Opinionista Dick Forslund 21 January 2020

SAA: Tito Mboweni’s R2bn game of financial chicken

The finance minister declared in August 2019 that he wants to debate economic policy. It seems, however, impossible to get an answer on why the single shareholder in the Government Employee Pension Fund, which is the Treasury, doesn’t change the GEPF’s investment policy to be more supportive of the public sector, as well as more prudent.

Finance Minister Tito Mboweni doesn’t seem to know how — or whether — to provide the R2bn that Treasury promised in immediate funding for South African Airways. Whatever other problems are facing the public service airline, the problem the Treasury has with this R2bn is contrived. Behind the financial game of chicken is the finance minister’s insistence that any rescue operation of SAA must be funded from the national budget.

In the face of that dogma, it doesn’t matter that SAA’s immediate problem is 95% smaller than Eskom’s. This is its relative size if we compare R2-billion to the “net current liabilities” that Eskom accounted for in March 2019. R44-billion had to be found for Eskom in the short term, starting from March 2019, notwithstanding that the public utility at the time was burdened with R445-billion in total debt (R53-billion higher than the year before, illustrating the unsustainability of Eskom’s finances).

Eskom first got R23-billion from the national budget through Parliament. After that, a Special Appropriation Bill was adopted in October 2019 that gave the public utility another R26-billion. This was also financed from the national budget. But tax money is what should fund the annual costs for health, education, water supply repairs waiting to be done in almost all municipalities, putting an end to sanitation disasters in poor communities, drought relief to farmers and so on: everything the national budget pays for during the year and that the country desperately needs much more of. 

The austerity choice of the Treasury (and Parliament) — to reduce the budget baseline twice this financial year, by about R60-billion over three years — was unfair, unethical and unnecessary. It has exacerbated social unrest and conflicts. It can even be argued that it was unconstitutional.

The Treasury has large funds at its disposal outside the Budget if there is political will. On that point there is, in fact, growing political space and growing sanity when it comes to public companies in crisis over which there is no political agreement: to avoid austerity, both Cosatu and Saftu are today open to using the more than R2-trillion in state pensions and unemployment insurance surpluses that are managed by the Public Investment Corporation (PIC). This can offer some calm while the deep problems of corruption are addressed. It will be a long process, upsetting enough as it is. Panic cuts in public service delivery should not be added to the explosive mix. 

But in the case of SAA, maybe we are rather dealing with a political choice. In the finance minister’s 2019 Budget Speech he took the opportunity to question the need for state-owned companies in South Africa.

Has he now gone from words to inaction when it comes to SAA? Should what happens to SAA be decided by the Treasury alone by means of procrastination? Or can less than 0.1% of the PIC’s R2-trillion be used for a loan to SAA, to get space for a proper discussion on the future of SAA (and SA Express that trafficks smaller destinations)? 

The finance minister declared in August 2019 that he wants to debate economic policy. It seems, however, impossible to get an answer on why the single shareholder in the Government Employee Pension Fund (GEPF), which is the Treasury, doesn’t change the GEPF’s investment policy to be more supportive of the public sector as well as more prudent.

A radical shift of the GEPF’s investment policy from having more than half of its funds invested in company shares (“equity”) to safer investments in bonds would take care of the too-small size of the solvency fund pointed out in the 2018 independent audit. The GEPF’s funds are too heavily invested in the stock market and should be weighted towards safer bonds and loans. Obviously, this is not one of the “structural reforms” that the Treasury has discussed with Moody’s or the World Bank.

The need for such a structural reform of GEPF, even if not to the likings of the finance minister, can be illustrated by the 2019 GEPF annual report. It informs that, during 2018, “net investment income” dropped by R146-billion to R47-billion in 2019. Now, how was that possible if the cash income from bonds was R48.3-billion and from dividends R34.5-billion? Doesn’t that come to R82.8-billion? 

The explanation is that the GEPF made “capital losses” of some R35.8-billion in 2019, even if the annual reports never declare the results of speculating in corporate share price movements and depend on honest corporate reporting, instead of buying safe Treasury bonds. The concepts “capital gain” and “capital loss” don’t appear in the GEPF’s reporting. The reader has to derive from other numbers what happened.

But that doesn’t mean that losses and gains from speculation are unimportant to a pension fund. If you sell shares like Steinhoff and Tongaat Hulett at a lower price than you once bought them for, and make a number of such sales during a generally bad year at the Johannesburg Stock Exchange, then you can end up with a total “capital loss” of a staggering R36-billion in 2019.

For the purpose of paying increasing pension and benefits to state employees every year, the upshot is, however, that GEPF, the largest pension fund in Africa, is about double the size it needs to be, especially with adopting a sane investment policy; something we have discussed earlier in detail. 

Considering that the coming year on the JSE looks “gloomy”, we suggest that the Treasury talk to the board of the GEPF about that R2-billion for SAA, even if a loan at a regulated interest is ideologically less attractive than “structural-reform-liquidation” of the public airline. R2-billion amounts to less than 0.2% of GEPF’s more than R1-trillion in shareholding managed by a PIC under investigation for corruption.

Ask the GEPF board to sell 0.2% of its too-large exposure to the vagaries of the stock markets, Mr Finance Minister. DM

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