The dawn of the new year brings with it the realisation that SA is a beggar on the world stage. For all the reasons we know, we do not have the money to repay our debts. In fact, our debt servicing costs are killing any hope of an economic recovery as all the revenue generated by entities such as Eskom and SAA is swallowed up by interest payments.
The ANC manifesto has already made reference to the reintroduction of a prescribed assets requirement, a piece of legislation that has its roots in the apartheid era, when all retirement funds had to invest 53% of their assets in government- and parastatal-issued bonds, thereby providing a constant source of funding to the National Party.
It is sad that we have to revert to mechanisms previously employed by master manipulators of state organs to fund our way out of the current mess. It is also not obvious that this is really a solution.
For one thing it would be open to court challenge, as retirement funds are no longer mostly defined benefit but defined contribution in nature, and therefore belong to specific individuals. Second, diverting money away from equity investments – corporation in other words – means there will be less capital available to grow the private sector and create jobs. Third, it may discourage individuals from saving through regulated retirement funds, preferring rather to do so directly via unit trusts, irrespective of the fact that it is an inefficient way of saving. Trade unions are also likely to wade in on the issue.
However, it cannot be disputed that we are running out of options. The biggest risk posed to the economy is Eskom, which features consistently in the headlines begging for help, whether through debt relief of R100bn or tariff increases. Irrespective of the reasons for the position it finds itself in, we cannot afford for Eskom to fail. Hence, however unpalatable it might be, Eskom must be rescued and given breathing room to recover.
If it was up to me, which clearly it isn’t, one elegant solution would be to deploy the assets of the Government Employees Pension Fund (GEPF) managed by the Public Investment Corporation (PIC).
The PIC is a topic for another day, but it is the only large pool of savings we have available to us. The GEPF is a defined benefit pension fund, so the liability to pay public servants’ pensions is a liability on all SA’s taxpayers. Deploying the assets of the GEPF to bail out Eskom means that although the taxpayer will still be on the hook, at least the impact of substandard returns, should that result, can be smoothed over many years.
How should the assets be structured? There is an instrument that could come in handy in this situation, which neatly retains the debt liability on the balance sheet of Eskom but frees it of immediate cash flow demands. That instrument is a zero coupon bond.
These are not normally issued to investors as they pay no coupon (six-monthly interest payments). The interest is capitalised in the value of the bond and payable when the bond matures. All Eskom would need to do is issue 10-year zero coupon bonds to the PIC in exchange for R100bn in cash. If the bond issue was a government guarantee, there is also no reason to pay an interest rate above what government bonds pay, saving Eskom more than R29bn in excess interest it pays now on its bond issues.
This means the balance sheet of SA remains unencumbered. At the same time Eskom has more room to manoeuvre. It is a bit of a “kicking the can down the road” scenario for Eskom, but we live in the hope that over the next 10 years Eskom can return to some semblance of profitability. The GEPF is only slightly affected in terms of liquidity, but not in terms of the value of its assets.
There are undoubtedly other options that one can explore. But as a taxpayer who stands behind the GEPF, and who has a vested interest in maximising the returns on my savings, rather a long-term liability than regulation that has the potential to affect our investment and savings markets in an unpredictable manner.
Magda Wierzycka is Sygnia Group CEO...