Why Cosatu might just be right about Eskom and the PIC
To do as Cosatu proposes and use only R200bn+ to invest in Eskom is possible
No-one wants the lights to go off. Not the companies that require electricity to produce their goods and services, citizens who need household electricity, or Eskom employees who need their jobs. But this is precisely what will happen if Eskom cannot find a solution to its mammoth R450bn-plus debt. Eskom’s financial situation is so dire that it is unable to finance its operations without continued bailouts.
For the utility to continue functioning, at least half its debt needs to be struck off its balance sheet, but there is very little consensus on how this should be done.
The government, for instance, seems committed to using the fiscus as the way to deal with Eskom’s debt. While the need to bail out Eskom is unavoidable, tapping into the government’s budget has already led to the deepening of the austerity agenda. This is because covering the increased debt service costs to government requires a reduction in spending on other key areas, such as service delivery, education and health.
Another of the main proposals is to approach international finance institutionsfor a loan. However, none seems willing to loan this amount of money to Eskom in its current financial position unless at very high interest rates. Therefore, the conditions of the financing may result in greater costs over the long run. These proposed “solutions” will lead to greater economic crisis and social despair. It may as well be darkness for the 11-million unemployed, and the majority of poor people in SA.
Most recently, union federation Cosatu has entered the debate, echoing proposals to use the Public Investment Corporation (PIC) and Government Employees Pension Fund (GEPF) to address Eskom’s woes. This has been dismissed by many experts, arguing that using pension money to bail out Eskom is like throwing money into a black hole. The biggest concerns are the viability of pensions payments; transforming Eskom to provide socially owned renewable energy; and the problem of corruption.
Cosatu’s proposal is to use the PIC to address all these issues. Managing more than R2-trillion in assets, the PIC is the biggest asset manager in Africa and the 10th largest in the world, and should therefore be used strategically. As of March 2019, the GEPF was estimated to have accumulated a little more than R1.8-trillion in assets, the equivalent of 108% of its present and future liabilities. It owns 87% of the PIC’s assets and already holds about 20% of Eskom’s R450bn debt.
Every year, the GEPF hands over all of its money from all income sources to the PIC, which then invests the money in the stock market and government bonds, for example, as well as granting loans — such as the one to Eskom. According to the Government Employees Pension Law (1996), the fund may be 90% funded (that is, 10% underfunded).
The GEPF today has 12% of its R1,800bn invested in a single company, Naspers. What kind of investment policy is that?
This law legislated a shift in how the pension fund was managed, moving from a pay-as-you-go scheme to a fully funded one. The shift resulted in a huge amount of external public money being transferred to the pension fund. That is, public money entirely separate from the fund’s internally generated income from assets. Over the past two decades, this extra funding has resulted in the fund’s spectacular growth.
This, together with it being evaluated at 108% funded, as previously mentioned, makes it perfectly possible to free up more than R300bn. Therefore, to do as Cosatu proposes and use only R200bn+ to invest in Eskom is possible. No less importantly, it allows Eskom sufficient time for its unavoidable transformation to become financially viable without having to find additional funding to finance what would otherwise be the stranglehold of (near) permanent debt service costs.
The GEPF’s pension scheme is a defined benefit, which means the employer guarantees minimum pension payments regardless of the performance of the PIC, and the state guarantees, by law, that the GEPF will do this. Furthermore, large contributions together with income from equity investments and interest received on loans has exceeded pension payouts every year by tens of billions since its inception in the late 1990s. In the 2019 financial year, the GEPF’s surplus to re-invest after paying R102bn in pensions and benefits was R55bn.
The GEPF can use some of its vast financial resources to grant Eskom a loan at less than market interest rates on certain conditions, without threatening pensions (present or future), in any way. Moreover, redirecting some of the funds managed by the PIC from the stock market to government bonds and investing in transforming public institutions — such as Eskom — would have the added benefit of bolstering the pension fund in the long run.
This is because the fund’s performance would not be dependent on constant share price increases. It would rely much more on cash income from interest on government bonds. Returns from bonds have been more than double dividend returns from company shares. Furthermore, the JSE is widely considered overvalued and propped up by constant investments in corporate shares by the PIC. This endangers huge amounts of capital as investors prepare to withdraw funds to invest in more stable financial markets, and may induce a stock market crash.
To move investment away from the stock market would bolster the stability and certainty of the pension fund in the long run. Potential jobs can be created by redirecting investment from the JSE to increased investment in the transformation of Eskom into a socially owned renewable energy utility.
Corruption, as ever
This is a more sustainable form of investment because it would be investing in long-term infrastructure aimed at re-industrialising the SA economy. This would have the added and critical advantage of improving people’s lives and simultaneously fighting the climate emergency. In contrast, the GEPF today has 12% of its R1,800bn invested in a single company, Naspers. What kind of investment policy is that?
It is not possible to separate the current crisis at state-owned enterprises (SOEs) such as Eskom from the problem of corruption. Unfortunately, we cannot attribute corruption to a few bad individuals only. We have to understand corruption in relation to how the governing party has prioritised a narrow class project aimed at developing what former president Thabo Mbeki called “the black bourgeoisie”.
This project has been embraced by both international corporate powers and old monopoly capital, left untouched by the negotiated settlement. The combination of established and old capitalist interest with the new created a monstrous process.
That public utilities have been “corporatised” is a part of the corruption problem. The corporate culture of secrecy infiltrating SOEs must end
Political power and access to state resources is an obvious means to self-enrichment, made possible by ready access to state resources. Privatisation might thus seem to be an obvious defence against the plundering of SOEs. Private profit is, however, at the heart of corruption.
Outsourcing is the oxygen of corruption. To address this seemingly requires cutting off access to state resources for self-enrichment and therefore to already corporatised state institutions. Several companies competing for lucrative state contracts while all offering more or less the same products or services at more or less the same price creates a situation that positively invites corruption. The alternative to this is similarly corruption prone: companies avoid competition by buying favours from state officials.
Public services provided in-house instead of through a tender process bypasses private businesses, and in so doing, bypassing corruption. However, to address problems in relation to procurement is not enough in itself. That public utilities have been “corporatised” is a part of the corruption problem. The corporate culture of secrecy infiltrating SOEs must end. When transforming these institutions it is critical to ensure transparency and accountability.
Some institutions have, at least thus far, not been implicated in the state-capture inquiry. It seems Cosatu was thinking about this when proposing to work closely with developmental finance institutions such as the Development Bank of Southern Africa (DBSA) and Industrial Development Corporation (IDC).
Twenty-five years of democracy have preserved the wealth of the already privileged and opened the doors of privilege to a new elite. The material lives of everyone else have, at best, remained largely unchanged. The PIC and the GEPF are well-placed to save Eskom from going bust, plunging the country into darkness, while simultaneously helping finance a rapid transition to socially owned renewable energy.
• Brown is economic justice programme manager at Alternative Information and Development Centre.