Loan pulled Eskom from brink of default, says PIC
Eskom projected a R10bn negative cash flow for the first week of February and was saved from the brink of defaulting on its debt only by the one-month R5bn bridging facility provided by the Public Investment Corporation (PIC), PIC CEO Dan Matjila has revealed.
The disclosure is made in a letter sent by Matjila to the chairman of Parliament’s standing committee on finance, Yunus Carrim. He outlined the rationale for the loan, which he said was needed to tide Eskom over until it obtained loans of R20bn from a consortium of local banks. This could not happen immediately as processes and conditions precedent had to be finalised.
Without the R5bn, Eskom’s going-concern status would have been jeopardised, Matjila told Carrim. A default would have put the PIC’s R95bn government-guaranteed exposure to Eskom at risk.
The Public Servants Association and South African Federation of Trade Unions have objected to the loan.
Eskom spokesman Khulu Phasiwe conceded that cash flow was a “big issue” but said that Eskom was generating cash from the sale of electricity and from the repayment of outstanding debt by municipalities.
The agreement entered into between the PIC and Eskom is for a money market instrument fully backed by a government guarantee in Eskom’s domestic medium-term note programme.
The pricing of the facility, Matjila said, was determined by adding 75 basis points to the one-month Johannesburg interbank agreed rate, which meant that the pricing was above the benchmark rate of the Government Employees Pension Fund (GEPF) and therefore favourable to the fund.
The PIC, which has assets of nearly R2-trillion, acts as investment manager for the GEPF and other statutory funds such as the Compensation Fund.
Matjila said that some unions had expressed unhappiness with the PIC because they were not consulted beforehand about the investment, but he said that the GEPF was the PIC’s principal partner in the relationship.
“The PIC is accountable to the GEPF directly in terms of the investment mandate signed between the two organisations. The PIC is under no obligation to consult or inform any trade union when it implements the mandate of the GEPF. “The decision to invest the R5bn was taken in consultation with the GEPF’s executive management and some members of their board of trustees.
“The mandate of the GEPF gives the PIC full discretion to invest in short-term money market instruments such as the R5bn, 30-day paper advance to Eskom without having to seek approval from the GEPF provided that the credit quality of the paper is investment grade and/or is fully guaranteed by government.”
Matjila insisted the investment fell within the mandate entered into between the PIC and the GEPF and approved by the Financial Services Board, but DA deputy finance spokesman Alf Lees believes the mandate needs to be urgently reviewed.
Matjila told Carrim: “The mandate between the PIC and the GEPF stipulates the credit ratings of the state-owned entities in which the PIC may invest and the mandate also specifically provides for investments that are backed by a government guarantee.”
He emphasised that Eskom was “too important to fail”.
Failure posed a systemic risk to the economy as Eskom would have been in danger of
breaking its debt covenants with financial institutions holding Eskom paper. “This would have had the effect of debtors calling on the government to honour the guarantees for debt — an event that could have affected other public entities with debt guaranteed by government.
“The magnitude of the guarantee is close to R300bn and under current economic conditions it would be difficult if not impossible for government to honour these guarantees.
“This would have had dire consequences for the South African economy. The default by Eskom would have made a downgrade of the sovereign credit rating unavoidable.
“Further to this, the rand would have weakened in a situation where the oil price is above $60 per barrel, which would have led to more hikes in fuel prices. The poor would have been hardest hit.”
Matjila said the gains made by the new political leadership and the installation of new leaders at Eskom could not be undone by allowing Eskom to default on its debt obligations.
Lees said the revelation of Eskom’s predicted R10bn negative cash flow for the first week of February indicated the crisis at the utility was far bigger than previously thought.
“Eskom had run out of cash and would not be able to continue trading without a cash bail-out,” Lees said. He suspected that Eskom had only been able to continue operating by not paying all its suppliers.
Lees said Eskom’s auditors had assumed its going-concern status simply on the basis that banks were “considering” granting loans to it. He strongly objected to pensioners’ money being put at risk to bail out a failing state-owned enterprise.