A case for the PIC to bail out ailing state-owned enterprises

As Eskom and South African Airways battle with crippling debt and working capital crunches, policy gurus have proposed the use of pension fund savings belonging to government employees, worth R1.8-trillion, to rescue these state-owned enterprises (SoEs).

The rationale for this proposal is that the pension fund savings of the 1.7 million current and retired government employees – through the Government Employees Pension Fund (GEPF) – are already guaranteed by the state or taxpayers.

This means that if the Public Investment Corporation (PIC), a state-owned asset manager that invests the pension savings on behalf of the GEPF, cannot pay out the pension money, the government would step in and pay any shortfall from the fiscus.

Eskom alone requires R128-billion in bailouts over the next three years to stay afloat because it cannot generate enough income to cover its costs, service a debt of R440-billion and interest.

If GEPF funds are used to bail out Eskom and the power utility couldn’t pay back the money, the government would also step in to inherit the debt to government employees.

Accordingly, it makes sense for government employees to take on the risk of ailing SOEs rather than South Africa’s asset management industry that manages R5-trillion (according to a 27four Investment Managers 2018 survey), which includes pension funds, insurers and other investors.

Research firm Intellidex has joined calls by market watchers, including former PIC CEO Dan Matjila and others, for GEPF funds to bailout state entities. However, Intellidex is not proposing a blank cheque for state entities, some of which have received taxpayer-funded bailouts without a clear plan on reforming their business models to be profitable and competitive.

In its submissions to a commission of inquiry that is probing corporate governance affairs at the PIC, Intellidex said policies on explicit environmental, social and corporate governance considerations and impact investing should be formulated for the state asset manager.

Intellidex wants the PIC to be compelled to support investments that stimulate economic growth and have “highly impactful social outcomes” even at the expense of financial returns. In other words, the firm wants the PIC to not only invest in JSE-listed and unlisted companies but to also include investments that support South Africa’s broader development agenda and benefits the public at large – instead of only government employees.

“The South African economy is still dealing with the legacy of apartheid and colonialism, requiring transformation of many industries and the funding of the growth of black business. This is in part a social concern that should fit in an ESG (social and corporate governance) mandate,” the firm said.

Over the last six years, the government (as an employer) has contributed an average of R37.7-billion per year to the GEPF (through taxpayer funds), which amounted to 64% of contributions while employees made 36% of the contributions. The government has increased its borrowing to fund total expenditure, which includes contributions to the GEPF.

“This broad taxpayer contribution can in part be justified if the GEPF is used to further national interests beyond the interests of pension beneficiaries only.”

The PIC has an ESG policy for its listed and unlisted investments. However, Peter Attard Montalto, the Intellidex head of capital markets research, told Business Maverick that the policy isn’t coherent – thus proposed policies will standardise the state asset manager’s social and corporate governance considerations with those of the broader asset management industry.

At the PIC inquiry, some witnesses testified that social and corporate governance considerations on investments by the state asset manager were an afterthought and not a priority. And in some cases, the PIC failed to meet its social and corporate governance targets.

Enter SoEs

Intellidex believes one of the ways in which the PIC can commit to social and corporate governance and social impact investing is the bailout of state entities only if the “public benefit can be clearly demonstrated”.

This benefit should be measured and the sacrifice of financial returns (or increased risks) should be calculated and justified in terms of the public benefit, the firm said.

“This can include supporting the government in managing crisis situations, but such decisions should always be made by the PIC independently with the case independently developed for the public good by the PIC’s investment committee. Such investing should never be directed to political ends that happen to fit short term political interests.”

The inquiry has heard that the PIC, which also manages social funds including the Unemployment Insurance Fund and Compensation Fund, has been pressured to fund entities linked to politically connected individuals.

Intellidex has proposed wide-ranging governance measures including independent third parties measuring public benefits linked to the bailout of state entities by the PIC, strengthening the PIC’s independence in supporting government’s developmental objectives, separating the CEO and chief investment officer role (both previously held by Matjila), and having the chief investment officer (tasked with investment decisions) reporting to the PIC board and not the CEO. BM