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Cosatu's debt relief plan for Eskom could work, energy expert tells MPs

Mar 04 2020 14:24
Lameez Omarjee

Eskom is in a "classic utility death spiral" and a special purpose financing vehicle proposed by the Congress of South African Trade Unions to address its growing debt could work, energy expert Anton Eberhard has said. 

Eberhard is a UCT professor at the Power Futures Lab and also chaired the Eskom Sustainability Task Team appointed by President Cyril Ramaphosa in December 2018.

The team was mandated to advise government on actions to resolve Eskom's operational, structural and financial challenges. It completed its work and submitted a report with recommendations in June last year.

Eberhard was among stakeholders, including labour and industry players the Energy Intensive Users of Southern Africa, who on Wednesday presented proposals to the Portfolio Committee on Public Enterprises on how to address governance and operational challenges at Eskom.

Cosatu's proposed special purpose finance vehicle to address Eskom's debt got most of the attention at the meeting, with Eberhard praising it.

Bleak picture

Painting a picture of the dire state of the power utility, Eberhard said that over the past 12 years, Eskom's debt had increased tenfold, to around R454 billion. Eskom has been relying on fiscal support since 2008, a situation which is "unsustainable", Eberhard said.

Not only is the power utility in a debt trap – having to borrow in order to service its existing debt, including interest – Eberhard described it as being in a "classic utility death spiral", having to increase tariffs to increase revenues.

However, tariff increases have had the opposite effect and have deterred consumption, forcing the utility once again to introduce tariff increases to boost its revenue.

"The more revenue it needs, it puts prices up and then consumption declines. The utility dies," he said.

Debt relief

The State could take on Eskom debt, but this is a costly option, Eberhard said. It would increase sovereign debt levels and likely lead to a downgrade by ratings agencies, he said.

"A much better option would be this special purpose vehicle, which is state-owned, Treasury-controlled or backed by government, and which offers to voluntarily buy out Eskom's current debt and refinance the debt on more attractive terms, like Cosatu put forward," he told the committee.

Eberhard said Cosatu's suggestion that the special purpose vehicle being linked to improved performance at Eskom is different to the State simply taking on Eskom debt, which would be a "moral hazard". The latter wouldn't change behaviour at Eskom and the power utility might have to rely on debt relief from the State again at another point in future.

New proposal

The key issue would be how to source the financing: which parties might be involved and how the refinancing would be linked to Eskom's restructuring, he added.

So far, the PIC and the Development Bank of Southern Africa already have high exposure to Eskom debt, which is why the presidential task team has made an additional proposal on debt. "We think there is a new source that can be used very effectively: that is a blended climate-linked finance facility at concessionary rates," Eberhard said.

The presidential task team put forward a blended climate-linked finance facility, in which finance would be made available to Eskom on condition that old coal plants would be decommissioned in favour of new generation, Eberhard explained.

'Not taking pensions'

Speaking to the committee, Cosatu's Parliamentary Coordinator Matthew Parks said the special purpose vehicle would essentially see R254 billion removed from Eskom's debt book, leaving it with a more manageable figure of R200 billion. This could be through a combination of private and public financing.

"It's not a question [of] taking workers' pension funds," Parks stressed.

Cosatu wants the Public Investment Corporation to consider investing in more government bonds - which are guaranteed and ensure a return on investment to lenders. The PIC so far has already invested R104 billion in Eskom bonds – these government-guaranteed bonds, which have been paid, have seen a "healthy return on investment," Parks added.

"It's not just public servants who should contribute. The private sector should contribute, and the government can contribute through the development bank and the IDC (Industrial Development Corporation)," he said.

As another option, if the PIC becomes an equity partner in Eskom, it would have a seat on the board and would be able to give input that ensures the power utility cleans up its act and restructures, Parks said. Any finance released to Eskom through the special purpose finance vehicle should be in tranches, subject to conditions being met.

He said the special purpose vehicle was only one part of the labour federation's proposal to turn around the utility. Most necessary is a social compact whereby government, business, labour and communities come together to find a solution collectively.

Parks added that Cosatu had, so far, had positive engagements with the private sector, particularly investment funds, which are willing to contribute.

Speaking at a briefing to members of the South African National Editors Forum on Tuesday, President Cyril Ramaphosa said that pension funds could be used to save Eskom.

eskom  |  cosatu  |  energy  |  electricity
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