With the clock ticking to President Cyril Ramaphosa’s State of the Nation Address (SONA) on Thursday night, 13 February 2020, there is much discussion over what many hope will be the main course to emerge from the present policy cauldron.

This is the plan to restructure Eskom’s finances and at the same time those of the state. The aim is to ward off a credit rating downgrade and provide a financial fix to the existential threat which Eskom poses to our futures.

Under public discussion is a proposal motivated by trade union federation Cosatu which suggested accessing R250-billion of the pension funds of state workers to reduce Eskom’s debt to about R200-billion, a level which it has previously said is manageable.

But Martin Kingston, vice-president of Business Unity South Africa (Busa), who leads business representation in discussions on Eskom both in negotiating forum Nedlac and a presidential working committee arising out of the Jobs Summit, says that while Cosatu’s proposal was extremely useful and catalysed thinking on the issue, the discussion has moved on somewhat.

Kingston says discussions are now centred on a framework agreement by government, business, labour and civil society which is intended to be finalised in time for inclusion in Thursday’s SONA. The agreement is intended to provide broad consensus on the way forward for a solution for Eskom’s operational, structural and financial challenges.

This means that the agreed framework is not a Cosatu plan, but one supported, including in a presidential process, by the social partners, government, business, labour and civil society as represented at Nedlac. 

Cosatu’s input was an important ingredient, says Kingston, but “discussions have developed beyond that”. He says that Eskom’s debt of R450-billion, as is widely agreed, is unsustainable and a financial challenge to both Eskom and the fiscus. Ideally, R250-billion should be removed from its balance sheet.

This should be done, says Kingston, in a manner which “does not compromise the standing of the SA financial sector”.

Any restructuring would be within the mandates of the financial institutions involved, so that the fiduciary responsibility of the trustees are not undermined, that risk-adjusted returns are not hurt and that the current regulatory environment is respected.

Kingston says it has always been the position of business in these deliberations that what is agreed should not include prescribed assets.

President Ramaphosa, who has been personally involved in these deliberations for some weeks now, has appeared to support the use of pension funds to restructure Eskom but had insisted that this be within the mandates of the institutions involved. It remains to be seen just how much confidence Ramaphosa can muster this Thursday should the framework agreement be in place by then, and what comfort the financial sector can take from assurances that these investments will meet existing prudential requirements.

Assuming Ramaphosa is able to outline a bold plan which will get sufficient support, this will be confidence-enhancing, even though such a plan is unlikely at this stage to translate into actual numbers in Finance Minister Tito Mboweni’s Budget later in February.

Kingston would not be drawn on the precise proposed mechanism for restructuring Eskom’s debt, saying that this would be a separate process led by experts once broad agreement had been reached by the social partners. “Once a framework agreement is in place an appropriate instrument will need to be found.”

A mooted possibility is setting up a special purpose vehicle (SPV) to manage the restructuring, but there is no intention for the structure of the SPV to be agreed between now and Thursday in time for the SONA.

Kingston says the government guarantees Eskom’s debt, implicitly or explicitly. The credit rating agencies already include the contingent liabilities or guarantees which the government has agreed on the debt of state enterprises, most of which is that of Eskom. He says that depending on the structure, the vehicle or instrument can extinguish or assume the debt.

“We are saying the Government Employees Pension Fund (GEPF) is a potential source of funding like all other public and private, both domestic and international, financial institutions,” says Kingston.

He stresses too, that what is under discussion will not be a “quick fix”. Once a broad agreement is in place, workstreams are likely to be set up to look at various financial options in detail. This part of the exercise will likely consider what support can be put in place to ensure that the SPV investors get appropriate returns on their funds.

All parties see the operational performance by Eskom to be key in any proposed restructuring.

If the Public Investment Corporation (PIC) is indeed able to consider debt to equity conversion, any such conversion should be contingent, says Investec Asset Management’s Nazmeera Moola, writing for Business Maverick.

“Step one would be a six-month interest holiday. If Eskom meets specific operational targets, then step two would involve an extension of the interest holiday for a further period, perhaps 18 months.

“If Eskom meets a more comprehensive set of operational targets, which should include the set-up of an independent buyer of electricity, then the debt would be converted into equity in two years’ time,” she says.

“In this way, Eskom would receive the financial relief that is badly needed to give it room to make badly needed operational improvements – without removing the imperative to make these changes. The risk of an immediate equity conversion is that when the pressure is removed, no operational changes are made.”

Cosatu does not provide much detail on its proposal to reduce Eskom’s debt from R450-billion to R200-billion through an SPV, says Kenneth Creamer of the economics department at Wits, writing in Business Day.

“Clearly, Eskom is in need of debt relief. Its balance sheet has been severely damaged by corruption, huge cost overruns on new power plants and adverse electricity tariff determinations by its price regulator. If Eskom could be given some form of debt relief it would be able to move closer to a situation where its annual revenues could match its annual costs,” says Creamer.

“In principle, an SPV could work well. Research by economist Grové Steyn indicates that Eskom’s debt restructuring would not trigger a default event if a new, state-owned SPV offered Eskom debt holders the same conditions as they now enjoy on Eskom debt. The government could then use the SPV to refinance Eskom’s debt at lower cost and create incentives for its accelerated restructuring,” he says.

Fedusa, which also has a seat in Nedlac, has taken an opposite position to Cosatu, saying in a statement on Monday that it did not agree that the pension funds of state workers should be used to bail out Eskom. It suggested rather that the utility, like SAA, should be put into business rescue.

“Fedusa rejects the proposal to raid R254-billion of public servants’ pension money warehoused in the Public Investment Corporation to bail out the utility,” it said.

The GEPF, which is likely to up the bulk of the funds in a proposed Eskom restructuring, has said that it has not been approached on the issue.

GEPF principal officer Abel Sithole recently told Business Maverick that he will only consider recapitalising Eskom if the government puts in place a credible business plan for restructuring the power utility together with strict repayment terms and conditions. These include an attractive return on investment and government guarantees on any money it extends to Eskom. BM