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Government employees are propping up Eskom

Through investments made via retirement savings.

Government employees could unwittingly be sucked into state capture through the increased purchases of debt in state-owned entities like Eskom using their retirement savings.

For the year ending March 2016 – the latest available reported figures – the government employees’ pension fund (GEPF), of which national and provincial public servants are members, increased its ownership of Eskom debt through the additional purchase of R8.3 billion of Eskom bonds. Moneyweb understands that this trend continued in the year ending March 2017.

At the end of March 2016, the GEPF held R73.7 billion of bonds and bills in the embattled state-owned utility, making it the largest single owner of Eskom debt by a long way. In fact, so large has the GEPF’s buying of Eskom bonds become, it now dominates ownership for many of the utility’s bond issues (see below).

GEPF ownership in select Eskom bond issues as at 12 May 2017 

  ESKOM ES 2023 Size (R’m)  R15,997.32     Eskom ES 2026 Size (R’m)  R24,962.16
  Top ten owners Value (R’m) % owned     Top ten owners Value (R’m) % owned
1 GEPF  R13,129 82.07%   1 GEPF  R19,131 76.64%
2 RMB Capital Markets Prop  R1,078 6.74%   2 Sanlam Life Insurance  R614 2.46%
3 Nedcor Capital Treasury  R250 1.57%   3 AIPF  R369 1.48%
4 Sanlam Life Insurance  R229 1.43%   4 Old Mutual plc  R282 1.13%
5 Old Mutual plc  R122 0.79%   5 SIMLEND  R200 0.80%
6 Orbis Allan Gray  R118 0.74%   6 Stanlib  R125 0.50%
7 Whitehouse Family  R118 0.74%   7 Liberty Life  R99 0.40%
8 AIPF  R100 0.63%   8 Sanlam Ltd  R88 0.35%
9 ABSA Bank  R49 0.27%   9 MMI Group  R76 0.31%
10 MMI  R43 0.27%   10 SAMWU National Provident Fund  R76 0.30%
  Top ten combined  R15,236 95.25%     Top ten combined  R21,060 84.37%
  Source: Bloomberg         Source: Bloomberg    

 

  ESKOM ES 2033 Size (R’m)  R29,424.53     ESKOM ES 2042 Size (R’m)  R13,610.40
  Top ten owners Value (R’m) % owned     Top ten owners Value (R’m) % owned
1 GEPF  R8,948 30.41%   1 Old Mutual plc  R5,289 38.86%
2 Transnet Second defined benefit  R3,892 13.23%   2 GEPF  R2,643 19%
3 Old Mutual plc  R2,412 8.20%   3 RMB Capital Markets Prop  R887 6.52%
4 Sanlam Life Insurance  R1,749 5.95%   4 MMI Group  R638 4.69%
5 MMI Group  R1,319 4.48%   5 Sanlam Life  R549 4.04%
6 RMB Capital Markets  R965 3.28%   6 Libery Life  R434 3.19%
7 Liberty Life  R639 2.17%   7 ABSA Bank  R224 1.65%
8 AIPF  R448 1.52%   8 Metal Industries provident  R132 0.97%
9 Orbis Allan Gray  R370 1.26%   9 JM Busha  R112 0.82%
10 Whitehouse Family Trust  R320 1.09%   10 Orbis Allan Gray  R100 0.73%
  Top ten combined  R21,062 71.59%     Top ten combined  R11,008 80.89%
  Source: Bloomberg         Source: Bloomberg    

 

This is particularly disquieting because Eskom ceased public auctions for its local rand denominated bonds as far back as 2014. This means the GEPF – through the Public Investment Corporation that manages its investments – has been continuing to buy bonds through private placements. 

The difference between a public auction (where details of a bond issuance are distributed to a large number of buyers – “the market”), and a private placement (which entails deals behind closed doors between a single or small number of buyers), is stark.

A public auction allows the market to test the pricing of the bond issue and brings transparency to the process. For X amount of bonds at a proposed interest coupon of Y, the bond market will indicate how much of the debt it is prepared to buy from the issuer and at what yield (price).

A private placement, by contrast, is a deal struck between the issuer and one, or a few, buyers. (In the case of Eskom, it might involve a call from its Treasurer to one of the investment managers at the PIC.) Market forces are excluded, and as a result, no-one has an idea if the yield being agreed to by the buyer in a private placement is fair, or whether there is even any appetite to buy the bond in the first place. And therein lies the problem for the pensioners and members of the GEPF:

with Eskom continuing to sell bonds to only one party (the PIC/GEPF) in this manner, no-one can be sure whether their pension savings are getting a fair deal.

