Appoint an independent investigation into PIC’s behaviour
Something is wrong at the Public Investment Corporation (PIC). Poor investment decisions are made and poor post-investment oversight is undertaken.
There are really only two possible reasons: the PIC’s mandates may be poorly framed — leading to poor outcomes for investments — or bad decisions are being made.
Either way, I think the minister of finance should appoint an independent body to investigate and get to the bottom of it.
There are two clear recent examples of poor outcomes.
First is VBS Mutual Bank. The PIC was deeply invested in the troubled bank, holding at least a quarter of the shares — worth R12.4m — and having made a facility of R350m available.
It did not appear to do this flippantly. The PIC appointed its own head of risk management to the board of VBS, presumably to ensure that the PIC’s money was being well looked after.
Well, it clearly was not. Judging by the latest information from the VBS curator, that money was fraudulently used to enrich related parties.
Half the bank’s R3.2bn in assets cannot be verified at all. The Reserve Bank has guaranteed only R50,000 of each depositor, so this means the PIC could well lose a substantial portion of its investment.
Second is Independent Media. The poor performance of the company has become public following the attempted listing of Sagarmatha Technologies as a new holding company.
Its prelisting statement showed Independent has been a dreadful investment. As at the end of June 2017 it had accumulated losses of R752m and was insolvent to the tune of R547m.
The PIC, which invested on behalf of the Government Employees Pension Fund (GEPF), has been forced to subordinate the debt it had injected in order for the company to continue as a going concern.
Unless Independent can mount a dramatic improvement in performance, the PIC is not likely to get the money back.
When it invested in 2013, many thought the R2bn price tag for Independent was far too rich. The PIC took a 25% stake.
It also committed debt, which, as at end June 2017, was sitting just shy of R700m, as well as investing in R456m of preference shares.
All told, well over R1.5bn of PIC money has been ploughed into an investment that is now clearly insolvent.
Another questionable investment was $270m in Camac Energy (since renamed Erin Energy), a Nigerian exploration company that was insolvent even at the time of the investment in 2014. It made another $100m commitment in the form of a guarantee in 2016.
Erin has lost money every year, most recently posting a $152m loss for 2017.
Erin is now litigating against the PIC in New York, alleging that the PIC is not handing over more funds that it had promised to the company. The PIC owns 30% of it. At today’s exchange rate, the PIC has put R4.4bn on the line for Erin.
The PIC has a massive R2trillion portfolio, managing the assets of by far the biggest pension fund in SA.
It holds more than 10% of just about every company on the JSE. It also has a large portfolio of unlisted assets, such as VBS and Independent.
In such a massive portfolio, it is quite easy to bury the disasters and render them almost invisible. But one disaster is one too many.
The PIC occupies a position in which it can take a very extensive and long-term view in its investment strategy.
Like large state pension managers elsewhere in the world, it is legitimate to use its investment power to drive sustainable change. In SA that would include transformation of the economy.
The PIC may have believed that its investment into Independent reflected an important principle of supporting domestic black media ownership.
It may have believed its investment in VBS met a mandate to promote black ownership in banking. I can’t imagine what it thought it was doing with Erin Energy.
But in any event, implementing a transformative investment strategy of this sort does not absolve one from making good deals in the first place.
It should not overpay or back incompetent or dishonest management. It must also pay close attention to the performance of its assets and intervene to steer them carefully to success, where possible.
REPRESENTATION
In 2017, Parliament’s standing committee on finance forced the PIC and the GEPF to provide significant information on its investments. It has also resolved that there should be more representation from unions and the GEPF on the PIC board.
But the minister of finance has oversight responsibility for the PIC.
Like he has done in the case of the South African Revenue Service, the minister should call for an inquiry into the PIC. The inquiry should consider whether its mandate and investment decision-making processes are truly up to scratch.
Every South African taxpayer is on the hook if they are not.
IN SUCH A MASSIVE PORTFOLIO, IT IS QUITE EASY TO BURY THE DISASTERS AND RENDER THEM ALMOST INVISIBLE