JOHANNESBURG – Cosatu has proposed that the Public Investment Corporation (PIC) produces “a debt package to reduce Eskom’s debt from R450 billion to R200 billion through a special purpose finance vehicle involving social compact between government, the PIC and DFI’s”.
Research confirms that the government explicitly guarantees almost half of the nearly R300bn in outstanding state-owned entities' (SOEs) debt, while at the end of 2018 banks had 10 percent of their equity exposed to SOE’s on average. Banks also package SOE exposure within debt instruments (credit linked notes) which they issue, giving investors exposure to both the risk of the bank and the underlying SOE.
How can you identify the opportunities? Our Transaction Advisory Corporate Finance team makes a detailed assessment of the standalone risk of the relevant SOE, and then determine what level of support might be inferred from the government. This ranges from an explicit guarantee to none whatsoever, and is based on the government’s previous actions when an important SOE has been in trouble. This risk assessment drives the yield we require over and above government debt. This additional return is made up of two components: extra compensation for the lack of liquidity (liquidity risk); and the additional default risk (or credit risk) one assumes.
The mission of the Government Employees Pension Fund (GEPF) is to be the custodian of a significant portion of the wealth of public servants to ensure the sustainability of the fund; provide for efficient delivery of benefits; and empower their beneficiaries through effective communication about target investments and its projected Interest rate of returns, while investing on impact developments to better the communities of the beneficiaries or pension fund members.
The GEPF value integrity, being ethical and truthful; maintaining good governance practices, meaning they will allocate funds to institutions that uphold principles of good governance and not withholding information to which their stakeholders are entitled and as a rated global pension fund they committed to acting with due diligence, competence, confidentiality, and reliability.
The PIC should be guided by these principles when assessing the R250 billion transaction for Eskom. The Eskom transaction will be attractive on two grounds that the PIC might also exploit, which are liquidity risk and credit risk that can benefit GEPF to maintain its above Inflation rate target interest. The GEPF and PIC have powers to recommend additional principles relating to governance and accountability to SOEs and also deploy their own candidate to be jointly managing finance activities alongside the Eskom Finance or any SOE they finance. There is nothing wrong in funding SOE as they are part of primary impact investment in every nation.
In the eyes of many policymakers, the scale of potential investors is key. Pension funds in particular have often seemed an attractive option – they pool large amounts of capital and have beneficiaries who care about the places in which they live. In theory, they can be partners in pairing financial returns with developmental goals. However, for many of these targeted investors, it can be difficult to meet the challenges of fiduciary duty requirements – that is, the legal obligation to act in the best interests of your clients – as well as integrating new practices into the fund consultant manager nexus.
The revisions to Regulation 28, which aimed to update pension fund investment practices in light of changing investment patterns and political and economic contexts in South Africa, was an opportunity for the South African government to link the regulatory reform of pension fund investment with the government’s broader goals of encouraging economic development and social investment. It limits the extent to which retirement funds may invest in particular assets or in particular asset classes. The main purpose is to protect the members’ retirement provision from the effects of poorly diversified investment portfolios.
There is a strong need to allocate funds to impact developments that are also part of the Sustainable Development Goals such as SDG11 to supporting cities and communities mainly in developing economies such as South Africa. South Africa has enough skills in the financial services sector and they have capacity to make a great judgement in the valuation of SOEs investment proposals. Our SOEs are too big to fail considering at their asset value, what we need is to disconnect SOEs from political interference, we need clean boards and all those must be professionals that are having technical skills to decide on these corporations.
The striking fact is that funding is available, but it is not flowing to where it is needed. The total investment available is about $120 trillion, including commercial banks, investment banks, insurance and public pensions, sovereign wealth funds, equity funds and public global funds, such as donors, foundations and endowments.
Reining in debt and other liabilities has substantially reduced the governments’ scope for sustaining demand in the face of severe negative shocks, thus reducing their ability to buy time for structural adjustment in the private sector. For now, investment in a shift to a sustainable growth and employment pattern has been crowded out. Shifting consumption to investment via tax increases is possible, but too problematic politically, with the burden-sharing issue usually leading to impasse and inaction.
The investment strategy has been designed, taking these long-term objectives into account, using a liability-driven approach after an extensive asset-liability modelling exercise which takes account of the size of the assets of the Fund within the South African and the African investor universe.
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 PIC ESG policies and the ESG score derived from the ratings matrix.
The stability of Eskom will attract investors in textiles, manufacturing, mining and services sectors. Pension funds members will not be lost as Eskom has assets that can be sold to recover its liabilities before such a corporation can be liquidated or sold. Eskom has enough properties that are business non-core and they need evaluate all those properties and sell them to operate as a lean principle organization that can easily adapt to complexities.
Miyelani Mkhabela is an Economist and Director of Antswisa Transaction Advisory Services, contactable at [email protected] and Twitter:@miyelani_hei