PIC bailout of Eskom not yet in the offing

Dr Reuel Khoza, Chairman and non-executive director of Nedbank at the Sunday Times Directors Event on June 23, 2015 at the Hilton Hotel in Johannesburg, South Africa. (Photo: Gallo Images / Sunday Times / James Oatway)

By Ray Mahlaka

31 May 2020

PIC board chair Reuel Khoza told eNCA that the state-owned asset manager had submitted a proposal to the GEPF to convert Eskom bonds held by the GEPF in exchange for equity in the power utility. But Khoza later clarified his comments, saying the Eskom proposal is ‘purely at a conceptual stage’.

When Abel Sithole takes the helm at the Public Investment Corporation (PIC) possibly in the second half of 2020, he will have an extensive to-do list, including whether the state-owned asset manager should facilitate a bailout to debt-laden Eskom.

Sithole, who currently heads the PIC’s biggest client – the Government Employees Pension Fund (GEPF) as its principal executive officer, has been fiercely opposed to throwing good money after bad to rescue Eskom.

Any bailout of Eskom, he recently told Business Maverick, should come with watertight terms and conditions including clear financial returns to the GEPF and government guarantees to money thrown to the struggling power utility. Government guarantees mean that the government – or taxpayers – will honour any outstanding payments to the GEPF if Eskom fails to pay back the money.

Sithole took a hard stance on the Eskom bailout because, as the GEPF principal executive officer, he is the custodian of the R1.8-trillion in pension savings belonging to about 1.7-million public servants, which are managed by the PIC. Any use of pension savings to recapitalise Eskom needs the approval of the GEPF board of trustees and members.

Eskom is in a dire financial position with insufficient revenue from electricity sales to service its debt load of around R450-billion and associated interest payments.

At a time when public finances are deteriorating, a debate has been raging for many years on finding alternative sources of funding to reduce Eskom’s smothering debt load – such as raiding pension savings belonging to public servants.

This debate surfaced again on Thursday 28 May. PIC board chair Reuel Khoza told eNCA that the state-owned asset manager had submitted a proposal to the GEPF to convert Eskom bonds held by the GEPF in exchange for equity in the power utility. Eskom issues bonds or debt in domestic and international capital markets to fund its operational activities, with a promise of awarding investors a return at a later stage.

According to the PIC’s 2019 annual report, the GEPF held Eskom bonds worth R84.4-billion, which are managed by the PIC.

“We [the PIC] have submitted a proposal that we believe could actually go a long way in getting Eskom out of the financial doldrums.

“If we could enter into discussions and negotiations [with the GEPF], and they met certain requirements, it is quite possible that we could convert those [Eskom] bonds into equity… Then the interest [that Eskom pays on its debt] would be virtually halved,” Khoza told the television news channel.

No decision on the proposal

But Khoza later clarified his comments, saying the Eskom proposal is “purely at a conceptual stage” and no decision has been made – either by the GEPF or PIC.

“We believe the proposal would serve as a chopping block [for Eskom’s debt]. With an asset that is important as Eskom to the country, you have to think about such a proposal, which would have to go through many iterations inside the PIC and GEPF,” he told Business Maverick.

He supported Sithole’s views, saying any financial support of Eskom should be backed by returns and a firm plan on how the power utility will improve its operational performance.

As the incoming CEO of the PIC, Sithole will lead investment teams at the state-owned asset manager that will be responsible for drafting terms and conditions for the possible financial assistance to Eskom. There is no firm date on when Sithole will start his duties at the PIC as his employment contract with the GEPF is yet to end. It’s expected to end in July.

“We will negotiate with Sithole’s employer on when he can be relieved of his current responsibility. We are about to embark on this,” said Khoza. DM/BM

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