While the quantum of lending by the GEPF to Eskom has increased in absolute terms in recent years, the good news is that on a relative basis, the exposure to Eskom has stayed constant (see graph). But size is also a problem for the GEPF. With R1.6 trillion in assets, most of which are invested locally, it might just be too big for the market in which it operates. 

While Eskom is not that big in the eyes of the GEPF, in the power utility’s eyes the GEPF is massive. Without the funding provided by the GEPF over the last few years, Eskom would simply not be able to operate.

It becomes important to reassure ourselves that the funding provided by the GEPF is being done on an arms-length basis, because if we can’t, it implies no other investors would be prepared to step in and buy the company’s debt on the level the GEPF has (or alternatively might demand much higher yields to do so) and this would fundamentally comprise the utility as a going concern.

To understand the competing interests and conflicting incentives of having a state agency (the PIC), on behalf of a defined benefit public pension fund (the GEPF), become the largest buyer of a state-owned entity’s debt (Eskom), Moneyweb compiled the graphic below to represent the flow of money between the economy, taxpayer, SOE and GEPF.

 

Looking at the above graphic, is the GEPF continuing to buy Eskom bonds to a) prevent the government from having to bail-out the state utility directly; b) protect its own investment in Eskom by preventing the company from going bust; or c) safeguard the long-term interests of its members by buying fixed income instruments on a measured basis?

Deciphering this becomes particularly grueling when evaluating the deteriorating governance standards at Eskom and its business model, which seems to be in terminal decline (Eskom produces and sells less electricity now than it did in 2004). And what about the concentration of risk in the economy? Is pumping money via government employee savings (who in turn derive their income from taxes) into an SOE that already depends heavily on taxpayer bailouts, prudent?

Andrew Canter, the chief investment officer of Futuregrowth, was widely excoriated when he threatened to stop funding SOEs with delinquent governance records. But he was right, because look what we have learned since: not only has Eskom lent the Guptas money, abolished penalties owed to it by them, but greatly enriched them with incredible coal contracts.

If you hold the view that state-owned entities are nothing but a piggy bank from which a predatory and parasitic political elite extract rents – as has been alluded to in a number of reports relating to Eskom specifically (State of Capture, Dentons, PwC) and reinforced by the re-appointment of Brian Molefe as CEO – then continued buying of bonds by the GEPF is nothing more than a form of prescribed assets enabling state corruption. The money is funneled via the savings of government employees to prop up over-indebted SOEs like Eskom so that the rents can be extracted through their procurement processes.

Moneyweb sent a number of detailed questions directly to the GEPF, Minister of Finance, and the PIC over the nature of the relationship between the various stakeholders, as well as what, if any, engagements had taken place over governance at the company.

Deon Botha, responsible for stakeholder engagement at the PIC, responded with the following (the full statement has been published at the bottom of the article):

“The PIC, on behalf of its clients, does hold a substantial amount of bonds of various SOEs. A significant portion of the PIC’s bond holdings in SOEs is government-guaranteed. At the outset, it should be stated that SOEs have never defaulted on any of the PIC’s bond investments. It should also be contextualised that bondholders do not have the same rights as shareholders.

The government is the sole shareholder in SOEs and therefore has the right to appoint members to the boards of SOEs. The PIC is concerned with governance practices of certain SOEs and has engaged the National Treasury in this regard. The PIC is also currently in discussions with external company law experts to determine what changes can be made to the PIC’s governance policies to enable the PIC to exercise a greater degree of oversight on the governance structures of investee SOEs.”

The PIC also has an Environmental, Social and Governance (ESG) which is based on corporate governance best practice and in which it applies a ratings matrix to companies in its purview. The PIC engages companies on these matters. 

Answers to more detailed questions about the engagement of “external company law experts” had not been received at the time of going to press.

It’s probably fair to say that the public has been perpetually disappointed with the management and governance at a number of SOEs that include Eskom and Transnet. The ratings agencies have noted the risk to the country’s sovereign credit rating due to the risks posed by contingent liabilities emanating from SOEs, most notably Eskom, which is by far the largest. It is one thing throwing good money after bad trying to bail them out – as the latest noises coming out of the SABC indicate – but doing it with the retirement savings of 1.6 million people is unacceptable.

