Using prescribed assets to get out of a financial fix
The debate around the prospect of prescribing private and public pension fund money to bail out Eskom, and other financially impaired state-owned enterprises, continues.
While the ideal of fully-functioning Eskom is one we all aspire to, implementing a version of prescribed assets implemented during the 1950s to 1970s is not the ideal solution and is cause for concern.
There have already been other stakeholders who have mooted the suggestion that the Public Investment Corporation (PIC) should have its investors – the most significant of which is the Government Employees Pension Fund (GEPF) – take on R250 billion of Eskom’s debt.
How have prescribed assets worked out in the past?
To understand the principle of using prescribed assets as a means of getting out of a financial fix, we need to take a step back in time. Who were the winners and the losers in the past? Historical numbers show why we should question the value of a prescribed asset approach.
Equity holders gained, bondholders lost out
In the previous period of prescribed assets there were significant gains, which ironically led to the establishment of state-owed entities such as Eskom and Sasol. However, these gains accrued to the equity holders of these entities: the government of the day. The bondholders received a poor return on investment (ROI) when they were forced through prescription to invest in the bonds that funded and founded these institutions.
If you look at the figures in the table, you’ll see the following:
1960s: Inflation averaged 3.0%. Although prescribed assets earned positive real returns, they earned -6.4% a year less compared with equities over the decade.
1970s: Inflation averaged 11.3%. Prescribed assets earned 7.3%, while equities returned 24.5%. Therefore the opportunity cost of investing in prescribed assets compared with equities was -17.2% a year.
1980s: Inflation averaged 14.5%. The opportunity cost of investing in prescribed assets compared with equities was -6.7% a year.