The Public Investment Corporation (PIC) is a registered financial services provider and manages assets on behalf of various public sector entities. Every client has its own portfolio, and investments include listed and unlisted equities, capital markets, money markets, property and unlisted investments.
The Government Employees Pension Fund (GEPF) is the PIC’s largest client, comprising 85.92% of assets under management.
The annual report demonstrates the impact of the Covid-19 pandemic, which sparked a global recession. This had a dampening impact on investments. However, the pandemic should not be used to explain away the devastating impact of state capture, and the resulting direct financial cost to the PIC – and, ultimately, the GEPF as the major client.
PIC CEO Abel Sithole is of the view that: “Although the PIC has been found wanting in several areas of corporate governance and ethics, it continued to deliver on key aspects of its core client mandates.”
Assets under management
The assets under management as at March 31, 2020 declined by 10.84% to R1.907 trillion, compared to R2.131 trillion at the close of the previous financial year. The local listed equities and property portfolios were most affected, recording losses of approximately 19% and 24% respectively.
The domestic listed equities portfolio is made up of in-house managed listed equities (32.82%), externally managed listed equities (8.28%), bonds (34.86%), cash and money markets (6.96) and listed properties (1.38). The unlisted investment portfolio is made up of private equity (0.95%), impact investing (3.02%) and unlisted properties (2.69%). The offshore and Rest-of-Africa investment portfolios are made up of global listed equities (5.63%), global listed bonds (1.97%), Africa listed investments (1.12%) and Africa unlisted investments (0.33%).
The PIC does not provide a breakdown of the investments, and commented: “Clients own the assets and it is for them to disclose. Competition considerations would inform the level of detail.”
If the public was made aware of the full details of unlisted investments, Moneyweb asked the PIC, would this not assist in the prevention of corrupt activities in regard to politically exposed persons? The PIC responded: “Clients already disclose the unlisted investments as is their prerogative.”
The PIC focuses on investing for financial returns and development, and during the 2020 year:
- Committed R1.2 billion to education infrastructure programmes, and
- Invested R15 billion in renewable energy initiatives via the Renewable Energy Independent Power Producer Programme.
The PIC also supports the sustainable development goals of the United Nations, and is committed to making cities and human settlements “inclusive, safe, resilient and sustainable”.
Strengthening governance and accountability
On October 4, 2018, President Cyril Ramaphosa established a Judicial Commission of Inquiry into Allegations of Impropriety at the PIC under Judge Lex Mpati. The commission’s report (the Mpati Report) was released in March 2020.
The Mpati Commission made many recommendations in its report, including that full forensic investigations and inquiries into various allegations of wrongdoing as well as the role played by employees be conducted, and for the necessary steps to be taken to recover all monies including accrued interest due to the PIC.
An advisory panel led by retired judge Yvonne Mokgoro has been established to assist the board in carrying out the recommendations of the commission.
The board has since (post balance sheet) introduced measures to strengthen corporate governance processes and accountability.
The revised organisational structure comprises the chief executive officer, chief investment officer, chief financial officer, chief operating officer, chief technology officer and chief risk officer. The Investment Committee (IC), a subcommittee of the board, is now the final approval authority for investments that are beyond management’s delegated authority.
The three fund investment panels that had approval powers for sector-specific transactions have been terminated.
The Audit and Risk Committee has been split, and each committee is now chaired by a different board member.
A separate risk committee has been established, and a new position, head of ethics, has been created.
Suspended executives still earning millions
Matshepo More, who was the CFO earning R10.5 million per annum, was suspended on full pay in March 2019. Roy Rajdhar, an executive earning R7.6 million per annum, was suspended on full pay. Fidelis Madavo, the executive head of listed investments who earned R4.9 million in 2020, was dismissed.
The PIC was asked to comment on whether any disciplinary processes were in progress, and replied: “Disciplinary actions are personal and must be sensitive to affected staff in terms of the employer and employee relationship.”
The PIC’s dividend policy
The Mpati Report outlined the recommendations for the PIC’s dividend policy, referring to the primary funding objective of the GEPF: that “employer contributions should be sufficient to ensure that the fund is able to meet its obligations at all times”. The GEPF short-term funding level objective is 90% (per actuarial valuation 2018: 108.3%); however, the GEPF long-term funding level is 100%, and the long-term funding level of 75.5% is hopelessly inadequate.
The commission set out its views as follows: “The mandate of the PIC is to act in the best interests of its clients; it is not to maximise profits. Essentially, by paying dividends from management fees charged to the GEPF and other clients, an indirect tax is imposed on PIC’s clients.”
The commission questioned how the PIC could pay a dividend of R80 million in 2018, stating: “The payment of a dividend raises the question as to whether this is being done to convey to the Shareholder that the PIC is in fact functioning extremely well and is thus able to afford to pay a dividend?”
In light of the above, how can the PIC justify paying a dividend of R99 million in 2020? Is this not tantamount to completely ignoring the commission’s recommendations?
The PIC replied: “No comment. The PIC is currently ceased [finished] with implementing the recommendations of the Mpati Commission including this.”
Interim results as at September 30
The PIC’s interim results for the six months ended September 30, 2020 show a slight improvement.
The assets under management for the six months increased to R2.1 trillion. Listed equities continue to be volatile and negatively impacted by the Covid-19 pandemic.
However, unlisted investments continue to perform badly, with an internal rate of return (IRR) of 1.87% against the end of fund life target IRR of 8%.
A significant number of distressed unlisted investments will not recover the losses made.
To put this in context, at March 31 the unlisted investments comprised R50.7 billion, and the impairments were already R11.9 billion.