Financing a Socially-Owned Transformed Eskom
Eskom Research Reference Group | Eskom Transformed | 22 September 2020
In the last few summaries, we outlined a few of the biggest issues with the plan for an unbundled Eskom and a for-profit electricity sector. We spoke about the investment crisis of renewables, the plan for unbundling, and how that will lead to Eskom becoming a “zombie” utility. Finally, we also outlined our vision of the alternative: a new, socially-owned, vertically-integrated, green Eskom that will be able to meet South Africa’s energy needs without getting us stuck in the complications of “power for profits”. However, we have left out a question that many will have: Where is the money going to come from?
This question sits front and centre of any Eskom debate because the utility’s biggest problems are its financial problems. Eskom sits with a massive debt, the interest on which costs around R70bn per year. While it does turn a profit, this profit is not enough to pay off its debt while still doing the necessary – and expensive – work of finishing its unfinished power plants while doing overdue maintenance on its existing ones.
So, why do we think that a new socially-owned Eskom is possible, given these circumstances? Our research makes three main arguments.
The first is the proposal for debt elimination. In 2010, Eskom received a loan of $3.75bn from the World Bank. $3.05bn of this loan – around R53bn today – was given for the construction of the Medupi coal power plant. This loan was given under suspicious circumstances: One of the companies contracted was partly owned by the ANC, and used this as leverage to get the contract – a fact the World Bank knew about at the time of the loan. What’s worse, an investigation into the World Bank was shut down by its then Vice-President for Integrity, who was known to have strong links to ANC power struggles. The World Bank itself later acknowledged corruption at the institution, explicitly mentioning its dealings with South Africa. Eskom would be well placed to write off this debt as “odious debt” – a legal term referring to debt which is against the best interests of the borrowing country’s population, and specifically where both the borrower and lender knew about this fact beforehand.
Our second proposal is to look at the Government Employee Pension Fund, which currently owns a large amount of Eskom’s debt – over 20% of it in 2018. At the moment, the Fund is valued at over R1.7 trillion, which is more than enough money to cover the pre-defined pension payouts of all of its members, including new ones, even if they were to retire all at once. This is unnecessary – in a country with a young population such as ours, a pension scheme does not need to be “fully funded” in this way, because only a tiny part of its members are ever going to be retired or retiring at one time. A pension fund with pre-defined payouts like the GEPF thus only needs enough to cover the pensions of those retiring and retired members, plus a little extra for security. The GEPF is very well placed to simply scrap the debt Eskom owes it, given that this debt counts for less than 5% of the GEPF’s assets and that it is already very over-funded.
Our final point is possibly the most decisive. As we outlined in the last few summaries, an unbundled Eskom competing in an energy market would actually end up being hugely expensive! There is no way for Eskom to inherit its current problems while still being expected to fend for itself against competitors. At the same time, we cannot let Eskom fail: its coal plants produce around 90% of our electricity, and no private company is willing to invest in coal. This means that the government would have to end up financing Eskom anyway, giving it either more big bailouts or excessive payments for its electricity. There is no cheap and easy way out of the Eskom crisis, so why not spend the time and money on transforming Eskom into a socially-owned and green-transitioning public utility, rather than on shifting it from one crisis to the next?