/ 18 January 2019

Not on to use pensions to bail out state

The pension fund industry will resist being forced to invest in state assets unless there are viable projects in which to do so. The Government Employees’ Pension Fund has already loaned Eskom which is building Medupi money before.
The pension fund industry will resist being forced to invest in state assets unless there are viable projects in which to do so. The Government Employees’ Pension Fund has already loaned Eskom which is building Medupi money before. (Madelene Cronjé)

Raiding pension coffers will do little to save embattled state-owned enterprises (SOEs) or public projects experts say, after plans were announced in the ANC’s election manifesto to investigate the introduction of prescribed assets on financial institutions’ funds “for investments in social and economic development”.

The proposal, which surfaced at the ANC’s policy conference last year in June, is back on the agenda as the government grapples with ways to resolve power-utility Eskom’s acute financial distress.

The SOE revealed at public hearings about its latest tariff increase application that it needs to raise R20-billion by March for its operations, according to a Business Day report.

“The issue is current … because the hunt for solutions to Eskom will likely lead to a debate around the need to dictate that the asset management community and banks lend to Eskom to keep it afloat,” says Peter Attard Montalto, Intellidex’s head of capital markets research, in a note.

Although Eskom is the largest risk to the national fiscus, other SOEs, such as the SABC and SAA, are also desperately seeking funding after years of mismanagement and corruption.

But according to the head of the ANC’s economic transformation committee, Enoch Godongwana, it is “incorrect to link this debate to the SOEs at the moment. The ANC is having serious discussion on restructuring the SOEs.”

The proposal of prescribed assets is related to funding infrastructure, he says. “The decision is to investigate whether they can be useful in the current environment.”

According to Leon Campher, Association for Savings and Investment South Africa (Asisa) chief executive, prescribed assets refers to the state forcing the savings industry to buy bonds issued by the government and SOEs, as was the case during apartheid.

“It did not work when introduced by the apartheid government and Asisa and its members maintain that it would have negative effects on the country should it be introduced now.”

Asisa represents, among others, the country’s asset managers, collective investment scheme management companies and life insurance companies. The industry together manages R7.8-trillion of the country’s savings.

Pension savings alone total more than R4-trillion, according to the most recently available data from the registrar of pension funds, the bulk of which, 45%, is made up of private- sector funds and the Government Employees’ Pension Fund (GEPF), which accounts for slightly more than 40%.

The problem is not a lack of willingness by capital markets to invest, “but we need viable projects”, says Campher. This notwithstanding, Asisa members have already invested R1.3-trillion to support the government, local authorities and SOEs.

Andrew Canter, Futuregrowth Asset Management’s chief investment officer, echoes this and says there has been no shortage of capital in South Africa for “creditworthy or bankable development projects or businesses”, and the lion’s share of government debt and other developmental investment is already held by the pension industry.

“Corrupting the investment decision processes by the introduction of prescription would be damaging for the entire economy,” Canter says, and directing pension fund investments to “favoured” investments would be an inherently political process.

He outlines other ramifications: it would turn pension funds into instruments of state policy, increase losses and reduce returns, undermine confidence in the local finance sector, thereby reducing investments and the savings rate and undermining the country’s “hugely effective pension fund savings system”.

The debate about prescribed assets comes at a time when the state-owned asset manager, the Public Investment Corporation (PIC), faces a commission of inquiry because of a series of recent investments. The PIC manages the GEPF’s money, by far the largest war chest in the country. By 2018, it had amassed R1.8-trillion and is a defined benefit fund, meaning it is entirely underwritten by the government.

The GEPF refused to comment on the ANC’s manifesto proposal because it has not been approached about the matter.

The fund has stepped in to assist Eskom before. In early 2018, Eskom faced a severe funding shortfall and the fund lent it R5-billion to enable the utility to continue operating.

Eskom’s problems are particularly acute, not only because it poses a risk to the government’s finances but also because its financial troubles have affected its operations, sparking load-shedding, a major dampener on economic activity.

The utility is forecasting a R15-billion loss this year and has proposed that the government should take R100-billion of its debt on to its own balance sheet. But, economists have warned that would affect the government’s own financial ratios and the ratings agencies would take a dim view of it.

Eskom did not respond to questions regarding what a R100-billion debt swap would mean for its interest bill but undoubtedly it would offer some relief. The utility’s debt burden has soared to almost R420-billion and is expected to hit R600-billion in the coming years.

“Unfortunately, Eskom has painted the nation into a corner,” says Canter, and forcing institutions to lend to Eskom is not a solution.

The solution, as unpalatable as it is, requires several measures, namely cutting costs, increasing tariffs, improving operations and some form of government bailout to reduce Eskom’s debt-to-equity ratio, he says.

Public-sector trade unions such as the Public Servants’ Association, which is affiliated to the Federation of Unions of South Africa, have in the past threatened to take to the streets if their pension funds are used to prop up ailing parastatals.

The ANC’s tripartite alliance partner Cosatu is “walking a fine line” on the matter, its parliamentary co-ordinator, Matthew Parks, says.

The federation represents about 946 000 public sector workers, who fall under the public service co-ordinating bargaining council. Including its members at SOEs, this figure is more than one million.

Prescribed assets would be pension funds, whether private or the GEPF, he says, and Cosatu’s number one mandate is to get a healthy, above-inflation return for its members, the workers.

“It’s not petty cash,” he says, adding that Cosatu has locked horns with the government in the past because of the government’s belief that it can use the PIC to bail out SOEs bankrupted by corruption.

But, he says, Cosatu supports developmental investments to grow the country’s infrastructure and economy, although Eskom’s problems have complicated this. If the utility was to collapse, it would hit not only Eskom workers but others too, and particularly if it brought down the economy, he says.