Cosatu’s Eskom debt rescue plan a slippery slope — global bank

Cosatu’s debt rescue plan for Eskom, which has already received support from the public enterprises ministry and the president, should be broached with caution as it is likely to amount to little more than an added “contingent liability by stealth” on the state’s finances.

This is the view of global bank BNP Paribas, which is expecting power cuts by the embattled state-owned entity to shave more growth off SA’s anaemic economy — resulting in the bank cutting the national growth forecast for 2020 to just 0.5%, from 0.8% previously.

Cosatu’s proposal to hive off R250bn in Eskom debt, and place it into a special purpose vehicle supported by the Public Investment Corporation (PIC) and other government development finance institutions, is not the way to go, BNP Paribas senior economist Jeffrey Schultz said.  

The use of PIC funds — which manages almost R2-trillion in funds on behalf of the Government Employees Pension Fund (GEPF) — may eliminate Eskom’s burden, by shifting the debt to the PIC’s books, but ultimately that liability is going to rest with the state, Schultz said.

This is because GEPF is a defined benefit fund, meaning pensioners get a set payout regardless of the fund’s performance and the state must make up any losses that are owned to beneficiaries.

“We are calling it a contingent liability by stealth, it’s just moving the contingent liability around ... [the state] needs to deal with this in a much more careful fashion,” Schultz said.  

Contingent liabilities are the risks posed by commitments that may result in future financial obligations.

Eskom’s financial woes have profound implications for the fiscus, which has already committed to R230bn in support for the power utility in the coming decade, along with R350bn in government-backed guarantees for Eskom’s debt.

Along with its guarantees to Eskom, the state’s support for other ailing SOEs and state agencies will see the government’s contingent liabilities balloon to more than R1-trillion by 2021/2022. 

“The notion of prescribed assets jumps to mind and this is a slippery slope,” Schultz said of Cosatu’s plan, and comes at a time that SA needed to be “signalling the right policies” to attract investment rather than those that detract from it.

The options that Eskom’s chief restructuring officer, Freeman Nomvalo — who is expected to submit his debt restructuring proposal to the government before the end of February — must be considered, Schultz said, and may include re-examining the R350bn in government guarantees held by Eskom.

“We could refinance those and hopefully bring down the cost of repaying Eskom debt. There are various mechanisms, but no one is easy,” he said.

Engagements will also need to be had with bondholders, because the matter of dealing with Eskom’s debt burden is complex and unlikely to be solved within the next two years, Schultz said.

Despite private sector qualms over the mechanics of Cosatu’s proposal, President Cyril Ramaphosa was reportedly “favourably disposed” to the plan, while public enterprises minister Pravin Gordhan has commended the federation for the proposal.  

Cosatu’s plan proposed the use of asset prescription — which would force private and public sector retirement funds to invest in certain state projects and companies — for investment in “key public goods and infrastructure”, beyond efforts to save Eskom. — BusinessLIVE