PIC on its 2018/19 Annual Report, with Deputy Minister

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Finance Standing Committee

15 October 2019
Chairperson: Mr J Maswanganyi (ANC)
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Meeting Summary

Public Investment Corporation 2018/19 Annual Report 9MB

Deputy Minister of Finance, Dr David Masondo, emphasised the importance of the Public Investment Corporation (PIC) investing R2 trillion in pension savings of workers. He said a shortage of capital was one of the causes of poor economic growth. Capital growth required savings and savings were low due to financial pressures on households and companies and a lack of government surpluses. There had been lapses in the handling of PIC investments and the government had accepted the resignation of the entire board. In spite of the lapses, the PIC performance had been impressive.

The new PIC Board Chairperson, Dr Ruel Khoza, outlined the steps being taken  to strengthen governance at the PIC. These included separation of the positions of chief executive officer (CEO) and chief investment officer (CIO). They had been collapsed into one by the former CEO. A new position of chief risk officer (CRO) would be created. Other steps were the separation of audit and risk assessment functions and the encouragement of whistle-blowing.

The acting CEO, Mr Vuyani Hako, said the PIC  assets under management rose by R47 billion to R2.131 trillion. Investment performance had been good. Listed investments outperformed benchmark returns for all major clients.

Social impact investments  had been made in areas contributing to job creation. Others were in housing development, healthcare, education, student accommodation, support of the agricultural sector and SMMEs. More than R107 billion of the externally managed portfolio of listed investments was managed by BEE asset managers.

Questions from Members focused on the flouting of proper processes for making investment decisions and what was being done to recover bad investments. They were told that that the PIC had filed a petition in the Amsterdam Court of Appeal for a judicial inquiry into the irregularities at the Steinhof group.  Steinhof had then announced its intention to try to resolve claims by its institutional shareholders. PIC had postponed its litigation in favour of participation in the mediation process. If that failed, it would resume litigation.

PIC, as a VBS Bank shareholder, had nominated two directors to sit on the VBS board. They were implicated in alleged misconduct in the Motau investigation into criminal activities. Both directors had now been declared delinquent directors by the courts which would prevent them from holding directorships at any other company in South Africa. PIC had filed claims with the VBS liquidators to recover some of its money and would consider civil liability processes. 

Committee members were told that the PIC was involved in steps to recover the investment of R4.7 billion it made in AYO Technology Solutions in  2017. The claim was based on misrepresentations to the PIC and flouting of internal rules by PIC employees.

The PIC had also taken action to recover loans made to Sekunjalo Holdings. A letter of demand had been issued and the PIC was considering the liquidation of the company.

Meeting report

Deputy Minister of Finance, Dr David Masondo, said the South African economy had been doing badly since the 2008 global economic crisis. Second quarter economic growth of 3.1% had been cancelled out by the negative growth in the first quarter of the year. A shortage of capital was one of the causes of poor growth. Capital growth required savings and savings were low due to financial pressures on households and companies and a lack of government surpluses.

Mr Masondo said the PIC played a critical investment role in administering the R2 trillion in pension funds. There had been lapses in the handling of investment and the government had accepted the resignation of the entire board. In spite of the lapses, the PIC performance had been impressive.

Mr Masondo said the government was committed to protecting workers’ savings. While the PIC should be aware of its social responsibilities in making investment decisions, the government would not compel fund managers to make bad investments.

The PIC Board Chairperson, Dr Ruel Khoza, said the new board was appointed by the Minister of Finance on 12 July 2019. He said the PIC during the year had delivered a sound and credible performance in a challenging and complex environment. However, its reputation had been damaged by allegations against senior officials of improper investment decisions and abuse of positions of privilege.

 The new board was reviewing and strengthening governance processes. Among the measures being implemented was the separation of the positions of chief executive officer (CEO) and chief investment officer (CIO). They had been collapsed into one by the former CEO. A new position of chief risk officer (CRO) would be created. The board had done away with investment panels and investment decisions would now be made by the full investment committee. The audit and risk committee had been split into two separate committees. Whistle-blowing would be encouraged and consequence management for transgressions would be a priority. Unscrupulous middlemen who acted as deal originators would be eliminated. The recruitment of a CEO and other executives would be done in parallel to speed up appointments. Too many acting positions created uncertainty.

