CURRENTS: Editorials: Edition: June / August 2020


Social compact

Retirement funds the glue for massive infrastructure proposals.

Forget prescribed assets. They’re a diversion from the potentially solid proposal now on the table that seeks a social compact through retirement funds, representing millions of South Africans’ long-term interests, for investment in growth and employment-generating infrastructure projects.

Introduction of prescribed assets would have been government’s blunt instrument to force a proportion of retirement-fund assets into the dark holes of virtually unaccountable state expenditures. The state would have been raiding pension assets in contradiction to simultaneously urging retirement provision.

Instead, what seems now to be emerging is the opposite. If the state isn’t to force the markets, it must be friendly to them. At least the latest proposal has sparked formal discussion, previously conducted inelegantly, to resolve longstanding contentions around deployment of retirement-fund assets.

On the one hand, there’s a state desperate for investment. On the other, there’re retirement funds screaming for a broader range of investable opportunities. The crisis over Covid-19 brings them to a head:

How to fund SA’s huge infrastructure requirements when the fiscus has no money:

How the mega-billions of rand in retirement funds can be put to more productive use in SA’s real economy. There’d be alternatives to hedging against the rand (by investing offshore or piling into the JSE’s large-cap giants whose revenues are earned primarily outside SA), and trapped into the ever-shrinking pool of domestic mid-cap JSE-listed equities (especially when the post-Covid scenarios for many old favourites range from speculative to sombre).

To dispense with the political wrap, the ground is being prepared for retirement funds to invest much more heavily in the unlisted space than the sparse limits presently allowed under the Regulation 28 prudential guidelines. The principle is well and good so long as long-established rights, enshrined by the Pension Funds Act for the protection of fund members, remain inviolate.

Unclear is the origin of this new proposal, quickly generating heat, and suspicion over its intentions. ANC transformation head Enoch Godongwana, in the role of spokesperson, happens also to chair the board of the Development Bank that’s centrally involved. His comments follow an address in London at end-May by ANC treasurer general Paul Mashatile.

At the same time, with detail yet to be hammered, none of the dribs and drabs to have emerged look contradictory to the laments in the 2020 Budget Review that finance minister Tito Mboweni tabled in February.

Neither is it clear whether sweeping amendments to Reg 28 are required. However, they would need a shift in the emphasis from listed securities so that funds will be able to invest in designated “development finance institutions” such as the Development Bank. These will in turn create and offer proposals, mindful of targeted take-up, for retirement funds’ direct investment in identifiable projects rather than generic instruments.

Their acceptance or rejection by retirement funds could depend, amongst other things, on whether government will guarantee the returns forecast. Another is the interest rate applied for feasibility projections. Retirement funds might divert from their traditional role as lenders or holders of liquid assets to become co-owners of bridges, dams or whatever. Their illiquidity would need to be reflected in the risk/reward ratio.

Who then will negotiate and evaluate the projected yields? Few funds have the in-house capability even to decide their asset allocations. They engage asset consultants and managers under mandate.

But these are precisely the adviser categories that the draft proposal wants excluded from involvement, ostensibly in order that the costs of intermediation are reduced. Yet it can be argued that retirement funds will either have to absorb the cost or fly blind in breach their fiduciary duties, inclusive of governance oversight.

Moreover, independently of government, a number of asset managers have significantly cut their teeth in infrastructure projects (TT March-May). They have experience to share. Additionally, they’re fiduciary stewards for retirement funds.

As such, in the absence of the funds themselves having a single collective voice, they are positioned to play a representative role in negotiations with government and assessment of feasibilities. They’d also guard the henhouse from the fox.

Unlike prescribed assets, on a benign interpretation this latest proposal looks encouragingly market-attuned. Part of the conversation must be about sharing in the costs of social infrastructure, as much in the interests of the state as of retirement funds. Both have putative commitments to the UN Sustainable Development Goals.

Numbers involved are hard to define. Mashatile has mentioned a $20,5bn infrastructure programme “after talks with the private sector and multilateral lenders as part of an attempt to recover from the coronavirus epidemic”. It may be assumed that the “private sector” is partially a euphemism for retirement funds.

