ANALYSIS: Restructuring Eskom's growing debt will need a collective approach

Restructuring Eskom's debt won't happen overnight, and as a starting point all relevant role players – government, business, labour and Eskom itself will have to find each other through a social compact to develop a solution.

This message has become louder in recent weeks, following the release of labour federation Cosatu's proposals to turnaround the power utility, which is overburdened with mounting debt of over R454 billion.

Among its proposals which address operational challenges and financial challenges, Cosatu has put forward that government establish a special purpose finance vehicle to reduce Eskom's debt to a more manageable R200 billion. What this special purpose finance vehicle will look like has not yet been determined, but the proposal would require a social compact between labour, government and business bodies to decide how to reduce the debt.  

The public discourse on the proposal has been that government would likely use pension funds, through the Public Investment Corporation to finance the debt. Cosatu's parliamentary coordinator Matthew Parks however told Fin24 that its proposal might have been misrepresented in media as purely targeting pension funds. Cosatu envisions a combination of public funding and private funding, Parks said. 

At a meeting this week to the Portfolio Committee on Public Enterprises, Parks said that Cosatu accepted that any funding should respect the "financial integrity, fiduciary duty and investment mandates" of funds.

At the same meeting, energy expert Professor Anton Eberhard - who also chaired the Eskom Sustainability Task Team - told the committee that Cosatu's proposal could work. However, institutions like the PIC and the Development Bank of Southern Africa both already have a high exposure to Eskom debt.

The sustainability task team has proposed another source of funding for Eskom's debt – through a blended climate-linked finance facility at concessionary rates. This facility would make available financing on the condition that old coal plants would be decommissioned in favour of new generation, Eberhard said.

Credible investment plan

Speaking to Fin24 by phone on Friday, Martin Kingston, vice president of the country's apex business organisation – Business Unity South Africa – said that the private sector would want to see a "credible investment case" in order to provide appropriate financial support to the power utility, and similarly any other "systemically important" state-owned enterprises. "No one is going to lend money to Eskom unless they are confident that there is a viable, sustainable business to which they are advancing capital," he said. "We will not do anything that will compromise the integrity of the financial sector in SA which we believe it is highly regarded, well-regulated and well run."

Institutional funds will want to be sure that the fiduciary duties of trustees and those with governance responsibilities are not undermined, that the mandate of the concerned institution is not compromised and that risk-adjusted returns are not adversely impacted, he said. Kingston also warned against any increased exposure to Eskom or other state-owned enterprises that could create either "concentration or contagion risk". 

Whatever plan is chosen, it would require buy-in from all stakeholders, especially Eskom, said Kingston. "Eskom needs to be intimately and fully involved," he said. Government, business and labour have been engaging on developing a framework agreement, expected to be finalised imminently.

Kingston said once the framework agreement is finalised, senior officials from various constituencies need to be appointed to iron out the details around implementing the agreement. Kingston said it was important to narrow down these details. "You actually can't fix the balance sheet without knowing what Eskom is going to look like, otherwise you simply perpetuate the problem," he said.

"We all need to be aligned in terms of the propositions that are put forward …  We do not want to alienate potential sources of capital, either current or future, when relevant issues have not yet been properly thought through and ventilated amongst social partners," Kingston said.

Any "partial visibility" of the plan can potentially undermine confidence, Kingston warned. "As a country we have to work, hand in glove with social partners if we are going to address the most significant challenges facing SA, and Eskom is one of those significant challenges," he said.

Similarly, Parks told Fin24 that a social compact is critical. "We don't want shoving down anyone's throats, like stand-offs and pitch battles," he said. Government, business, labour, and communities need to come together and make compromises and find solutions to save Eskom, he added.

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