The PIC – the Public Investment Corporation – is in the news for all the wrong reasons.
As the principal asset manager of our public sector’s savings, the PIC controls some R2 trillion of assets (that’s two thousand billion!). This makes it the largest fund manager in Africa and the single largest institutional investor on the Johannesburg Stock Exchange.
Understandably, with so much at stake, clients want to hear about the quality of the PIC’s oversight, the strength of its processes and the excellence of its returns. They do not want to hear suggestions that it may become a victim of state capture, or that it plans to prop up failing state-owned enterprises, such as South African Airways.
But those are the stories doing the rounds now. If true, then that concerns all of us, not just government employees.
The PIC is supposedly a financial service provider like any other. It is registered with the FSB and is governed by the Financial Advisory and Intermediary Services (FAIS) Act. It’s subject to the Companies Act and FICA.
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 peccable credentials in the context of our ‘state capture’ saga. The previous chairman of the PIC Board, Mcebesi Jonas, went public on attempts to ensnare him.
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. (Lest anyone has forgotten, Mr Molefe is also the former CEO of Eskom, which is all we have to say about that).
The latest annual report does not hide Mr Gigaba’s ambitions. Rather than posit for a more robust and inclusive economy, his commentary envisages “socio-economic transformation that will change the structure, systems, institutions and patterns of ownership, the management and control of the economy, in favour of those who had been marginalised from mainstream economic activities.” Animal Farm stuff, in other words.
With wild and woolly brush strokes, he recreates the Bell-Pottinger “WMC” landscape, claiming the “economy consists of monopolies and oligopolistic industries, with low competition and high barriers to entry … Only a small number of companies dominate the market with negative consequences for the consumer in the form of limited choices and, in some instances, exorbitant prices and products and services of low quality.”
The irony, that this perfectly describes Eskom, escapes him. And for all the rhetoric on transformation, job creation, and impact investing, 91% of the PIC’s 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 R2 trillion 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 an understandable concern that, with undue influence, institutional funds will 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?
The most obvious candidates are the members of the Government Employees Pension Fund (GEPF). Almost R1.7 trillion in the PIC coffers is theirs. A further R135 billion 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 ie 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.
Still, there is reason to believe the GEPF assets are not under threat. As these pensions are guaranteed by the state, it is a lot like borrowing from yourself. By replacing one obligation with another, it merely kicks the ‘can’t’ down the road.
The government has no such obligations towards the UIF, however. By recent accounts, it’s overfunded, so much so that Treasury (unsuccessfully) proposed to lower contributions at one point. Even if a shortfall should arise future, this could be made up by raising UIF contributions from the private sector, without putting government in the middle. If one were going to raid a piggy bank, this one looks more likely.
And there is also the reality that once a risk has been identified, it is mitigated. 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.
