image_pdfimage_print

Public Investment Corporation: Editorials: Edition: April / June 2019

When gamekeeper turns poacher

The look into internal workings of the PIC offers a great opportunity for rethink and perhaps restructure. Flaws and failures require resolution for the long term.

The latest annual report of the Public Investment Corporation creates the impression of SA’s largest asset manager doing a mighty fine job. But revelations before the commission of inquiry into PIC irregularities reflect precisely the opposite. They cannot both be right.

Whatever the findings ultimately produced by the commission, chaired by retired judge Lex Mpati, things can never be the same again; neither for the PIC itself nor for its major client, the Government Employees Pension Fund. The PIC directly manages almost 90% of the GEPF’s R2 trillion investment portfolio.

Together, the PIC and GEPF have been presented as the manager-client model for SA retirement funds to emulate. Clearly, the model is flawed. Amidst the alleged shenanigans at the PIC, where was its board to whom the chief executive reported? And where was the GEPF board to ensure that the PIC complied with its mandated responsibilities?

The PIC directors resigned en masse, ostensibly because the evidence before Mpati had made their jobs impossible. Should allegations be proven – there’s a long way to go – dismissals in disgrace might seem more appropriate. For their part, the GEPF trustees cannot indefinitely leave their stewardship role unexplained.

It is they who provided the PIC with its investment mandate. It is they who, the GEPF annual report proclaims, govern the fund and are accountable for its investment and administrative performance. They also protect its values, from integrity and transparency to the flag-carrier for stakeholder activism and responsible investment.

Yet, from under the noses of committees and sub-committees, the PIC faces interrogation from the commission for a fundamental tenet of the mandate whereby the GEPF trustees “require global best practice in terms of risk management, monitoring and reporting”.

Mpati . . . evidence accumulates

By way of illustration, starting to surface are huge amounts in advisory and other fees paid by the PIC to various black-empowerment entities. Revealed by Sygnia chief executive Magda Wierzycka, from a supposedly ‘private and confidential’ PIC document, her comments in a Business Day column impact on the reputations of numerous entities “completely unknown” to her although at least one is a service provider in competition with Sygnia.

That the entities are unknown to Wierzycka doesn’t necessarily make suspect either them or their transactions with the PIC. The document lists fees paid by the PIC over the period from 2014 to 2018. During this period, the PIC chair was deputy finance minister Mcebesi Jonas. He was subsequently appointed a director of JSE-listed Sygnia Asset Management on whose main board he continues to serve.

Perhaps easier to address is the SA Home Loans instance, small in money but big in principle, of a payment nearly deflected by the PIC from the GEPF to an individual. The “mistake” of then PIC chief executive Dan Matjila was successfully challenged by SAHL (see next article ‘Picked out’).

Were there occasions when similar “mistakes” had not been detected? It will be for the commission to find out, as it has with such contentious schemes related to investments in Ayo Technologies and Independent Media, bringing with them the important question of how the PIC has selected black-empowerment investees.

Related to it is the criteria, shown only in broad transformational terms, used by the PIC for investment into 123 unlisted companies and support for 785 small-to-medium enterprises. Left to guesswork, except for the Mpati hearings, is where personal or political interventions were possibly at play (TT Feb-April ’18).

Still undisclosed by the PIC is the identities of the 13 external asset managers it appoints, let alone the sizes of their respective allocations. The PIC merely records the managers by number and shows their BEE levels in an agglomerated table. The GEPF, on the other hand, identifies by name the 18 external managers which it says the PIC has appointed for parts of its portfolio. But it too doesn’t set out the sizes of respective allocations.

Why the differences in disclosures, or lack of them, when competition for allocations is fierce and billions of rand in pension monies are at stake? Are appointments made on the basis of objective criteria consistently applied? Once there was trust. Today there isn’t.

As the PIC unravels, policy issues arise for consideration. They’d include:

  • Whether the PIC should continue in its present form or be rationalised into the GEPF with a view to elimination of duplicated structures. There are talented personnel in both the PIC and GEPF (including highly-regarded board members) whose functions overlap. In its most recent financial year, the GEPF paid R1,1bn to the PIC as management fees while the PIC had R805m in total expenses of which R550m were employee costs;
  • Whether, alternatively, the PIC’s investment function cannot be performed entirely by GEPF-appointed external managers under client mandates; or whether the PIC shouldn’t be open to competition for GEPF appointments. Such moves would doubtless cause salivation amongst private-sector managers, particularly those with strong BEE credentials, and the potential explosion in the sizes of their assets under management should comfortably invite the absorption of specialist skills from the august bodies;
  • If not, whether the PIC’s board composition should be solely at government’s discretion. By contrast, half of the GEPF’s board comprises stakeholder representatives;
  • Whether the time has arrived for the GEPF to establish a defined-contribution fund, so that new members can enter it and existing members can choose whether to convert from the present defined-benefit arrangement. A DC fund (prevalent in the private sector) could be to the greater advantage not only of members but also of government (hence taxpayers) which underwrites the DB liabilities.

