Public Investment Corporation – is it really independent?

News from the bond market is that several state-owned enterprises (SOEs) have suspended their monthly bond auctions due to dwindling support from private investment firms. This leaves the Public Investment Corporation (PIC) – custodian of nearly R2 trillion in public servants’ pensions and savings – as the primary backstop of financial support for SOEs.

Something is clearly wrong here. The PIC is willing to put public servants’ savings into bonds that private investment firms won’t touch. It is an established fact that a major reason for SA’s sovereign credit downgrade is the ongoing concern among ratings agencies over the state of governance in our SOEs.

As the accompanying table shows, the PIC (and the Government Employment Pension Fund) owns 48% of Sanral (SA National Roads Agency) bonds, 56% of Eskom’s and nearly two-thirds of Transnet’s.

.

The PIC itself states that it practices a policy of shareholder activism, with the aim of ensuring that “the entities in which we invest on behalf of our clients are well managed, accountable and transformed.”

That being the case, the PIC should exercise its mandate to its clients and use its massive investment muscle to push for well-managed, accountable and transformed management at the many SOEs in which it is invested.

It claims to be doing this, but the fruits of this activism are not readily visible. SAA under Dudu Myeni, who has racked up more than R10bn in losses during her chairpersonship, still squats in her chair. Brian Molefe, sometime CEO at Eskom and friend of the Guptas, has just been returned to the CEO post at the behest of the board and the minister of public enterprises. This is the same board that showed largesse to the Guptas – lending them money, abolishing penalties they owed Eskom, and dishing out amazingly generous coal contracts to them. SAA is not involved in raising bonds, although bond-raising has been touted as a solution to its financial crunch. The PIC does not seem at all keen on this, so we can assume Treasury is going to have to figure this one out some other way.

The obvious solution is to take a firehose to the boards of these SOEs and restore some credibility. There’s no sign of that happening.

In the last few months both Transnet and Sanral have suspended their monthly bond auctions due to lack of support. Their own internal treasury guidelines require them to seek a diversified spread of investors as a risk-mitigating mechanism. That is no longer possible. Where there is hardly any support left, it seems the PIC is left to pick up the slack. Some have argued that the PIC is the lender of last resort to these malfunctioning institutions, thereby placing public servants’ savings at risk.

Transnet held an auction in March this year, which was well supported. Support crashed in the April auction: it raised just R45 million of the R200 million it was seeking in that month. It has some flexibility to reschedule its capital expenditure programme, and has already extended a seven-year capex programme into a 10-year one. This also means that it will have to scale back on its massive R360-380-billion capex programme over the next 10 years – and this is something the economy can ill afford. Our rail and other basic infrastructure suffers from decades of under-investment and is a critical bottleneck to growth.

Transnet is able to access Development Finance Institutions (DFI) and Export Credit Agencies (ECAs), provided the funding is tied to specific projects. But neither of these will support basic maintenance and office overheads. That then leaves government as the final backstop, but even this is becoming less and less tenable. The sovereign downgrade makes it more difficult even for government to raise capital on the bond market, and it will have to pay higher interest costs than has been the case until recently.

The Eskom board’s insistence on re-appointing Brian Molefe to the CEO position – a decision that has created a rift between the ANC and Minister for Public Enterprises Lynne Brown – also has financial consequences. SA’s credit downgrade is already priced into Eskom bonds, and the same applies to all other SOEs in SA. Eskom has a sophisticated treasury operation which gives it some flexibility in its capital raising options, but as in the case with Transnet, it is able to tap the DFI and ECA programmes (provided its fund raising is tied to specific projects). Hence, the impact of the “Brian Molefe affair” and other instances of mis-governance are not visible from the bond data provided by the JSE. But Eskom’s bonds are trading at significantly wider spreads above their respective benchmark bonds than was the case a few years ago. That tells us all we need to know about the market’s perception of governance in the organisation, and of SA’s sovereign credit rating.

Sanral

Earlier this month, Sanral announced that it had cancelled all future bond auctions pending the outcome of a governmental task team inquiry into road funding. Sanral needs to borrow about R600 million a month to cover its interest bill and operations, but, as already mentioned, the auctions have been poorly supported over the last year. Sanral says it has enough cash to last a few months. Urgent action is required to arrest its deteriorating cash position, and the options are few.

Options include:

• Solicit additional grants from government (the least favoured option, given the budgetary stresses already in place).
• Extend government guarantees and re-price the bonds (ie. offer additional yield) to entice investors to support the bond auctions.
• Attempt to improve revenue collection by pursuing legal action against e-toll boycotters, though this is not an option that is expected to yield any tangible result, now or in the near future.
• Lean on the PIC to back these bond auctions, which in itself is arguably an abuse of public servants’ savings (even though the PIC will pick up additional yield on these bonds).
• Embark on a Zimbabwe-style money printing programme and lend the money directly to SOEs – in which case the rand will tank, inflation will rise, and we can say farewell to any hope of economic recovery.

Obviously none of these are particularly satisfactory.

The bottom line is that there are growing concerns that the PIC is being used as a funding arm of government, and in apparent violation of its own investment guidelines.

PIC was asked for comment, but had not replied at the time of publication.

Brought to you by Moneyweb.