South Africa: Is Eskom Paving a Way for an Internal Deal With the PIC?

The Democratic Alliance (DA) notes that Eskom has put out a comprehensive Request for Proposals (RFP) for Treasury and Financial Services.

The RFP covers almost every aspect of services aimed at understanding and restoring the viability and financial stability of the entity – from Advisory Services, Balance Sheet Optimisation, Cost and Debt Analysis, Expected Future Exposure through almost every letter of the alphabet – ending in Valuations, Xerus/Xpac Models and Zeta Models. (See here and here)

The problem is however that (a) much of this has been done before – repeatedly and at huge cost, (b) the delivery of this falls squarely in the lap of its highly remunerated Treasury Unit and, (c) all these efforts aimed at wooing investors to make Debt for Equity Swaps will amount to nothing as no international bond investor will touch it with a barge pole.

This then may well amount to a costly exercise to pave the way for an internal deal with the Public Investment Corporation (PIC). Towards the end of May this year, the PIC submitted a proposal to government on converting bonds it holds in struggling state utility into equity.

However, National Treasury’s 2019 Medium Term Budget Policy (MTBP) statement announced that the Ministers of Finance and Public Enterprises had appointed independent financial experts to assess Eskom’s daily cash flow management to eliminate continual requests for government support and determine the degree to which operational efficiencies are being implemented across the business. This was to include considering whether capital expenditure should be halted or deferred given Eskom’s weak financial position.

Additionally, the MTBP statement was clear that the capital structure will be modified to reduce and ultimately end Eskom’s reliance on government support. Moreover, debt relief was only to be considered once operational efficiencies had been achieved. Now that operational inefficiencies have plunged the country into rolling blackouts yet again and successive draining bailouts to SOEs and Covid-19 have emptied Treasury’s basket, options are few and far between.

The prospective results from the RFP will hardly provide a magic wand to conjure up the investment and financial relief that is being sought. It might just pave the way of the yellow brick road towards the Emerald City of the PIC coffers – 87.12% of which comprises the Government Employees Pension Fund (GEPF).

The problem is the GEPF is mandated to protect the members benefits and to ensure that all investments are in the best interest of members and pensioners. Given the parlous state of Eskom’s finances, the DA will keep a beady eye on the forks in this road. The wisest route to take would, of course, be the one that leads to a break up of Eskom’s monopoly and that allows for the private sector to step in to fix this public sector market failure.