Dr Khoza said the board looked forward to the release of the findings of the Mpati Commission of Inquiry into improprieties at the PIC. They were aware that they could be far-reaching and  damaging. The board was looking forward to enhancing governance and putting the PIC on a new path of ethical conduct.

PIC acting CEO, Mr Vuyani Hako, said the PIC had a broad and complex shareholder base which included social impact investments. Around 70% of PIC assets were in listed equities, bonds and cash (money market). About 20%  was in unlisted investments - this included private equity, social impact investing and properties. About 10% was in offshore investments.

Assets under management (AUM) rose by R47 billion to R2.131 trillion. Mr Hako said investment performance was good. Listed investments outperformed benchmark returns for all major clients.

Unlisted investments of R15 billion in impact investments, private equity and properties were approved during the financial year. Social impact investments  were in areas contributing to job creation. Others were in housing development, healthcare, education, student accommodation, support of the agricultural sector and SMMEs. More than R107 billion of the externally managed portfolio of listed investments was managed by BEE asset managers.

Mr Hako said the PIC wanted to be an “impactful investor”.  Financial returns were its first priority but it also looked at achieving social returns without compromising financial returns.

PIC employed highly qualified young talent. Of the 407 employees, 92% were black and 45% were women. 

PIC’s acting Chief Financial Officer,  Mr Brian Movuka,  said revenue for the year was 2% lower. Costs were 14% higher. There had been irregular expenditure of R4.9 billion, resulting in an unqualified audit opinion with findings - a regression from the previous year’s clean audit.

Discussion
Mr G Hill-Lewis (DA) asked what criteria were used to decide when bad loans should be recovered. He asked what action was being taken on a loan to the company, Sekunkjalo. He asked what the ownership relationship was between PIC money, Sekunjalo and the African News Agency (ANA). There were reports that ANA was being shut down or moved offshore and he was concerned that assets could be moved out of the country.

Dr D George (DA) referred to the asset class composition listed on page 8 of the PIC Annual Report. He said bond investment appeared to be overweight.  He asked if all the loans were to listed companies, saying the unlisted class was a good place to hide underperforming loans.

Dr George said the PIC audited performance had deteriorated. Investments had been made without following proper governance procedures. He asked if all these deals have been identified and what had been done about them. Referring to what he termed looting and raiding at VBS Bank, Dr George asked if any action had been taken against people who used the money “to fund slush funds to maintain their lavish lifestyle”.  On non-compliance he asked what action was being taken against those responsible. If people’s pension money had been misappropriated, those responsible should go to jail. “I want to know what you are doing to get them into jail,” he said.

Mr W Wessels (FF+) also asked what was being done about those who did not comply with governance procedures. How many suspensions or resignations had there been? There had been media reports about “exorbitant” salary increases of 40 to 70%  for the PIC former CEO and its suspended CFO. He asked what the new board’s view was on the remuneration structure. There had been media reports that staff were unhappy because National Treasury had stopped  the payment of incentives.

Mr G Skosana (ANC) said he appreciated the steps taken by the board to reestablish good governance, in  particular the separation of the CEO and CIO functions and the move to appoint a chief risk officer. However, he wondered how the changes being implemented now would fit with recommendations in the pending  report of the Mpati Commission. 

Ms D Mabiletsa (ANC) asked what the PIC view was on increasing investment in Eskom. She asked what the PIC was doing to recover losses due to its investment in Steinhof. She asked if when it invested in companies, the PIC set conditions for economic empowerment.

Mr F Shivambu (EFF) asked if director fees were paid to PIC officials deployed to serve on the boards of companies in which the PIC invested. He suggested that all PIC board members should make public their exposure to companies in which the PIC invested. He asked how much the PIC had invested in the Steinhof and Lancaster companies and what the legal foundation was for writing off debts while businesses continued to operate. He questioned the wisdom of the PIC investing more than 10% of its assets under management (AUM) in Naspers. He asked how many black asset managers benefited from the PIC externally managed funds. 

