By Mike Cohen
(Bloomberg) – A plan proposed by South Africa’s biggest labour group to get pension funds and state lenders to refinance part of the state power utility’s gargantuan debt faces hurdles that may be impossible to overcome.
Under the Congress of South African Trade Unions’ so-called social compact, Eskom’s R454bn ($29bn) of debt will be cut to R200bn, with the balance transferred to a specially created entity. That will be funded by the Public Investment Corporation, which manages civil servants’ pensions, private retirement funds, the Development Bank of Southern Africa, the Industrial Development Corporation and other investors.
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While the government and lobby group Business Unity South Africa have welcomed Cosatu’s plan, the main opposition Democratic Alliance and trade union Solidarity have threatened court action because they say it’ll put workers’ savings at risk. The Public Servants Association, which represents more than 237,000 state employees, has also voiced opposition to the proposals. The standoffs could take years to resolve.
Cosatu, which is part of the nation’s ruling alliance and represents 1.8 million workers, has also said the rescue plans hinges on Eskom and the government agreeing to a range of preconditions that will be legally problematic to meet.
Here are some of the potential sticking points:
Investment mandate
The Government Employees Pension Fund has said any funding it gives Eskom has to comply with its investment mandate, provide adequate returns and be repaid, and it will only be able to assess if those criteria can be met once the Cosatu plan is finalised. The GEPF has already invested R84bn, or 18% of its assets, in the utility’s bonds, and it wouldn’t be ideal from a prudential perspective to have an excessive holding of a single asset, Abel Sithole, its principal executive officer, told lawmakers. The PIC manages the GEPF’s assets.
State guarantees
Cosatu wants the government to guarantee any investment workers make in Eskom, a commitment that has the potential to place further strain on state finances and undermine the case for South Africa to retain its sole investment-grade credit rating from Moody’s Investors Service. The state currently guarantees more than 60% of Eskom’s debt.
Investor opposition
Private investors in Eskom’s bonds including Futuregrowth Asset Management, South Africa’s biggest specialist fixed-income money manager, are vociferously opposed to any attempt to prescribe to them how to invest their clients’ money. A lengthy legal battle is likely to ensue should the government try and force them to help fund Eskom.
Job security
The unions say their investment in Eskom is contingent on the utility not firing workers. But Eskom has more than 46,000 staff, or about a third more than it says it needs, and their numbers ideally need to be reduced for it to reverse losses currently running at more than R20bn a year. The unions also want Eskom to reduce its tariffs and increase the amount of free electricity it supplies to indigent households, a move that would compound its financial woes.
Contract renegotiation
Cosatu is calling for contracts signed with independent renewable-energy producers to supply the national grid to be renegotiated because it says prices are excessive. It’s also calling for Eskom’s coal-supply deals to be revisited with a view to cutting costs. More legal tussles would be in store if the utility were to renege on those agreements.
Plant overhauls
The unions wants Eskom’s coal-fired power stations that are reaching the end of their lifespans to be refurbished so they can use gas and other forms of fuel, so as to preserve jobs. The utility has said that option isn’t financially viable.
Municipal financing
Eskom supplies part of its output to municipalities, which sell it on to consumers and businesses at a mark-up, but all too often don’t pay their bills. Cosatu wants all customers to pay Eskom directly, a change that would require South Africa’s entire municipal-funding model to be overhauled.