None of these suggestions can be simplistically argued but they could be seriously contemplated, given the thrust for review generated by changed circumstances. The ostensible situation that’s arisen, of the PIC ‘s unacceptable behaviour and the GEPF’s flawed oversight, cannot be resolved by tinkering.

Begin with an examination of the GEPF’s investment mandate to the PIC – curiously, not at present in the public domain – for launching a debate on how its objectives can best be attained. Documentation is one thing. Implementation is another.

This might not be within the immediate remit of the Mpati commission. However, it might well be a necessary consequence.

Litigation: Editorials: Edition: April / June 2019

Full of pep

Battle prepared for landmark case on duty of the regulator to protect retirement-fund investments. R70m claim to be defended.

Like a hand arisen from the grave, the PEP Limited provident fund (PEPF) is holding the Financial Services Board accountable for some R70m in losses it sustained from the Trilinear debacle that’s been hanging around for ages.

With the FSB first having inspected Trilinear over a decade ago, matters didn’t come to a head even with the “confidential” report of an inspection it concluded years later (TT Sept-Nov 2012). In at least one respect, they will now.

Since the PEPF has about zero chance of recovering a cent from Trilinear, it is suing the FSB (effectively the Financial Sector Conduct Authority which has taken over the old FSB’s assets and liabilities) for the R70m. The litigation will be heard by the North Gauteng High Court in October.

Defendants are the FSB and its then executive officer Dube Tshidi. PEPF holds them liable for losses allegedly suffered by the fund for them having failed in the performance of their statutory duties; in a nutshell, for not having supervised and enforced compliance with the laws regulating financial institutions and the provision of financial services.

Implicitly, had the PEPF known what the FSB knew, it could have responded to avoid the loss.

PEPF was not alone in its loss. The FSB’s damning report of 2011 showed that, as at April 2010, Trilinear had received R467m from funds participating in the Clothing Industry Northern Chamber Provident Fund.

The Trilinear group, which included an investment-management firm (TIM) and an empowerment fund (TEF), had as its “guiding force” one Sam Buthelezi. It had made disastrous investments. For example:

  • Canyon Springs. Associated with then Economic Development minister Enoch Godongwana, it was lent R91m by TEF. By the time the FSB report was completed, it was in provisional liquidation;
  • Pinnacle Point, into which TEF had invested R195m from retirement funds, became insolvent.

The essence of PEPF’s claim is that the FSB and its executive officer had knowledge of Trilinear’s affairs that they didn’t disclose to the fund. Their omissions caused the fund’s loss.

These were actionable failures in the regulators’ duties not only to comply with their own statutory requirements but also in their duty of care and obligation reasonably to prevent harm, amongst them by not having:

  • Taken timeous and appropriate action against the Trilinear group, or taken preventative measures at their disposal to divest Trilinear of assets it managed;
  • Notified the fund during August 2009 at the latest that TIM was or appeared to be acting unlawfully;
  • Appointed a curator by August 2009 to take control and manage Trilinear’s affairs.
Centred on workers

For their parts, the FSB and its executive officer deny that they breached any duty of care or that they owed obligations to the PEPF that give rise to civil liability. They further deny that they acted with gross negligence or that “a causal link exists between any of the omissions and the alleged losses”.

They add that at all material times the FSB Act provided for the FSB to perform its enforcement function by establishing an enforcement committee to deal with alleged contraventions of the law: “At no material times…(has any) law relating to the enforcement committee conferred any powers on the FSB.”

Then they introduce Richard Kawie (purportedly national benefits coordinator of the SA Clothing & Textile Workers Union) as a third defendant. Kawie, they say, was a trustee or alternate trustee of PEPF. As such, he was obliged to act with due care and in good faith, to avoid interest conflicts “and disclose any facts or circumstances known to him which gave rise or may give rise” to interest conflicts.

But according to the FSB, Kawie had failed to disclose to his fellow PEPF trustees that amongst other things:

  • He and Buthelezi were influential in decisionmaking of the TEF (into which TIM was entitled to invest PEPL funds);
  • TEF had never been audited;
  • An entity to which TEF provided finance, primarily in the form of unsecured loans, was Canyon Springs;
  • He exercised effective control over all Canyon Springs’ decisions;
  • A material reason for him recommending investment in TEF was his expectation of personal financial gain from Canyon Springs.
Kawie and Buthelezi . . . centered in scandal

Had Kawie disclosed such matters to the PEPF, the FSB contends, it would not have granted a private-equity mandate to TIM. Or PEPF would have withdrawn the mandate, reclaimed amounts invested in TEF and made no further investments.

In the event that damages are awarded against the FSB, it urges that the court considers where losses were caused by the PEPF’s negligence. Consequently, the amount of damages should be reduced “to the extent that the (PEPF’s) losses were caused by (its) own fault”.

Having taken eons to reach the civil court, the aftermath must eventually play out in a criminal court. Sleep uneasily, Kawie and Buthelezi.

First Word: Editorials: Edition: April / June 2019

Leading companies are adding new talent to support a digital operating model. To develop sharp insights using digital tools, procurement teams will need data science and analytics expertise.