Prior to Covid-19 the Budget Review noted that government had committed R100bn to the Infrastructure Fund mainly from the “private sector”. The fund’s implementation unit, housed within the Development Bank, “aims to build a pipeline of potential projects worth over R700bn over the next 10 years”.

There follows in the Review a list of 30 major projects, only one being ready for implementation. National Treasury admitted that the value of government’s infrastructure budget “is eroded by insufficient capacity and skills” so it is introducing reforms “expected to improve the effectiveness of infrastructure spending and develop a project pipeline for funding by government and the private sector”.

Maybe this time it’s serious. It must be serious because time isn’t on its side.


PIC’s newish broom

The appointment of Abel Sithole as Public Investment Corporation chief executive has credibility because it was made by a PIC interim board under Reuel Khosa. However, it followed a closed process. Nobody will know the questions put to him, let alone the answers he provided, for the board to have concluded he was the best candidate.

He might well be. But on the basis of his overlapping roles – principal executive officer of the Government Employees Pension Fund and acting commissioner of the Financial Sector Conduct Authority – he might not. It gets a little more complex in that the GEPF is the major client of the Public Investment Corporation which in turn is supervised by the FSCA.

Suffice to say that the Mpati commission made no findings for or against Sithole. From his evidence, however, a number of questions could have arisen for purposes of his PIC job interview. It remains strange, for instance, that the GEPF remained silent through the years of highly-publicised controversy over the PIC’s predictably loss-making investment into Independent News & Media SA.

Be that as it may, a broad policy issue for the future is whether interviews for such critical jobs in the public sector should be behind closed doors. The principle of open interviews is established at the National Prosecuting Authority, the Judicial Services Commission and the Public Protector.

The argument is for consistency, especially since the appointment of Sithole to the PIC will leave vacancies for his positions at the GEPF and FSCA that equally deserve open interviews. This is particularly so because the FSCA, if it wants to be seen as more than a continuation of the old Financial Services Board (who board Sithole chaired), should have an injection of fresh blood into its head.

Had there been productive conversations between the FSCA/FSB, PIC and GEPF – Sithole being the official common to all three – it might have changed the course of recent SA financial history over shenanigans at the PIC that the Mpati commission have revealed.

However, there’s no line of accountability or authority between the GEPF and FSCA (previously the FSB). This is although they’re joined at the hip by

the PIC:

• The GEPF is SA’s largest pension fund. Governed by its own statute, and not by the Pension Funds Act, it is not supervised by the FSCA;

The PIC is SA’s largest asset manager because it manages the bulk of GEPF assets. The PIC is supervised by the FSCA;

Former FSB boards and present FSCA management committees are essentially unchanged. PIC operations are under supervision of this body, irrespective of being styled the FSB or FSCA at any particular time.

Where then was the FSCA during the 2017-18 period that the Mpati commission was investigating? Pretty much missing in action, it would seem.

After increasingly strident media reports, several concerning suspected irregularities at the PIC over companies related to Iqbal Surve, the FSCA conducted an onsite visit at the PIC in February 2018. The scope of the visit was limited to mandate compliance, governance framework and processes followed to make investments of behalf of clients.

“Based on the information provided by the PIC, the Authority did not identify areas of noncompliance with the focus areas prescribed in the scope of the onsite visit,” said the FSCA in a letter to the commission. It was signed by FSCA executive head Dube Tshidi on behalf of Sithole.

Contrast this with findings in the Mpati commission report. References to accusations by Sithole in his GEPF capacity are frequently made against the PIC. Examples are “a breach of faith and trust”, “material misrepresentation” and only responding about an investment “when the GEPF began asking questions”.

So, to repeat, where was the FSCA? Now there lies an opportunity to freshen the FSCA, by the appointment of a new commissioner, just as the Mpati commission paved the way for a new PIC chief executive and as the Nugent commission did for Edward Kieswetter on his appointment to head the SA Revenue Service.

What the Mpati and Nugent commissions have shown is the advantages of competent fora in gathering testimony from witnesses unafraid of losing their jobs. There might be more than a few past and present employees at the FSCA/FSB and GEPF wanting the opportunity to be heard on applicants for the positions Sithole will vacate.

