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South Africa: ‘Inquiry placed enormous pressure on PIC’ says CEO Sithole

By Xolisa Phillip, in Johannesburg
Posted on Tuesday, 19 October 2021 14:56

Abel Sithole, CEO of South Africa’s Public Investment Corporation / twitter

Fear and loathing permeate the corridors of the Public Investment Corporation (PIC) in the aftermath of a damaging commission, which investigated what caused a breakdown in governance at the state-owned asset manager.  

An amendment to the PIC Act – that now stipulates the appointment of the deputy minister of finance, or any of the deputy ministers in the economic cluster, to chair the board of the asset manager – has also raised concerns about the prospect of political interference.

The South African government owns the PIC. The minister of finance is the government’s shareholder representative and is responsible for the appointment of a board chair in consultation with the cabinet. The term of the interim board, which was appointed by former minister of finance Tito Mboweni and is chaired by Reuel Khoza, expires at the end of October.

In the wake of the commission of inquiry, staff morale and performance have been the biggest casualties, says CEO Abel Sithole. This stems from a mutual mistrust among colleagues, some of whom made scathing submissions about their co-workers to the Mpati Commission, whose recommendations are still being implemented by Africa’s largest asset manager.

…the implementation of the findings and recommendations of the commission has further antagonised the environment as a number of staff and executives are subjected to disciplinary processes.”

“The inquiry placed enormous pressure on the PIC and among its people who had to respond to the commission’s work and submitted evidence … often against their colleagues,” says Sithole, who adds that “this engendered an environment of distrust, fear and beggar-thy-neighbour attitude, all impact[…] on morale and performance.”

Moreover, “the implementation of the findings and recommendations of the commission has further antagonised the environment as a number of staff and executives are subjected to disciplinary processes,” says Sithole.

However, the predominant concerns that the commission highlighted related to past investments made in the PIC’s unlisted portfolio, notes the CEO. The unlisted portfolio makes up about 4% (R70bn) of total assets under management. “Importantly, this implies that most of the PIC’s investments, 96%, were and are not the subject of allegations of impropriety,” he says.

The disclosures come against the backdrop of the PIC having recently tabled its annual report and financial statements for the year ended 31 March 2021 to Parliament, as required by South African law. State-owned entities and other government agencies have six months to make the submission to the legislature from the date of the financial year end.

The nature of the entity

The PIC’s clients include the Government Employees Pension Fund (GEPF), the Unemployment Insurance Fund (UIF) and the Compensation Commissioner Fund. The GEPF (89.24%) is the biggest client followed by the UIF (4.96%).

The PIC’s assets under management include listed equities, bonds, unlisted properties, as well as offshore and rest of Africa investments.

In the period under review:

  • The PIC’s assets under management grew to R2.3trn. This was primarily aided by a 30% recovery in the market and the performance of the asset manager’s listed portfolio. This represents growth of about R439bn year on year.
  • The PIC paid R58bn to the UIF in support of the latter’s Temporary Employer Relief Scheme (TERS). The TERS scheme was designed by the government to aid employers with partial payroll payments during the hard lockdown in 2020 and subsequent restrictions on economic activity. An estimated 267,000 employers and 5.4 million employees have so far benefited from TERS.
  • Revenue decreased by 0.9%. Total expenses increased by 17% because the PIC made new hires to fill vacancies. The PIC’s net asset value grew by R600m.

Portfolio performance

“From a sustainability point of view, … we’ve seen a decline in our management fees in the last year due to a decline in revenue. The PIC, like all asset managers, was impacted by Covid-19, which saw a significant readjustment in market prices across asset classes. We were impacted by that, as was the case globally,” says Sithole.

“Being a South African asset manager, we had a second impact on our asset values due to the downgrade of our sovereign rating. The impact of that was a decline in the market broadly of about 30%. The good news is that we saw a recovery of that, but we get our revenue and our fees from the assets we manage. There was a decline in those, which resulted in a decline in revenue and the fees we were able to charge on mandates,” he says.

The unlisted portfolio underperformed. The PIC got returns of about 2.78%, which is far below an 8% ‘hurdle rate’ that the asset manager sets for itself. The hurdle rate refers to a minimum expectation of returns on investments made.

…in all likelihood, the next chair of the PIC will either be the deputy minister of finance or a deputy minister in the economic cluster. You can’t contend [with] that.”

“The expectation is that you should be getting returns of about 18% and up to 25% in this area. We are underperforming, hence the focus on improving this area of our investment,” says the PIC CEO.

On the offshore side, the global equities and bonds that the PIC holds on behalf of clients performed well. However, its investments in the rest of the continent did not do so well, according to Sithole.

Board matters

In terms of governance matters, the current interim board was set up in 2019 following the resignation en masse of the previous non-executive directors. Its term was extended, and a mandate included for bringing stability to the asset manager, repairing its damaged reputation and helping to implement the Mpati Commission recommendations.

Notably, the interim board is filled with non-executive directors who are not career politicians, but are well-versed about the investment and business environment.

“Whether this board will be there depends on how and when the shareholder appoints a new board. If a new board is not appointed, this board will continue to serve until such time a new board is appointed. We just hope that board members have not made other plans because they were told their term will end in October,” says Sithole.

“There is a desire on the board to engage with the press. We will communicate to the media once they [interim board members] are clear about when their tenure expires, so that they can give an indication [about] where they are [on] all the issues they have been tasked to take [on] and what else needs to be done,” Sithole states.

He also notes that the Mpati Commission had recommended that board members be suitable and come with appropriate experience in managing an entity such as the PIC. However, “in all likelihood, the next chair of the PIC will either be the deputy minister of finance or a deputy minister in the economic cluster. You can’t contend [with] that,” Sithole says.

“The amended Act is also clear about the representation of clients and labour. […] you are probably going to have a robust board regardless of who is going to be the chairperson. You [ are going to] have all interested stakeholders on the table and able, hopefully, to ensure that no particular constituency drives its agenda,” he says.

However, Khoza has a different view.

“… It was hoped that the PIC would in future be run by a board with non-executive directors largely from the private sector, ideally chaired by an independent non-executive director. This was also elucidated by the recommendations of the Mpati Commission report,” said Khoza in his chairman’s report.

Khoza also warned that the amended Act carried negative implications for the implementation of some Mpati Commission recommendations.

For Sithole, the other area where the amended Act has made changes is an explicit requirement for transparency in PIC investments. “Remember, there’s been this challenge of whether PIC investments are transparent. We need to make all our investments transparent,” Sithole says.

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