PIC’s full statement in respect of questions put to it by Moneyweb

“The Public Investment Corporation (PIC), on behalf of its clients, does hold a substantial amount of bonds of various State Owned Entities (SOEs).  A significant portion of the PIC’s bond-holdings in SOEs is Government-guaranteed.  At the outset, it should be stated that SOEs have never defaulted on any of the PIC’s bond investments.  It should also be contextualised that bondholders do not have the same rights as shareholders.

The Government is the sole shareholder in SOEs and therefore has the right to appoint members to the boards of SOEs.  The PIC is concerned with governance practices of certain SOEs and has engaged the National Treasury in this regard.  The PIC is also currently in discussions with external company law experts to determine what changes can be made to the PIC’s governance policies to enable the PIC to exercise a greater degree of oversight on the governance structures of investee SOEs.”

The PIC has an Environmental, Social and Governance (ESG) Policy, which is based on corporate governance best practice, specifically for SOEs.  This policy takes into account, inter alia, documents such as King IV, the Companies Act and the Public Finance Management Act.  The PIC also has an ESG Rating Matrix with various metrics on environmental, social and governance best practice with which it rates the ESG scores of SOEs.   The PIC actively engages all investee companies, including SOEs, on ESG matters based on our ESG policies and the ESG score derived from the ratings matrix.

As a result of these engagements, Eskom understands what our views are on a number of issues, including governance.  The PIC can assure government employees and pensioners that it is not conflicted as an organ of state, as all investment decisions are taken in the best interest of our clients and in line with client mandate requirements and the investment risk parameters stipulated by client mandates. In the case of the Government Employees Pension Fund (GEPF), this mandate is approved by the GEPF board of trustees and is based on a detailed asset and liability study.  The continued support of SOEs will be underpinned by these mandate requirements. Moreover, all investments are also subject to a robust due diligence process which includes a credit analysis, ESG reports as well as risk and legal reports. The PIC remains fully committed to work with National Treasury and Government to improve governance and public finance management in SOEs.”   

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COMMENTS   16

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and when it comes crashing down it will be blamed on white monopoly capital. This is the only way that these ‘shareholders’ can account for the party they voted into power. Bloated government financing bloated SOEs in a fantastic house of cards.

G E P F – another disaster waiting to unfold, curtesy of the ANC.

All of the alluded to above went on under Gordhan & Jonas’s watch which the author has omitted to drive home the desired narrative.

How BEE should be in my view employee ownership not select individuals.

If we look a little further and based on reports of relatively stagnant SA markets; holes in the PIC/GEPF left by politically driven largesse payments to entities like Eskom were probably plugged by more bouyant investments in the JSE. With the JSE flat; how are the holes going to be plugged?

public pensions are plugged by taxes

Well the big picture is that the whole PIC/GEPF is derived from tax (all government employees are paid from tax) aside from its returns on investment. I suspect that the real end game answer is money printing and devaluation; Zim style. Unless you somehow think that there can be enough taxpayers that generate their income from sources that have no connection to government. Otherwise it is like trying to lift yourself up by the bootlaces.

It is the right way to do it, I fully support that the majority of a country’s infrastructure if not all should be funded by the pensions of its own citizens. We do not need the Aussie’s and the Swiss to bond the building of our freeways and charge us perpetual e-tolls. Our Pension funds as a nation should be invested in the betterment of our infrastructure and that will be perpetual annuity for our nation.

Bulldust.

The ONLY people who should have a say in investing their OWN money must be the individual contributors and pensioners via the Trustees of the pension funds.

The big problem here is that the GEPF is a defined benefit fund, which means the risk isn’t with the pension fund, the risk is once again being carried by the taxpayer. If the GEPF can’t pay beneficiaries their dues due to underperformance of the assets, the taxpayer will be on the line.

this is the problem globally. In a weak growth environment the shortfall will have to be covered by increased taxes, or if that is impossible, then by reduced benefits (if politically palatable).
If globally there is no growth or the youth don’t want to/can’t cover the old, then the only way out is a hard reset through a war like last time.

Thank you government employees, but this morning my lights still went out.

Do I now send my complaint letter to the PIC?

“The PIC remains fully committed to work with National Treasury and Government to improve governance and public finance management in SOEs.”

They have not been very successful in this regard so what power do they really have or are they alo part of the big issue of state capture?

Correction” Are they also part of the big issue of state capture?

Warren Thompson, I can only marvel at how very polite you wrote all this…polite, and politically correct.
All I would have been able to come up with is; ‘My God, public servants – you’re all being taken for a FAT RIDE!’

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