From saving Edcon to saving Eskom: that is how Cosatu views its proposed bailout of Eskom using pension-fund savings.
In 2019, faced with the closure of troubled retailer Edcon and with it the loss of 30,000 jobs, Cosatu took the lead in mobilising R1.2bn of Unemployed Insurance Fund (UIF) funds managed by the Public Investment Corporation to pay down Edcon debt. Together with creditors and property owners, the PIC wiped out Edcon’s R2.7bn debt, enabling it to restructure and make a fresh start.
It was this success that planted the seed that the same could be done on a much bigger scale to help save Eskom. Instead of just 30,000 jobs at risk, says Cosatu’s parliamentary co-ordinator Matthew Parks, if Eskom was to collapse, every firm in the economy — 12-million jobs — would be affected.
The suggestion is that about 7% of the R2.2-trillion managed by the PIC, together with contributions from the Industrial Development Corporation (IDC) and Development Bank of Southern Africa (DBSA) be invested in a special-purpose vehicle (SPV), which would take over R250bn of Eskom debt.
This is the sum of debt relief Eskom itself has identified as necessary to be sustainable, as it is unable to service the R450bn debt it has accumulated.
The two main conditions of the proposal are that no worker should lose their job and that Eskom will not be privatised.
In the past, when the then-public enterprises minister approached Cosatu to bail out troubled state-owned enterprises he was sent packing.
Parks says this is “a different era and different circumstances”.
“We have a leadership we can trust not to loot and we are very keen to see [Cyril] Ramaphosa succeed,” he says.
The design of the SPV and the possible financial instruments that could be used have not been explored in detail, says Parks. In the case of Edcon the issue was straight forward, as the PIC essentially took an equity stake in Edcon and “nobody expected to get that money back any time soon”, says Parks.
As Eskom has only one shareholder and the value of its share capital could be difficult to agree upon, the mechanism in this case is not as apparent.
Investments of savings by pension funds or asset managers in infrastructure is usually linked to a fixed, long-term return paid in a regular way as income. This is not the kind of investment being imagined here, and implicit in the proposal is that the Government Employees Pension Fund (GEPF) would not be looking for an investment return, but for a social return in the form of a restructured Eskom.
A zero coupon bond or a perpetual bond, which is never redeemed, are two conceivable options of how the R250bn could be transferred to the SPV.
But the wisdom and the principle of a free bailout using pension money will be controversial politically, in the savings industry, in the financial sector and among pension holders and taxpayers.
Because the vast bulk of the funds managed by the PIC belong to the GEPF, which is a defined benefit fund, Cosatu argues that in this case there is no risk to pensioners. If the fund were to fall short of its liabilities, the government and the taxpayer would have to step in and bail it out.
The PIC is enormous, and at R2.2-trillion is the biggest single investor in the SA economy. It already holds roughly R100bn in Eskom debt. Cosatu argues that, given the size of its overall portfolio, it has the ability to absorb what would be a non-paying investment. GEPF is fully funded, which is not required, and it would be legitimate to fund it to the 90% level.
While the government and business explore the principles of using PIC debt for bailouts with labour — Cosatu hopes in time for an announcement in the state of the nation address next week — there are other big political and policy questions that emerge.
Not least is moral hazard. Once a free bailout has been done with pension money and at zero cost to the government, the temptation to do it again will be enormous. While Cosatu has tied PIC financial support to a substantial list of “conditions” and a “worker-friendly turnaround plan”, the recent past lies littered with abandoned conditions that were tied to successive Treasury bailouts of Eskom. It is impossible, preconditions notwithstanding, to ensure that the GEPF’s billions, in the end, result in a better-run Eskom.
A key imperative for SA’s future is the transformation of the energy market, towards a low-carbon future and a competitive one, where multiple producers produce electricity for a liberalised market. While Cosatu’s proposal does not take a stand against a competitive energy market, its emphasis is strongly on growing the state sector. Among the conditions for the bailout, for example, is one that says that Eskom should enter the renewable energy generation business.
These are among the issues that will need to be unpacked in the coming months.
Correction: February 6 2020
A previous version of this story incorrectly stated that Edcon is a listed company, when in fact it delisted from the JSE in 2007. It also incorrectly stated that the PIC holds R1bn in Eskom debt when it actually holds roughly R100bn. Business Day regrets the error.
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