The PIC is the ready solution to SA’s debt crisis
Government borrowing from the fund instead of the IMF makes for a win-win situation
Albert Einstein defined madness as expecting different results after repeating the same action. A definition of Einsteinian sanity would thus be the need to do something completely different to achieve something never before achieved.
The Public Investment Corporation (PIC) manages assets of R2.084-trillion (March 2018), 87% of which belongs to the Government Employees Pension Fund (GEPF). The government-controlled PIC has invested R488.4bn of the GEPF’s money in interest-bearing bonds — that is, loans to the government and state-owned companies.
With 50% of GEPF’s assets held in shares, the fund was good for R1.673bn in March 2017. Another 8% of the funds managed by the PIC belongs to the Unemployment Insurance Fund (UIF). With unemployment being so shockingly — and persistently — high, the UIF has nonetheless somehow managed to accumulate a surprisingly large sum of R180bn in assets which, along with the GEPF, is similarly managed by the PIC.
The UIF allows for an easy implementation of Einstein’s “doing something different” wisdom. All waged/salaried employees pay 2% of their earnings into the UIF (half of it indirectly via the employers). This amounts to about R22bn-R23bn per year. After the UIF has paid out its insurance benefits, the surplus is handed over to the PIC. For many years the surplus has been R6bn-R8bn. Today it is R2bn.
The only ‘but’ is whether the GEPF could afford to lose some between R8bn to R10bn in annual interest income that would otherwise come from Eskom. Yes it can.
These numbers allow for an easy innovation. As it happens, the widely reviled VAT increase to 15% is expected to raise R23bn a year. A moratorium on UIF contributions would cover this VAT increase which is, additionally, a factor behind the “technical” recession. No less importantly, it would immediately be enormously popular and stimulate economic demand. It would, in other words, be an exceedingly rare instance of a “win-win” situation.
What would be so completely different to please even Einstein? One interesting — though disregarded — suggestion was to convert the R84bn in loans from the GEPF to Eskom into shares that pay no dividends. That would immediately remove interest payments on the R84bn. The only “but” is whether the GEPF could afford to lose between R8bn to R10bn in annual interest income that would otherwise come from Eskom. Yes it can.
The GEPF is a “defined benefit” pension fund. The members get what they are entitled to according to the rules, no less and no more. There is, thus, no need to maximise the size of the fund. It needs only to be big enough to safeguard the pension payments and meet other obligations to members. It could therefore safely use the rest of the money in the fund to maximise value to society, instead of hoarding it and maximising its return on investment.
This wouldn’t hurt its members. Extending this financially prudent logic, GEPF should lend most of its funds to the government. Doing so would safeguard SA’s policy independence from the IMF, China, or any one of the other creditors who impose conditions on loans and dictate economic policy to safeguard their investments in our debts. The corrupted deals at Transnet and Eskom amount to tens of billions of rand.
And just as many have argued about the $3.75bn loan from the World Bank in 2005 to Eskom’s financially and ecologically disastrous coal adventure at Kusile and Medupi, it could very well be argued that a large chunk of some of the loans from Chinese institutions — to trains and harbour cranes — should be renegotiated as odious debt. But this cannot happen if we are asking to borrow R400bn more from China.
The GEPF has in fact already lent the government R324bn, Eskom R84bn and Transnet R25bn. We can only guess that the government right now pays interest of between 6% and 9%. On this basis, the GEPF’s holding of the government and parastatal bonds should mean it gets between R20bn and R30bn per year in interest income from these investments in public debt.
The GEPF would not lose any income. The pensions of the GEPF pensioners would not be threatened. The only losers from the PIC reallocating sizeable investments would be the JSE and the elite beneficiaries serviced by the PIC’s largesse
GEPF’s annual surpluses have been about R50bn. This huge amount, let it be emphasised, is after all benefits have been paid. This is why the PIC is growing. Even if the GEPF were to give the government and parastatals an interest moratorium, it would today still harvest a surplus of between R20bn and R30bn per year.
The data from budget reviews and the annual reports of the GEPF show that the annual rate of return on its investments has been around 4.5% for 10 successive years. We measure this like the Treasury measures it, without considering the erratic value changes of shares and bonds on the market. Compared to the GEPF’s 4.5% income growth from its investments, the government is paying an average of 6.5% per year on its R2.8-trillion debt, according to the 2018 budget review. Every half percentage point the government can save in debt service cost would save R13.8bn per year. A reduction from the 6.5% it is now paying, to 4.5% if it borrowed from the GEPF, would reduce the debt service cost by R55bn a year.
The GEPF would not lose any income. The pensions of the GEPF pensioners would not be threatened. The only losers from the PIC reallocating sizeable investments would be the JSE and the elite beneficiaries serviced by the PIC’s largesse. We should not worry about that. With a market capitalisation of about 300% to GDP, the JSE is still one of the most overvalued stock markets in the world. And to the extent that the PIC has been used to build a black business class, this minority project is destroying the ANC.
It is manifestly in the broad public interest that the government does as much of its borrowing as possible from funds that are neither controlled by profit-maximising financial institutions nor in foreign currencies. There is just such a fund available. It is called the PIC. Some 95% of its assets belong to two other public funds. The investigation of corruption in the PIC should be a signal to completely change the management of public debt in SA. There is a ready-at-hand solution to the debt crisis. There is no need for austerity.
• Forslund is senior economist at Alternative Information and Development Centre.