters, the PIC is the single-biggest holder of Eskom bonds of long standing, totalling just under R100 billion – the utility already owes the PIC in any case. The existing debt could be converted into equity and a formula found to calculate the percentage.

From this point of view, the moral hazard argument turns on its head since the real hazard is a collapse of Eskom which would come to fruition by doing nothing to address the utility’s debt crisis.

The R250 billion proposed by Cosatu – or whatever amount is significant enough to reduce Eskom’s debt – would be new money which increases whatever would be the PIC’s debt/equity swap. Some in the policy space argue that government could guarantee returns at an agreed percentage above inflation over a period of time.

Already, national treasury has budgeted R59 billion for Eskom over the current medium-term budget which could be utilised, in part or in whole, to provide the guaranteed return to the PIC.

This route would obviate the need for a special purpose vehicle which might imply additional costs the country can least afford.

Eskom has not once defaulted on its debt obligations to the PIC, which does not mean that such a day might not arise. The PIC is invested in many listed and non-listed companies throughout the economy and it has an interest in the sustainability of each one of them, including Eskom whose bonds it has purchased.

This week, Eskom lost an urgent application before the High Court in Pretoria to set aside the National Energy Regulator of South Africa’s decision to refuse the electricity utility a 17% tariff increase in the next two years. Under normal circumstances, Eskom could presumably have weathered the storm, but not at the moment – it needs every cent it can muster.

The argument that a PIC cash injection into Eskom would militate against the restructuring of the utility is tantamount to saying that the utility’s healthy financial position is an anathema to the process. In view of the appetite of powerful vested economic interests for the unfettered market access of independent power producers and the demand that Eskom stays out of the renewables space, the argument reveals more than it conceals.

Cosatu’s proposal might have its shortcomings but the principle underpinning it is commendable and exudes the spirit the country needs to address our pressing problems and challenges.

The Cosatu document, “Key Eskom and Economic Intervention Proposals”, in which the proposals are contained reads, in part: “Cosatu’s approach is based upon a social compact, where all parties from government to labour, business and society make a contribution and where necessary, a sacrifice for the sake of the national interest.”

The federation stresses that: “It is critical to understand that [the proposal] is not a blank cheque or a donation.” It is tied to a number of conditions such as:

• “A comprehensive public audit of all Eskom contracts and expenditure, [including] coal supply contracts;
• Those who have looted must be arrested and their assets seized;
• Those who mismanaged [the utility must] be dismissed and held personally financially liable;
• Coal suppliers and independent power producer (IPP) generation contractors must be forced to reduce their prices or their contracts cancelled and assets expropriated;
• Eskom’s generation mandate must be expanded by the minister to allow it to expand its own renewable energy generation capacity;
• The relevant investment in battery storage for renewable energy must begin, and;
• A comprehensive debt recovery plan be implemented to recover the billions owed by departments, SOEs, municipalities, communities (including Soweto) and consumers at large.”

Even if Cosatu did advance these conditions, the amount of money required to save Eskom requires additional and stringent measures intended to prevent relapse into the abyss.

In its statement yesterday, the PIC listed “Eskom’s growing debt burden, governance reforms, operational effectiveness, procurement practices and reliable supply of power to the economy” as part of the issues required for a lasting solution to the utility’s problems.

Supposing that the critics are correct, including with respect to inevitability of an all-round fatalistic scenario of a moral hazard and the PIC’s failure to make a return, they are obliged to answer an urgent and critical question about what happens to Eskom’s liquidity in the short to medium term.

Says the Cosatu document: “[Eskom] threatens not only to implode the state but also the economy. Not only are the jobs of workers at Eskom at risk but in fact all workers in the event of Eskom collapsing.”

If Cosatu’s estimation of the destabilising potential of Eskom is correct as one is persuaded that it is, does this not make the social-compacting that the federation is proposing that much urgent? Or does the less than desirable state in which many of our SOEs find themselves and the weakened capacity of the state inspire other impulses whose manifestations the country might yet again have to contend with in another decade from now?

Mukoni Ratshitanga. Picture: Neil McCartney

• Ratshitanga is a consultant, social and political commentator. (mukoni@interlinked.co.za)

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