Let them. So much the better for clean slates all round. Had open hearings accompanied job interviews for a new chief executive at the Independent Regulatory Board for Auditors, the subsequent blow-up over the appointment of Jenitha John could easily have been avoided.

Ethics properly examined

On the SA playing field, is “business ethics” an oxymoron? Using research tools developed at Harvard Business School, the Gordon Institute of Business Science sought to find out. It’s produced the GIBS Ethics Barometer “at the intersection of academia and action”. That’s how Gideon Pogrund, director of the GIBS Ethics & Governance Think Tank, justifiably positions a piece of work that challenges the easy comfort of platitudes.

“In the absence of a clear metric, conversations about ethics run the risk of becoming vague, amorphous and fuzzy,” Pogrund explains. “Through a combination of quantitative and qualitative datadriven insights, the Ethics Barometer opens the door to a more meaningful assessment of the ethical performance of SA corporations.”

In its inaugural phase, the Ethics Barometer engaged with over 8 000 employees of 15 leading SA companies from diverse sectors. The processing of data enabled organisations to compare their ethical performance against peers, Pogrund says: “Since the conversations which the instrument enables are rooted in empirical evidence, they have more credibility and hence the potential for greater influence and impact.”

There are seven ‘standout insights’:

Widespread agreement about ethics. If people generally agree on what’s ethically important, even without necessarily behaving that way, corporate ethics-related interventions are more likely to resonate and be effective;

Discrepancy between the behaviours employees expect and the perceived realities. If stakeholders including employees are treated with ethical values such as fairness and respect, they may well reciprocate. If they perceive that they are being treated badly, it may well boomerang;

Speaking up against ethical failures. Companies need to work on cultivating a ‘culture of dissent’, building trust and giving employees the psychological and institutional safety to speak out;

Diversity and inclusion. An inclusive organization harnesses the advantages that come from diverse people working together in a way that enables multiple perspectives to be respected and considered;

Correcting historical wrongs. Ignoring voices of the ‘vocal minority’ may well result in growing and dangerous discontentment;

Business as a force for good. To be recognized as a ‘national asset’, business needs to engage more vigorously with societal stakeholders, defining its purpose beyond profits and articulating its social impact;

Leadership behaviours. As leaders become more powerful, they risk getting increasingly out of touch. To counter this ‘altitude effect’, the Ethics Barometer aims to facilitate a process of selfreflection.

A huge amount of work has gone into this project. Additional to the data analysis, there were focus groups with stakeholders from outside the companies to gauge their perceptions and expectations of business in society. The more that this project gains traction, the better for SA society and business itself.


Fedgroup stands firm

Back in October 2018 Fedgroup launched an application for the FSCA to review and set aside a rule for the administration of collective investment schemes in participation bonds. It contends that the rule is inconsistent with the Constitution, unlawful and invalid.

The FSCA is opposing the application. However, following engagements with Fedgroup to address some parts of the application, the FSCA is still considering it and the matter has yet to be set down on the court roll.

Basically, explains Fedgroup chief financial officer Sheldon Fredericksen, the rule as it stands is restrictive and limits the powers of Fedgroup to manage its collective investment scheme in participation bonds: “In the commercial credit-granting industry, it is common practice to secure one’s interest not only with collateral but also by taking a position on a company’s board.” Being on the board of the property-owning company, and using Fedgroup’s 30 years of property experience, Fredericksen believes that the performance of the company and value of the property can be enhanced.

He adds: “Through the processes put in place already, Fedgroup is able to manage the part-bond scheme, taking the necessary action to actively manage the mortgage bonds for the benefit of the investors and protecting their interests in the underlying properties.”

Citadel’s deal

To gather scale in the post-Covid world, numerous consolidations are expected in the asset-management industry. But the purchase by Citadel wealth manager of a 49% interest in Seshego Benefit Consulting isn’t one of them.

Seshego, notes director Andrew Crawford, has been working in a cooperative agreement with  Citadel since 2017. This latest transaction, negotiated in the weeks before Covid, takes the process further. It brings individual and corporate advice into a single entity.

Citadel is a subsidiary of JSE-listed Peregrine. According to its website, Peregrine has R124bn in assets under management.