Cosatu’s social compact can work if it is not backward looking on Eskom
A broad-ranging effort to ensure the country’s energy future has to extend beyond just saving Eskom
In a recent wide-ranging document on economic policy, Cosatu argues compellingly that workers will bear the brunt of the consequences of a collapse of Eskom and that decisive interventions are needed to save both jobs and the SA economy.
The union federation proposes that there should be a social compact between the government, labour and industry to stabilise Eskom, on condition that Eskom is not privatised and that no Eskom worker will be retrenched. Cosatu further argues for a deal to reduce Eskom’s debt through a special purpose vehicle (SPV) involving workers’ pensions, government, business and development finance institutions.
Due to the realities of the energy transition faced by SA, along with the rest of the world, there is a need for a broad-ranging social compact for the country’s energy future that extends beyond just saving Eskom. A social compacting process, led by President Cyril Ramaphosa with the assistance of relevant ministers, is needed to advance a “just transition” for SA, in which the restructuring and stabilisation of Eskom are not the only focal points but still an integral part.
One of the guiding principles of a social compact should be to restore sufficient electricity to the economy as rapidly and cheaply as possible. The cost of the continued, and growing, shortage of electricity, job losses and lost investment is already high and threatens to be catastrophic.
To expand electricity supply the integrated resource plan (IRP) 2019 needs to be implemented without delay. This should be one of the government’s main contributions to the social compact. The IRP 2019 outlines a mix of electricity producing technologies including wind and solar, coal, battery storage, gas and hydro. However, it is widely recognised that the renewable energy components will come on stream more rapidly than the rest and that new wind and solar projects will produce electricity at a considerably cheaper price than the others.
A main objective of the social compact should be to use SA’s natural resources to restore the provision of lower-cost electricity in SA, which will improve competitiveness and revitalise the country’s industrialisation and job creation potential.
To properly serve the SA economy, Eskom will need to be restructured in a forward-looking manner. As per government policy, Eskom’s generation, transmission and distribution components must be separated to align with the requirements of the unfolding energy transition.
If SA falls into the error of simply trying to “make Eskom great again” in a backward-looking manner, certain crippling limitations will quickly emerge. The country will continue to experience severe electricity shortages and load-shedding as Eskom does not have the financial capacity to invest in further electricity generation. Any new state-owned entity trying to enter the electricity generation sector will suffer similar limitations.
On the other hand, there is a high degree of pent-up demand to invest in renewables and other independent power producers (IPPs). Allowing private and community investment in this sector makes sense for two important reasons: technological innovation means small-scale generators can be economically competitive and such projects shift the risk and financial burden away from state-owned companies.
Eskom’s highly strategic system operator and transmission division will remain a natural monopoly and should be placed at the heart of ensuring that the system is governed in a way that harnesses and directs electricity supply at the lowest possible cost to business and household consumers.
In line with one of Cosatu’s conditions, Eskom will not be privatised. Far from being a privatisation process, if done correctly Eskom’s restructuring will entail the reconfiguration of public sector assets to make them fit for purpose.
Eskom’s generation assets will continue to be state-owned, but there will be an expansion of private power generation that supplements and competes with Eskom’s generation component. This is where Cosatu’s second condition — that no Eskom worker should be retrenched — comes in. As Eskom’s generation component competes with new lower-cost power producers, it is likely that over time ageing Eskom generation plants will become uneconomic and face closure.
Even within this context, it is possible that Cosatu’s demand that no Eskom worker should be retrenched can be met, for example, if alternative positions can be found where vacancies become available. Furthermore, Cosatu has acknowledged that changes affecting workers can be mitigated through reskilling and redeployment programmes. The government can assist in funding such programmes though the “development fee” already embedded in IPP contracts.
Clearly, Eskom is very much in need of debt relief. Its balance sheet has been severely damaged by corruption, huge cost overruns on new power plants and adverse electricity tariff determinations by its price regulator. If Eskom could be given some form of debt relief it would be able to move closer to a situation where its annual revenues could match its annual costs.
Cosatu does not provide much detail on its proposal to reduce Eskom’s debt from R450bn to R200bn through an SPV. In principle, an SPV could work well. Research done by economist Grové Steyn indicates that Eskom’s debt restructuring would not trigger a default event if a new, state-owned SPV offered Eskom debt holders the same conditions as they now enjoy on Eskom debt. The government could then use the SPV to refinance Eskom’s debt at lower cost and create incentives for its accelerated restructuring.
One concern with Cosatu’s proposal is that instead of socialising the costs of the debt relief as widely as possible, it seems to rely too heavily on the pension funds of public sector employees, namely those held by the Government Employees Pension Fund (GEPF) and managed by the Public Investment Corporation (PIC).
Cosatu argues that as public sector pensions are based on a defined benefit scheme, workers’ interests would be protected as the fiscus would ultimately fund future pension payments. The risk to workers, though, is that if SA’s financial position deteriorates there would be no guarantee that pension benefits would not be reduced. Workers understand this, and as has been the case before when pension policies have been reviewed, there is a risk that some government workers might choose to leave their jobs and cash in their pensions, as they fear future benefits might be compromised.
If, as Cosatu implies, the GEPF is now in surplus, the workers’ assistance to Eskom might be better structured in a more flexible and indirect manner. For example, there could be an annually determined reduction in contributions from the fiscus to the GEPF, thus freeing-up more funds from the fiscus to assist with Eskom’s debt restructuring via the SPV. This year-by-year approach would be preferable to a one-off transfer as it would pose less risk to the viability of the state’s defined benefit pension scheme and would maintain appropriate governance and fiduciary duty requirements for those running the GEPF and PIC.
Cosatu should be congratulated for the leadership role it is playing in proposing solutions to SA’s Eskom and energy crisis. Hopefully, its proposals will stimulate agreement on a social compact that will advance SA’s energy transition towards a more reliable, lower-cost and lower-carbon electricity mix, and stimulate investment and job creation in the process.
• Dr Creamer is a senior lecturer in economics at Wits University.