Who will ultimately benefit from the proposed R250bn PIC gift of Eskom?

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By: Hadebe Hadebe

Trade union federation Cosatu’s proposal that the Public Investment Corporation (PIC) should settle up to sixty percent of the Eskom debt comes at an opportune time when South Africa generally struggles with issues of corporate governance and maladministration as well as massive looting. The PIC manages pensions on behalf of the Government Employees Pension Fund (GEPF) worth around R2.13 trillion. Cosatu suggests that the PIC and other state finance bodies such as the Development Bank of Southern Africa (DBSA) and the Industrial Development Corporation (IDC) should gift Eskom R250 billion from the pensions of public servants. The total Eskom debt is presently estimated at R450 billion.

This article argues that the proposed grant to Eskom will go to individuals and private companies that have been milking Eskom for years and that the ‘soft privatization’ policies do not help state institutions and its companies to operate efficiently as they should. Stemming from this, it is further contended that there is no empirical evidence that Eskom will not generate another massive debt in, say, twenty years as its business model remains unchanged. This cash cow will continue to feed bellies of greedy individuals and companies well into the future unless its procurement spend is reviewed and managed.

Although the modalities of the proposal by Cosatu are still to be revealed, public commentator Yamkela Spengane appears to be amenable and suggests, “let the government absorb that debt into sovereign debt.” Spengane is therefore of the view that the PIC can lend the government the money, at a favourable interest rate to pay its foreign creditors. This money will be paid back to the PIC, he adds, but it will not be as expensive to the government as the current debt which is in dollars and not in local currency. Some things are easier said than done. One has to dig deeper into the structural design of the economic model that informs how Eskom and other public institutions to pre-empt the possible outcomes of a decision to decrease its debt via pensions of public servants.

Spengane’s idea is that the government needs to absorb the Eskom debt in its entirety, at least. In this way, Eskom will be free of debt and will therefore “have clean leverage to lend money in the market and transform itself.” How Spengane frames his argument is correct but several issues need attention. People like finance minister Tito Mboweni and others have singled out the wage bill of R32.35 billion as a problem. This assertion was further strengthened by the World Bank which said the power utility “has 66% too many employees.”

The salaries of workers could be a problem but the way the message is put across to the public represents a distorted picture and appears to avoid dealing with substantive issues concerning expenditures and contracts worth billions of rands. It is, therefore, becoming clearer that the wage bill is used as a scapegoat in all state-owned enterprises (SOEs) and the public service in general. At SAA, for example, it has been reported that the business rescue practitioner (BRP) doesn’t only intend to cancel certain routes but also will cut many jobs. Numsa and the South African Cabin Crew Association, which together represent about 3000 SAA workers, do not agree with this. They correctly argue that the airline’s financial problems emanate from “its failure to manage its R25 billion procurement budget, rather than excessive wage costs.”

Even for Eskom, it is therefore impossible to discuss its debt and settlement without looking at the power utility company’s procurement spend. Cosatu leader Bheki Ntshalintshali has rightly suggested that “a comprehensive public audit of all Eskom contracts and expenditure should be instituted, including coal supply contracts.” But an argument can be made that this is still not enough for as long as ‘soft privatization’ at Eskom and other public institutions is not addressed.

The power utility procures chemicals, equipment, and a wide range of professional and consulting services costing billions of rands. This is in addition to long-term coal supplier contracts and independent power producers (IPPs), whose details remain very scant. Eskom planned to spend R728 billion between 2012 and 2017, excluding costly IPPs and coal supplier contracts. Rough estimates for coal purchases is R51 billion in the 2019 financial year, consisting cost-plus contracts (31%), fixed indexed contracts (17%), and short to medium contracts (52%). As per Eskom documents, the historical coal purchase increases is more than 15% year-on-year. And IPPs were about R25 billion in the 2019 financial year.

Without understanding the finer details of the nature of contracts and spending at Eskom, it is almost impossible to know what exactly we are dealing with.

The operational model for Eskom, government and other SOEs is informed by the free-market economic policies supported by the International Monetary Fund (IMF) and the World Bank. Although South Africa did not go for outright privatization of SOEs at a large scale, it decided to increase the role of non-state institutions by incorporating them into the organization, financing and management of SOEs. But South Africa’s accession to the World Trade Organization (WTO) required a speedy removal of tariffs and subsidies, which immediately destroyed the country’s manufacturing capabilities to a great extent.

