Is the PIC to be a giant shock absorber for the state?
Its lifeline to Eskom raises the question: what role does the ANC want it to play in SA's economy?
The Public Investment Corporation is a fractious and contentious entity. It is a massive investor, even by global standards, and dominates the JSE. Yet its political line has always been precarious.
Its reason for existing was to secure the apartheid-era pensions of civil servants held in the Government Employees Pension Fund (GEPF) (which the PIC manages). They, and subsequent state workers, receive a defined-benefit pension based on years of service and salary. But fears that an ANC government might not have been able to meet that obligation meant the GEPF was endowed with assets to cover the liability. For a government running a budget deficit, it is like having a savings account and an overdraft. That doesn’t make economic sense.
Of course, it doesn’t feel like that when you are a civil servant contributing 7.5% of your salary to it every month (matched by 13%-16% paid by the employer). Civil servants are mitigating their credit risk, though the liability is still borne by the state.
From the state’s point of view, it is one liability among many. When it comes to finding ways to deal with threats to the solvency of the country, reshuffling liabilities is one option.Eskom is the most intractable financial problem the state faces. So last week’s mooted idea of converting the PIC’s Eskom debt into equity is a sleight of hand that shifts credit risk from Eskom’s other lenders towards GEPF members. The R120-billion of Eskom debt that the PIC holds would be converted into equity. Right now it is a solid-yield asset, generating returns of various amounts. As equity, though, it will yield nothing – Eskom has no prospect of paying a dividend.
The idea was aired last week by ANC treasurer-general Paul Mashatile and apparently discussions are under way.
Depending on what swap terms are agreed, the percentage of Eskom that the PIC ends up owning could be substantial. Eskom has a book value of R170-billion, says its latest financial statements, although any investor should demand a due diligence of the valuations of those assets before doing a transaction. But it looks clear that a swap would mean Eskom gets a substantial new shareholder in the PIC.
It would not be the only swap – the state could swap some of its exposure and maintain a controlling interest. It is also hard to see how other creditors, particularly those with non-guaranteed debt, would sidestep the conversion entirely. They might be forced to reschedule.For the PIC, the Eskom equity would have to be valued at an amount equivalent to the debt, in order not to simply open a big hole that would leave the GEPF with assets far below what is needed to meet its obligations to pensioners. But eventually the GEPF will have to receive top-up contributions from the state to restore its funding.
This prospect emerges while the PIC is facing a governance crisis. It is, frankly, hard to tell who the good guys and bad guys are. The PIC’s fractious political life means it faces pressures from all sides – to serve as a vehicle of patronage and to push the ANC’s developmental agenda, while appearing to be a custodian of pensioner assets.
Recipe for trouble
Last week, Claudia Manning quit the PIC board amid reports of a split on how to do deal with allegations against CEO Dan Matjila. Also last week, though unrelated to Manning’s resignation, Finance Minister Nhlanhla Nene announced an independent enquiry into the affairs of the institution. Important issues are certainly there to explore.
Matjila’s role as both CEO and chief investment officer is a recipe for trouble. When there are management failures at the institution, such as the apparent bribing of its chief risk officer to direct cash into failed bank VBS, the CEO should be held responsible. When there are poor investment decisions such as investing in now insolvent Erin Energy, the investment chief should account. Having both roles invested in one person will create accountability problems.
However, it is ultimately the ANC that has to decide what it wants the PIC to be. If it wants a world-class manager of pension assets, there are no mysteries about what needs to be done. There are many excellent international examples to follow. The transparency, investment decision-making processes, and governance structures have been hashed out by other comparable institutions around the world, and it would be easy to emulate them.However, if the ANC wants the PIC to be the financial shock absorber for the state, it cannot aim to emulate world-class pension institutions. Instead the PIC must effectively function as a sovereign wealth fund, a savings buffer for financial problems facing the state. The obligation to pensioners would be its notional purpose, though those obligations would truly be a liability of the state as a whole.
Nene’s commission must deal with the governance failures and allegations of graft at the institution. But it may also be able to ponder its way through the deeper questions of what function we want the PIC (and the GEPF) to perform in the economics of our country.