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Why threats to the PIC concern all South Africans

Oct 20 2017 06:00
Tracy Jensen, 10X Investments’ chief operating officer

THE Public Investment Corporation (PIC), which has R2trn of assets under management, is in the news for all the wrong reasons. If the stories doing the rounds now are true, it might well be a concern for all South Africans, not just government employees.

The principal asset manager of the country’s public sector savings is the single largest institutional investor on the Johannesburg Stock Exchange and the largest fund manager in Africa.

With so much at stake, clients want to hear about the quality of oversight, strong processes and excellent returns. They do not want to hear suggestions that it might become a victim of state capture, or reports about plans for its funds to be used to prop up failing state-owned enterprises, such as South African Airways.

But those are the stories doing the rounds now.

The PIC is supposedly a financial service provider like any other. It is registered with the Financial Services Board and is governed by the Financial Advisory and Intermediary Services Act. It’s subject to the Companies Act and the Financial Intelligence Centre Act.

But there are notable differences. For one, it’s wholly owned by the state and reports to the minister of finance (Malusi Gigaba). It plays by its own rules – the PIC Act, 2004. The auditor general signs off on the accounts. The PIC board is automatically chaired by the deputy minister of finance (Sfiso Buthelezi) and clients aren’t directly represented.   

This doesn’t sit well right now. Tax revenues are falling, but not government spending. Some state-owned enterprises need finance, yet little is forthcoming from the private sector. Mr Gigaba is enthusiastic but unproven, with dubious credentials in the context of our ‘state capture’ saga. The previous chairperson of the PIC Board, Mcebisi Jonas, went public on attempts to ensnare him.

Could Brian be on the way back?

Mr Gigaba appears to be making moves on the PIC, calling for a forensic investigation into its unlisted investments. He plans to publish the full list of beneficiaries. Such transparency should be applauded, but cynics see an attempt to discredit PIC CEO Daniel Matjila. The rumour mill foresees the return of former CEO Brian Molefe.    

Notwithstanding the emphasis on transformation, job creation and impact investing in the 2017 PIC Annual Report, 91% of its assets are invested in traditional listed securities, local and international.

Still, that leaves 9% hiding out in a black box called “unlisted investments” which, in a R2trn fund, is not small change. The annual report lacks real transparency as to how this money is invested, who benefits and what returns have been generated. 

While there is no shortage of detailed case studies, there is no detailed recon of holdings. With a fund this size, and reporting of this nature, money might slip through the cracks very easily.

So there is understandable concern that, with undue influence, institutional funds could be misappropriated to further the cause of corrupt and connected individuals. Or, less extreme but no less harmful, that monies will simply be invested unprofitably, for example in our dysfunctional state-owned enterprises.     

Time will tell whether these concerns are valid. But if there’s worrying to be done, who should do it?

Who should be doing the worrying?

The most obvious candidates are the members of the Government Employees Pension Fund (GEPF). Almost R1.7trn in the PIC coffers is theirs. A further R135bn belongs to the Unemployment Insurance Fund (UIF). The balance is held on behalf of various smaller clients.  

Although most exposed, GEPF members can relax, according to Abel Sithole, the GEPF’S principal executive officer. The GEPF is a defined benefit fund, which means that pension benefits are paid according to a formula – mainly referencing the service period and the final pay scale – rather than the returns earned on contributions.

These benefits are guaranteed; if the GEPF runs out, the state steps in. In theory, it should therefore not matter to members how and where the PIC invests.

In practice though, it probably will. Other than service years and pay scale, the GEPF benefit formula includes an “actuarial factor”, which changes from time to time, on the advice of the GEPF’s actuaries. Inevitably, poor fund returns will lower the “actuarial factor” and cause lower pay-outs.   

It does require the buy-in from relevant employee organisations, however. If that is not forthcoming, and the benefits are maintained, then it’s on government to fund any shortfall, or rather the government’s sponsor i.e. taxpayers.

The point is, someone will have to foot the bill eventually, so it is in everyone’s interest that the PIC invests prudently. To claim that its investment decisions are inconsequential is folly.

With all eyes on the PIC, South Africans can hope for stronger governance and investment vetting, and a reduced chance of a sweetheart deal for anyone. Anyway, the things that bite us on the bum tend to creep up from behind. The real danger lies in the unexpected.  

  • Tracy Jensen is 10X Investments’ chief operating officer. Views expressed are her own.

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