Linked to this was fiscal consolidation. According to the Paris-based Organization for Economic Cooperation and Development (OECD), “government (including SOE) investment in infrastructure (or gross fixed assets) dropped from the 1976 high of 16% of GDP to around 4% – 5% over the decade from 1994. SOE’s were not allowed to invest (even off their balance sheets) as they were supposed to be privatized.” Former Eskom chair Reuel Khoza, who is now the PIC interim chair, admitted in a radio interview that Eskom was not permitted to make new investments to improve its power generation capacity and from building a new capital projects capability.

This followed a Cabinet decision in 2001 that Eskom “would never again build a power station in South Africa and that all new power stations would be built by private sector companies.” This decision was however reversed in 2004 and the state declared that Eskom would be ‘government’s champion in the energy sector, meaning that it’d responsible for seventy percent of all future new builds and that no existing generating facilities would be sold. Eskom responded by announcing that new two 4800MW coal power stations would be built. However, the Eskom build programme faced challenges like costs and regulatory issues, which led to a late start. But the devastating electricity shortages in 2008 meant that Medupe and Kusile power stations were urgently needed to solve the problem. The tender contracts for Medupi and Kusile continue to be troublesome and have caused costs to rise.

In his unpublished thesis ‘Examining the Effectiveness of BEE Implementation: A Case Study of Eskom Restructuring 1995-2005’, G. Mabutho Shangase explains that the policy restructuring of SOEs of 2000 was “a buffer had been created between state ownership and outright privatisation of some SOEs.” The outcome of this is ‘soft privatization’, that is large scale outsourcing through programmes like black economic empowerment (BEE) and high dependency on the private sector companies. Black economic empowerment was deliberately mixed up with the developmental mandate of SOEs and this policy has created more problems than solutions.

The OECD mentions that the Department of Public Enterprises was initially called the ‘Office for Privatization’ and its overwhelming mandate was to sell SOEs. The OECD goes further to state, “intrinsic to this position was the notion that government has no active role to play in the economy.” But this policy was modified into ‘restructuring’, meaning the introduction of the private sector into key areas of the SOE value chains was to be prioritized. One biggest scam thus far concerns renewable energy producers. The IPP costs make up 25% of the total energy cost of R99.5 billion but contributes a mere four percent of the energy production. It is predicted that the unsustainable IPPs would have cost a whopping R1.2 trillion over twenty years. As the push to dump coal intensifies, this figure is expected to be even much more.

Other expenditure that is permanent in Eskom’s books concerns servicing of equipment and provision of supplies other than coal. Companies such as Steinmuller, Actom and Babcock are responsible for “outage and maintenance repair services for boiler pressure parts for 15 Eskom power stations.” The boiler maintenance services contracts cost not less than R250 million per annum. Besides this, Eskom has multiple contracts that are worth millions of rands and which are a source of controversy and corruption. For example, in March 2019 Carab Technologies was said to have sold back to Eskom the boiler monitoring software that was paid for and piloted by the power utility for an amount of R275 million. M&G reported in January 2020 that a relative of former Eskom chair Jabu Mabuza “scored big” in an R11-billion boiler tube maintenance contract. These two examples go on to indicate that Eskom is a land of milk and honey – the PIC gift will, therefore, benefit many people but the nation.

For a long time, Cosatu has always opposed the privatization agenda and fervently argued for the “maintenance of a vertically integrated, public-owned utility who should be used as an agent of the government.” The latest stunts by the trade union federation clearly show that its priorities are elsewhere and worker interests don’t feature anywhere in its agenda. Its proposal, therefore, seeks to prop ‘soft privatization’ practices at Eskom. The R250 billion will therefore not contribute to building the power utility but will be given to private companies and individuals who have been milking Eskom for years.

One consideration is for the PIC monies to be used to settle Eskom debt but on condition that ‘soft privatization’ to white companies and there who are black is addressed. Eskom has the potential to contribute to economic development and industrialization, which in turn can positively lead to the increased share of black people in the economy and create millions of additional sustainable jobs. Giving Eskom so much money from pension funds without reviewing how the power utility currently operates will be a waste of scarce resources.