A decision on how to restructure Eskom’s debt is edging towards finality.
President Cyril Ramaphosa’s task team, which was given the job of looking into the company’s sustainability, has submitted its final report. The department of public enterprises and the Treasury have had numerous interactions with the team, Eskom and their own advisers and are preparing a cabinet memo outlining the options.
The ANC’s economic policy head, Enoch Godongwana, has also been engaged in discussions, as has the savings industry (the owners of much of Eskom’s debt) through its industry body the Association for Savings and Investment in SA.
Investec founder Stephen Koseff has spent hours behind the scenes discussing the design of a special-purpose vehicle that could take over the debt, and chair of law firm ENSafrica, Michael Katz, has been advising the Treasury.
But who will bell the cat?
When President Cyril Ramaphosa delivered his state of the nation address last week, he shied away from being the one.
The lack of substance on Eskom came as a disappointment. In February, at his previous address, he had boldly announced that Eskom would be split into three parts: generation (which is made up of the power stations), transmission (which is the national grid) and distribution (which are the poles and wires). So there was an expectation that, given the radio silence since then, Ramaphosa would provide an indication of what comes next.
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His reluctance to do so led one newspaper, Rapport, to say it had it on “good authority” that the cabinet had already rejected the task team’s report.
But neither the report, which deals with Eskom as a whole and not only its debt problem, nor the cabinet memo on the options for the debt have yet been served before cabinet.
Time is running out. Already the delay since February has cost the government and Eskom money and credibility. Five months ago, the Treasury assured SA and the investor community that the R23bn it would set aside each year for the next decade would be enough of a bailout. Now it is clear it won’t be, and Eskom will need more than double that amount in the first year alone.
Three main options
What are the options?
There are several permutations and combinations, but in broad strokes there are three main choices: a similar arrangement to the one announced in February in which the government provides Eskom with cash to service its debt and repay its debt redemptions; an arrangement where Eskom debt is swapped for government bonds so the debt moves onto the national government’s balance sheet; or a government-owned special-purpose vehicle is established “over the top” of Eskom holdings into which bondholders can exchange Eskom debt for new government debt.
The first choice is the most heavily laden with moral hazard. While the Treasury can try to put conditions in place on its cash payments — such as a requirement that Eskom contains costs — previous conditions on the Treasury bailouts have fallen by the wayside. There will be few incentives for Eskom to change its ways if it can access cash from the Treasury on an ongoing basis.
The second choice also invites some moral hazard as it eases the pressure for Eskom to get its house in order. It is probably the simplest option for the Treasury and bondholders, though all will need to agree in a creditors meeting to the new arrangement.
The third choice is more complex and is the one that has been proposed by the task team. It involves the creation of a new structure or loan company that would offer to buy the debt of Eskom bondholders and would itself issue new notes. While the creation of a special-purpose vehicle doesn’t reduce the quantum of government debt — it is still on the government balance sheet — it could offer some bondholders, such as the Public Investment Corporation (PIC), the chance to exchange some debt for equity. The most attractive offer would be for equity in the transmission company, which is viewed as the most likely of the three parts to have a strong guaranteed revenue flow.
Special-purpose vehicle
A big debate in government circles has been whether the special-purpose vehicle option is significantly better than the simpler debt swap. Its proponents argue that the special-purpose vehicle would probably have a better quality of debt that would be cheaper than the premium Eskom increasingly has had to pay. It could also be managed by the private sector and removed from the ambit of Eskom.
Its biggest advantage, they argue, lies in the manner in which the special-purpose vehicle could facilitate the split of Eskom into the three component companies. The split is seen as essential for management to gain a better line of sight over the complexity of the utility. Because it separates transmission from generation, it is also a crucial first step to a liberalised energy market, in which the transmission company can seek out and buy the lowest-cost energy.
The most complex part of the split is the apportioning of the debt to the three entities. An “over-the-top” structure into which all bondholders could voluntarily exchange their debt simplifies this and is the shortest way, they believe, to get the split done. It would also give Eskom greater freedom to design appropriate capital structures for each part of the business.
Splitting Eskom without dealing with the debt problem first would involve a longer time frame, with some in Eskom believing it would take seven years for the company to be fully disaggregated.
The decision on the debt restructuring is a complex one for the government to grapple with. The appointment of a chief restructuring officer (CRO) to drive the Eskom split may be essential to enabling the government to take the first steps in the process.
This was one firm commitment on Eskom that Ramaphosa made in his address. While viewed as a non-announcement as it was a commitment previously put in place by finance minister Tito Mboweni at February’s tabling of the budget, in reality the announcement represents some progress.
Looking at it from Ramaphosa’s perspective, the CRO could be the person who helps to bell the cat.
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