Mr Shivambu questioned the employment of PIC corporate affairs manager, Mr Adrian Lackay, at the PIC. He said Mr Lackay had been a spokesperson for the Minister of Public Enterprises and had been involved in the dispute between Mr Gordhan and the Public Protector. He said the PIC should consider the reputational risk of employing Mr Lackay.

Ms Lindiwe Dlamini, PIC Acting Executive, Legal Affairs, responded to questions about efforts to recover bad investments.

On Steinhof, she said the PIC filed a petition in the Amsterdam Court of Appeal for a judicial inquiry into the irregularities at Steinhof. Steinhof then announced its intention to try to resolve claims by its institutional shareholders. PIC postponed its litigation in favour of participation in the mediation process. If that failed, it would resume litigation. PIC had engaged all relevant stakeholders on the Steinhof matter, including the police investigative unit, the Hawks, and the Financial Sector Conduct Authority (FSCA). Debarment and delinquency proceedings against those implicated in the Steinhof saga were being considered. 

On VBS, Ms Dlamini said the PIC, as a shareholder, had nominated two directors to sit on the VBS board. They were implicated in alleged misconduct in the Motau investigation into criminal activities. Both directors had now been declared delinquent directors by the courts which would prevent them from holding directorships at any other company in South Africa.  They had also been debarred by the FSCA. The PIC had filed claims with the VBS liquidators to recover some of its money and would consider civil liability processes.  She gave an assurance that the PIC would explore all possible consequence management measures.

Ms Dlamini said the PIC was involved in steps to recover an investment of R4.7 billion it made in AYO Technology Solutions in  2017. The claim was based on misrepresentations to the PIC and flouting of internal rules by PIC employees. AYO was contesting the claims. PIC had considered applying for an anti-dissipation order to prevent assets being moved abroad, but held back after receiving assurances that this would not happen. PIC would reconsider its decision in the light of new developments.

Ms Dlamini said the PIC had taken action to recover loans made to Sekunjalo. A letter of demand had been issued and the PIC was considering the liquidation of the company.

Various PIC officers answered questions about investment policy: 

Members were told there were no investments in unlisted bonds. The Naspers investment was in line with the client’s mandate.

On transformation and empowerment, the PIC engaged at least twice a year with companies in which it invested and was able to send strong messages at these occasions. 

PIC externally managed funds were a success. Of the R5 trillion on savings in South Africa, R490 million was in the hands of black asset managers. PIC was responsible for R149 billion of this.

Writing off loans was done only when efforts to turn around a defaulting company had been unsuccessful and the cost of recovering the loan through litigation would be higher than the amount likely to be recovered.

PIC managers were not remunerated for serving on boards of companies in which PIC had invested.

Dr Khoza said the board had “touched sides” with Judge Mpati and he was comfortable that the measures being implemented now would not deviate too much from the recommendations likely to be made in the Commission’s report. The board had been in place for only two months. It would hold a strategy session in November to do a full review of what needed to be done.

On Eskom, he said the PIC investment in the utility stood at R90 billion in the form of bonds. He would like to believe that as things improved at Eskom, they would be able to look at a number of permutations of that investment, but this would depend on certain conditions being met.

To Mr Shivambu, he said Mr Lackay was now employed full time at the PIC and was not “moonlighting” for any other department. On the declaration of PIC director exposure to possible conflicts of interest, the process of declaring such interests had been enhanced and directors would recuse themselves from decisions about companies in which they had an interest.

In closing the meeting, the Chairperson commented that there had been no feedback from Cabinet on the PIC Amendment Bill drafted and adopted by the Fifth Parliament. There had been no explanation why the Bill had not been  signed into law by the President. Implementing the Bill could not be delayed until the release of the Mpati Commission report, because it could not be known how long the President would take to consider the report.

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