South Africa: Nigeria to the PIC’s rescue?
The Nigerian government could be dragged into the Public Investment Corporation’s (PIC) efforts to recover the massive losses from the asset manager’s ill-fated investment in the obscure American-owned Erin Energy corporation.
That is one of the warnings contained in a sweeping and damning 955-page report coming from the judicial commission of inquiry into the affairs of the PIC.
The long-awaited report was published late on Thursday 12 March.
In 2018, President Cyril Ramaphosa ordered an inquiry into the PIC following a series of damaging reports about allegations of impropriety at one of Africa’s largest asset managers.
The PIC’s cumulative assets under management are valued at R2trn, making it one of the most important entities under state control.
The inquiry was headed by Judge Lex Mpati, the former judge president of the Supreme Court of Appeal: South Africa’s court of last instance in non-constitutional matters.
The inquiry sat in Pretoria from 21 January 2019 to 14 August 2019, during which time 77 witnesses gave verbal evidence.
The inquiry’s commissioners examined the PIC’s internal governance and risk control mechanisms in relation to investments made into, among others: Independent News and Media South Africa, Sagarmatha, Ayo, Erin Energy and Lancaster Steinhoff.
READ MORE: Africa’s largest pension fund changes tack
A slippery oil slope
Erin Energy is an oil and gas exploration company, based in Houston, Texas in the United States, that had operations in Nigeria, Kenya and the Gambia.
It was previously known as Camac Energy Incorporated and had a primary listing on the New York Stock Exchange.
Starting in 2014, when Erin Energy wanted to undertake a secondary listing on the Johannesburg Stock Exchange, the PIC had an initial exposure of $270m to the now insolvent company.
In 2016, the asset manager had a further $100m exposure to Erin Energy when the PIC agreed to guarantee a loan facility on loose commercial terms to the company from the Mauritius Commercial Bank.
Of that $100m, Erin Energy drew down $67m.
In Nigeria, Erin Energy held two oil mining licences for wells situated in the country’s Oyo Field.
According to the inquiry report, in 2019 the Nigerian government revoked Erin Energy’s licences citing “legacy debt”.
Capacity issues at the wells and a nose-dive in the oil price rendered the investment a lost cause for the PIC, which had to repay the $67m loan.
This reality of losses crystallised in 2018, when Erin Energy filed for Chapter 11 bankruptcy in the US.
High risk, zero return
As things stand, the PIC has little to show in the way of return on investment.
“The question has to be asked as to how appropriate it is for an asset manager of a pension fund to invest in oil exploration, which is a high risk endeavour,” reads part of the inquiry report.
The entire deal was riddled with governance mishaps.
One of its most glaring aspects includes the fact that Erin Energy was technically bankrupt in 2014 when it sought a secondary listing on the JSE. This element was in fact concealed from the Johannesburg bourse.
Former PIC CEO Dan Matjila, who helped facilitate the Erin Energy deal from inception, conceded to the inquiry that the transaction was a “very poor” investment.
Recommendations to the PIC
The commission has recommended the “PIC … investigate what measures can be taken to retrieve any tangible assets of Erin to reduce losses, and engage with the Nigerian government in this regard if deemed appropriate.”
The commission recommended further that its report:
- “… be forwarded to the relevant state law enforcement officials to consider the findings of fact … to determine whether it would be appropriate to prosecute individuals who have been involved in acts which may give rise to criminal wrongdoing.”
- “The PIC … evaluate[s] the wrongdoing arising from the findings of fact and to institute appropriate actions to recover any loss or damages that may have been incurred.”