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|
|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%|
|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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