Issue: September-November 2011
Editorials

NATIONALISATION 1

Ownership by the people, for the people

Nationalisation is nonsense. Those who propound it seem utterly oblivious to the modern-day reality that it's not a few wealthy capitalists but many millions of ordinary savers, notably through pension funds, who stand to be hurt the most.

There's an straightforward argument that drives a stake through the heart of nationalisation rhetoric. It's in the contrast between fantasy and fact. Nationalisation involves the transfer of corporate ownership to "the people" via the state. But in reality the ownership of those mineral-resources and financial-services behemoths – ostensibly targeted for nationalisation – already belongs to "the people" via such collective investment vehicles as pension funds, unit trusts and life assurance policies.

Long gone are the days that nationalisation meant taking Anglo from the Oppenheimers or FirstRand from its triumvirate of founders. Modernday ownership of SA's larger corporates vests overwhelmingly in the many millions of people who save, voluntarily or compulsorily, through the extensive range of institutional product offerings.

Pension funds are prominent amongst them. Let it be said again that pension funds are the main, and often the only, depositaries of black workers' savings. This makes it paradoxical that Cosatu, the largest trade union federation, has signalled its support for nationalisation. Perhaps it hasn't yet considered the extent to which nationalisation will prejudice the pockets of its own members.

True, savers through collective vehicles are indirect investors. Equally true is that their rights, were they to show interest in exercising them, are no different from direct investors. Only the means are different; for example, in the mandates for pension fund managers to vote on their behalf at shareholder meetings of companies in which the funds are invested.

These rights are superior to those that apply when the sole shareholder is the state. For one, there's the enhanced recognition of stakeholders in the new Companies Act. It includes requirements that shareholders elect directors and pre-approve their remuneration.

For another, there's the Code for Responsible Investing in SA (CRISA). In terms of CRISA, institutions have committed themselves to practise the good things that enshrine the interests of the "ultimate beneficiaries" as paramount.

Shareholder democracy – with all the elements of transparency, accountability, sustainability, engagement and voting powers – is there for the taking. It defeats the need to bother with nationalisation, moving shares to and fro between representatives of the "the people", especially in the face of attendant disruption that surely threatens.

Largest fund in the land

Take the Government Employees Pension Fund which has 1,2m active members. It's the largest fund in the land, a founding signatory to the UN Principles for Responsible Investment and the most forceful leader of CRISA. According to the GEPF's latest annual report, at end-March last year 56% of its R801bn portfolio was invested in JSE-listed equities.

Take the Government Employees Pension Fund which has 1,2m active members. It's the largest fund in the land, a founding signatory to the UN Principles for Responsible Investment and the most forceful leader of CRISA. According to the GEPF's latest annual report, at end-March last year 56% of its R801bn portfolio was invested in JSE-listed equities.

And this is only one fund. Similar asset allocations, through resources and financial services, would apply to many others. Shares with the larger market capitalisations are amongst the institutional favourites not only because of their relatively safe and prudential blue-chip status but also because they offer the liquidity required by investment vehicles; say by pension funds to pay benefits, unit trusts to pay on withdrawals, retirement annuities on maturity and so on.

Were these shares removed by nationalisation from market disciplines and trading, the JSE's investable universe would substantially narrow. The more limited the investment choice, the greater the dangers of volatility from buying and selling into lower-capitalisation stocks. Heightened risk is counter-intuitive to savings and hence to the nation's capital pool.

Which in turn begs the question of who'll pay for nationalisation. The amounts involved are huge, almost certainly prohibitive. Market capitalisation of targeted companies way exceeds the R730bn in the national revenue fund and even the R890bn total expenditure in government's main 2011-12 budget.

For instance, to contextualise the numbers, taken together the market caps of Anglo American and Billiton alone exceed R1000bn. It illustrates the size and clout of the companies in the line of fire. About 48% of Anglo's revenues, and a mere 2,5% of Billiton's, are from SA.

Both companies have their primary listings abroad so their overseas shareholdings are immune from attack. It means that only their SA operations could be nationalised, whatever the effects – all negative – for shareholders irrespective of domicile. Moreover, bereft of SA assets, there'd be little purpose in them maintaining their JSE listings.

Banks present greater complexity. SA's five biggest have a combined market capitalisation approaching R500bn. Absa is controlled from abroad by Barclays; Standard is 20%-owned by a bank that the Chinese government controls; about 11,5% of FirstRand is held by foreign investors; Nedbank's parent is Old Mutual which has its primary listing in London, and Investec has a dual London/JSE listing.

All these banks rely predominantly on SA activities and infrastructure for their revenues and profits. Unlike the mining houses, their domestic businesses defy separation from their international. Also unlike mining, there are no ‘new' banking rights to be separated from ‘old'. Nationalisation of the banks therefore implies an outright state takeover of them as they stand.

Clearly, shares in operations of the mining and banking groups' magnitude cannot be expropriated at market valuations because government cannot afford it. Alternatively, they can be expropriated at lesser values or without compensation. Either way, to a lesser or greater degree the consequence would be wholesale theft from institutional holders such as SA pension funds.

Back to the GEPF example. While most SA pension funds are of the defined-contribution variety (where the member bears the investment risk), the GEPF is a defined-benefit fund (where the employer, in this case government, is contractually obligated to pay members certain benefits irrespective of the fund's investment performance).

So here, what government takes with the one hand it will have to put back (using taxpayer money) with the other. The vast majority of private-sector funds, including those administered for trade unions, are not in a similarly fortunate situation. Their members will carry the can for the impact on share prices.

Theoretically, it could be argued that shares nationalised at full value (a financial impracticality) amounts simply to a transfer of money from the state to savers for investment elsewhere.

WHO OWNS WHOM

The authoritative King III report on corporate governance (2009) noted:

An analysis of the registers of the major companies listed on the JSE will show that they are mostly comprised of financial institutions, both foreign and local. These institutions are ‘trustees' for the ultimate beneficiaries who are individuals.

The ultimate beneficiaries of pension funds, which are currently among the largest holders of equities in SA, are individuals who have become the new owners of capital. This is a departure from the share capital being held by a few wealthy families which was the norm until the end of the first half of the 20th century.

This is a worldwide trend.

But this runs slap-bang into a vice that nationalisation will create. To the one side is the narrowed JSE investment universe. To the other is Regulation 28 that restricts offshore exposure. Both limit the scope for diversified investment in large-capitalisation shares that pension funds must necessarily seek.

Amidst the heat of the nationalisation polemic, pension funds had better make their voices heard. They have the cleanest credentials to inject rays of light.