In mid-2019, a proposal by the biggest owner of Eskom’s debt, the Public Investment Corporation (PIC), to convert its R90-billion holding into equity was touted as a hare-brained rescue option to restructure the troubled power utility that was largely responsible for bringing SA Inc. to the edge of the fiscal cliff.
Then came Covid-19 with additional pressures on the economy, and now the same madness has resurfaced. It was hardly a bold bid by the audacious then and now, it’s more like the last throw of the desperate.
In the event of this madness coming to pass, the PIC, which manages about R2.2-trillion and is responsible for the pensions of more than a million state workers, will end up owning equity for which there is no active market and which no one else wants. In return, they would presumably get a say over Eskom’s messy finances, including board representation.
The questions, apart from the plain fact that this would be entering an unacceptably risky swap, are: Does the PIC have the requisite expertise to sit on Eskom’s board? Which “division’s” board would they sit on? How would this be received? Why was it mooted before and forgotten about? What other covenants would such a move trigger with other lenders? Is this in line with the PIC’s mandate?
To answer the first question, the PIC itself does not have the expertise, but that shouldn’t deter them, after all, they are entertaining an idea of investing in Moroccan real estate. Where’s the expertise there?
The idea to convert Eskom debt into equity was dropped previously because Eskom, National Treasury and the Department of Public Enterprises didn’t want the rating risk nor the attendant director issues, and it would probably have to have been listed on the JSE with all the transparency considerations that would entail. It makes one wonder why the idea has resurfaced in spite of the risk of selected default if you offer something to only some bondholders, even if it is at their request.
Add to this the clear signalling of a distressed move and imperilling of the savings of government employees – which is why reliable sources say that the Government Employees Pension Fund (GEPF) has simply agreed for now for the PIC to consider the matter. They may or may not say yes under pressure eventually, because it would be madness, and at some point, their members would work it out.
One wonders if this suddenly dusted-off discussion document that claims to “set(s) out a wide range of possible options”, is considering going cap in hand to the International Monetary Fund (IMF) for more money.
In the past, the PIC, which gets almost 90% of its money from the GEPF, has been lambasted by the Public Servants Association (PSA), the biggest union representing government workers, for the amount of Eskom bonds it holds. The PSA had previously asked the PIC to stop buying the Eskom debt and to sell down its holdings. Tahir Maepa, the PSA’s deputy general manager for members’ affairs, went as far as to describe Eskom as nuclear waste.
It is completely irresponsible in the circumstances for the chairman of the PIC, Dr Reuel Khoza to have gone out on a limb in the manner he has. He is driving an unsupportable agenda and creating uncertainty in the markets and fear among pensioners. Of course, certain merchant bankers, close to the government, and some ministers, will make small fortunes in fees, both on the swap and on the ensuing bond mandates.
Now that Khoza’s utterances have raised many eyebrows, the PIC has, post-facto, seen fit to make reference to some hitherto unheard-of discussion document “which sets out a wide range of possible options”, and goes on to say that they “will meet the risk and return expectations of (our) clients, and be fully consistent with (our) fiduciary responsibilities”. In its most recent statement, the PIC says it “considers any misinterpretation… as unfortunate and regrettable.” It looks like baloney to me.
Perhaps this discussion document also explores selling the debt to the Chinese banks in exchange for some concessions and rebuild contracts, R90-billion is, after all, peanuts in their scheme of things. Perhaps the reason why this option has not been pursued is that even the Chinese may well not want to touch Eskom with a barge pole. One wonders if this suddenly dusted-off discussion document that claims to “set(s) out a wide range of possible options”, is considering going cap in hand to the International Monetary Fund (IMF) for more money. Of course, the IMF, if amenable, would probably drip-feed loans in small tranches, each subsequent disbursement dependent on verifiable proof that the previous allocation was employed as agreed – and, if they don’t put these covenants in place, they need their heads read.
In any event, Covid-19 embroiled South Africa, with zero fiscal space at its disposal, is in no position to even contemplate debt to equity swaps of this nature. It will result in the blind leading the blind.
In the interim, while one hopes more sensible options like the IMF option mooted above are investigated, solid expertise, not government appointees should be driving the utility to meet short-term needs while privatisation options are pursued.
Of course, these will be on terms that are geared to ensure sustainability – and that is precisely what is required, not irresponsible schemes that will provide no possibility of investor recoupment as a result of equity appreciation under the current – tried and trusted – recipe for failure. As for irresponsible statements, recently discovered discussion documents and other face-saving measures, I don’t think anyone believes any of it. DM
Ghaleb Cachalia is the DA spokesperson on Public Enterprises.