What was not said in Sona
CAPE TOWN – It was clear from President Cyril Ramaphosa’s State of the Nation address (Sona) that the ruling tripartite government bought into Cosatu’s Eskom plan whereby inter alia the power utility's debt will be reduced.
“The social partners – trade unions, business, community and government – are committed to mobilising funding to address Eskom's financial crisis in a financially sustainable manner. They would like to do this in a manner that does not put workers’ pensions at risk and that does not compromise the integrity of the financial system.”
Therefore, it can be expected that Cosatu’s other plans and demands for Eskom and the economy will be adhered to.
Cosatu wants a weekly public report to be made available by the government and Eskom on the interventions encompassed in Cosatu’s plan. While the intention is good, we all know that that such reports may, or may not, reflect the true state of things. Withholding information and deliberate misrepresentation caused the downfall of many well-known corporates and state-owned enterprises over the past few years.
The big question is whether Cosatu is equipped to fully understand and monitor Eskom's true path and direction. Last week I said that the Cosatu plan for Eskom ticks all the boxes, but there are huge risks as fiscal, political and labour discipline combined are of utmost importance.
In my opinion there is an urgent need for a true gatekeeper that will ensure that the utility sticks to the plans and ensure that Cosatu and its alliances as well as the government and general public be kept abreast of what is really happening at Eskom.
One such candidate is KW Miller who has vast experience in restructuring in the energy sector globally, is well-known by the trade unions and advises global investors. He has conducted extensive operational and financial analysis on Eskom and issued a detailed restructuring report in October last year.
There is no room for error, especially possible political intervention as the entire plan could collapse, resulting in Eskom and the economy in an even worse situation than it is now.
The South African financial markets have already started to react positively on the plans for Eskom. Credit rating agency Fitch, however, is sceptical, but I am sure that the appointment of an apolitical independent company restructuring specialist as chairperson of Eskom will remove a lot of uncertainty as it will underline the seriousness of the ruling party and its allies to get the country and its economy on track again. On its own, the appointment will be credit rating positive, lack of it – credit rating negative.
Cosatu’s campaign to compel investment that will create employment and improve working conditions and uplift the poor also paid off in the emphasis that Ramaphosa placed on investment and job creation.
The main questions is how will it be financed? Well, again it is clear that Cosatu’s solution is likely to be implemented. The federation proposes that all retirement funds, the life assurance industry and the assets managed by the Public Investment Corporation invest at least 10 percent of their asset base in government bonds dedicated to social investment and employment creation. Yes, the reintroduction of prescribed assets.
Yes, I see the red flags go up, but wait. What we have to realise is that the South African economy today is not in a too dissimilar situation as during the apartheid era, specifically during PW Botha’s tenure.
The wrongdoing and maladministration over the past few years have left South Africa undercapitalised and investors are very uncomfortable to increase their debt exposure – reminiscent of the PW Botha era where the country's economy was suffocated by the dearth of foreign capital due to the apartheid policies. The apartheid government at the time relied heavily on the savings of the country's citizens through prescribed assets in their retirement or pension funds.
In an article in Business Report in May last year, I argued that “there is a place where it is logical to introduce prescribed assets – project-specific or asset-specific bonds. In order to guard against funds earmarked for specific projects being hijacked to fill gaps in other government departments or SOEs it makes sense to issue project-specific or targeted bonds to the public.”
In August last year I suggested that the time had arrived for inward investing by the savings sector by lowering the Regulation 28 limits and ensuring that the repatriated funds were productively employed in the economy, a new prescribed asset class may or should be introduced. I took a lot of flak from the industry on this one, but desperate times require desperate actions.
I, therefore, support Cosatu’s suggestion on prescribed assets as up to R400 billion or more could become available for much-needed fixed investment to grow the South African economy. It will relieve a lot of pressure on the government to tap global markets. On its own, the introduction of the prescribed assets will be credit rating positive.
I am positive that the announcements will be welcomed by foreign investors, despite potential apathy by local fund managers. Yes, desperate times require desperate actions.
Ryk de Klerk is analyst-at-large. Contact [email protected] His views expressed above are his own. He has no direct interest in any company mentioned in the article. You should consult your broker and/or investment adviser for advice.