If fixing Eskom is proving difficult, finding the cash to keep it afloat is perhaps harder. But the answer to its financial problems could lie in South Africa’s R3-trillion retirement industry, an option the ruling party has been chewing on since last year.
Eskom’s funding gap was last estimated at R225-billion, and growing, caused by runaway costs, continued delays at the power stations Medupi and Kusile, and a hefty diesel bill to run back-up generators.
South Africa’s pension industry, one of the largest in the world, could provide the funding the utility is looking for.
In October last year, Finance Minister Nhlanhla Nene said a cash injection of more than R20-billion would be provided to the ailing utility from the sale of nonstrategic state assets – and the first of three tranches would be paid next month. It’s widely expected the government will sell some of its 13.9% stake in Vodacom, which is worth nearly R30-billion.
But, according to the head of the ANC’s economic transformation cluster, Enoch Godongwana, it is a short-term fix, only papering over cracks that run so deeply through the troubled utility that much more is needed to sustain Eskom and put it in a position to expand.
“What we said about it at our discussion at the lekgotla last year is that we must explore the possibility of pension funds investing in Eskom,” he said. The discussion was not about privatisation but about the restructuring of funding of Eskom.
“Someone is going to say: ‘Don’t sell equity; let it be debt or bonds.’ But they [Eskom] are already doing it. That won’t be something new.
“What Eskom needs at the moment is cash, not debt or bonds. From where we sit, there is money out there to be utilised,” he said.
“My view is not to force pension funds but make sure you can make it attractive for them to invest.”
He said he was not talking only about state employee pension funds, but “all kinds”.
In response to a suggestion that Eskom was not an attractive investment, he replied: “That has not been tested, so no one can say.”
In 2010, Eskom sought a private equity partner for Kusile, but none materialised. But a direct stake is not the only option.
“It may well be Eskom may say: ‘No, we are not going to sell stakes in Eskom.’ Then it could be that they securitise some of the income from some of the power stations,” Godongwana said. “The funds might put money into Eskom and it would be agreed that all income from that power station would be owned by the pension funds.
“Government should have looked at this proposal and said, ‘Look, you guys are dreaming,’ or say ‘No, we have found a better formula.’ But that is yet to happen,” he said.
Referring to ANC secretary general Gwede Mantashe’s recent comments that a Chinese model, in which a parastatal is capitalised by listing part of it, could be used, Godongwana said: “Some people have said the secretary general contradicted me, but a closer reading of what he has said shows it’s a different interpretation of the same thing … He is talking about a partially listed entity without losing strategic control.”
Government employees have little to lose if their pension funds are invested in Eskom because their retirement benefits are guaranteed by the government.
Danny Adonis, the general manager of the Public Servants’ Association of South Africa, said 90% of the union’s members worked for the government and had their pensions in the Government Employee Pension Fund (GEPF), the largest pension fund in Africa, with more than R1-trillion in assets under management. It is a defined benefit scheme, and pensioners can expect a fixed return, regardless of how its investments perform.
“Government guarantees the pension,” Adonis said. “The benefit of the member is set; there is a specific calculation. Money in GEPF is channelled to the Public Investment Corporation [PIC] to grow it. But treasury guarantees everyone who is member that it will pay that person’s pension. If investments go belly up, the guarantee kicks in.”
Grové Steyn, an infrastructure and regulatory economist at Meridian Economics, said determining the value of a utility such as Eskom had nothing to do with the cost of constructing or procuring its assets, but rather with its ability to produce positive earnings down the line from selling electricity or some of its assets.
But there were also the issues of time value and discounting – an investor had to factor in the future value of revenues and weigh it up against what the money was worth today, and what it could be worth if it was invested elsewhere and earned compound returns.
“The worth of an asset today is the sum of its future revenues discounted to the present time,” he said.
The rate of return that Eskom offered would be key in getting people to invest in it.
“I can put it elsewhere, in the stock exchange, for example, and earn 10% or 12% or more. If I am going to buy into Eskom, I need to earn the same … If it’s more risky, I would need to earn more.
“The regulator is not prepared to give Eskom what it needs to cover its costs. And Eskom does not have control over its costs, and is set to spend more in years to come, which means that future net revenues are not going to look too good,” he said.
In light of Eskom’s mounting liabilities, stagnant electricity demand and soaring tariffs, “you will be asking investors to buy something on the brink of a huge financial crisis”, Steyn said. “The outcome will be very uncertain, to say the least.”
If the PIC was compelled to invest directly into Eskom under these circumstances, it would have the effect of “nationalising employees’ private savings”.
Securitising the revenue from some power stations would be the equivalent of providing government guarantees for Eskom’s debt, said Steyn.
“It’s just a fancy way to get some very expensive cash from the capital market while hiding some of the true costs thereof. By reducing the risks to equity providers, this will reduce their incentive to fix the underlying problem – Eskom’s costs.”
He added that, even if Medupi, Kusile and Ingula were removed from the equation, Eskom would still have severe problems, but it would be a viable enterprise.
In reply to the Mail & Guardian‘s questions, the PIC said it was aware of discussions about the possible sale of Eskom and suggestions that part of Eskom should be sold to pension funds, including the PIC.
“The PIC will not be expressing any opinion on these discussions because they are within the purview of policymakers,” it said.
“However, it is useful to point out that the PIC’s investment mandates allow for investments in a range of asset classes, including bonds. These bonds are issued by different institutions, such as corporates, government as well as state-owned entities such as Eskom. The PIC has been investing in bonds issued by Eskom and other state-owned entities for years, in line with our mandates,” it said.
Republished with permission from the Mail & Guardian