STUART THEOBALD: An opportunity to set out a new vision for the PIC

Posted in: i-Blog, SOEs on February 4, 2019


Commission of inquiry sorting through the mess also has the opportunity to set out a new vision for the PIC

This column was first published in Business Day

This is surely the lowest point for the Public Investment Corporation (PIC). It has no board and swathes of its senior management are suspended amid corruption allegations.

A commission of inquiry is sorting through the mess while pondering a plan for its future.

The PIC is one of the 10 biggest pension fund managers in the world, the custodian of  more than R2-trillion in assets and the biggest investor on the JSE.

The core problem is that there is no consensus on what we want the PIC to be. As the government’s financial stress has grown, its role has become increasingly contested.

The government has many liabilities and pensions to civil servants is just one.

Why is it that pensioners — the Government Employees Pension Fund is the largest pot of assets that the PIC manages — get a pool of assets while the government has to scrabble around with increasing desperation to meet other liabilities like SA Airways, Denel and Eskom debt? Civil servants benefit from a defined benefit scheme after all, so the benefits to pensioners do not depend on the performance of the assets (with one minor exception — in theory annual adjustments to pension benefits are guided by the returns to the pool of assets, but in reality these have been based on inflation).

The government has to step in and meet the obligations no matter how assets perform. So why not use the PIC to house assets that commercial investors will not touch?

Over the past few years the PIC has been the default (no pun intended) home for distressed public-sector debt.

Late  in 2018 it quietly picked up R290m of Denel’s debt when the arms parastatal could not repay the capital to the City of Johannesburg which had held it. The PIC has been stuffed full of billions in SAA  debt as the airline has been abandoned by commercial lenders. It has always been a big buyer of Eskom debt and has lately been advancing short-term cash to rescue its liquidity.

There is an inherent conundrum in the PIC. One can see it as a manager of pension funds. But one can also see it as the custodian of a pool of assets to meet the government’s liabilities.

The PIC is the least bad option for emergency parastatal rescues. But it has also been a big vehicle to dispense political patronage and outright corruption. The PIC’s investments in VBS Mutual Bank, Erin Energy, Ayo Technologies and Independent Media are the best known, but everyone suspects there is much else lurking in the PIC’s non-public portfolios. No asset manager following a properly considered investment decision-making process would have made those investments.

In a perfect world parastatals would not be in the mess they are. They’d be able to raise debt in the market like other competently run institution. But when things do go wrong, what should be done? There is an inherent conundrum in the PIC. One can see it as a manager of pension funds. But one can also see it as the custodian of a pool of assets to meet the government’s liabilities. The perspective has been shifting from the former to the latter for decades.

I have no doubt this feels very different to civil servants. Every month their payslips show that a certain amount of their income has been deducted for their pensions.

That implies a sense of proprietorship over the management of those assets. But that is largely illusory. In practice civil servants are prepaying for an annuity and set of benefits on retirement that will be guaranteed by the state.

I have argued in this column that the PIC should be run like a world class public sector pension fund manager.

There are no mysteries about what that means — international examples  such as the California Public Employees’ Retirement System (better known as Calpers) or the Ontario Teachers Pension Plan — provide straightforward models to emulate.

For example, Calpers’ entire portfolio can be seen on its website with daily closing values. Its board meetings have elements that are publicly broadcast. Its investment decision-making process is finely crafted to meet pension obligations as well as long-term issues like dealing with climate change.

But, given the fiscal realities facing the government, the PIC cannot be a pension manager alone. Pretending it should be, while the government has far bigger headaches than pension obligations, has contributed to the mess it is in.

Rather, we need a world class asset manager that can play an acknowledged role in some of the government’s other liabilities, without ever amounting to a blank cheque for parastatals.

We need a formal mechanism through which it can act as a backstop for public sector disasters, a lender of last resort, through a transparent and democratic process. Its main business can still be to manage a market portfolio with the objective of maximising returns within a risk framework.

Its mandate can be carried out by a highly competent team working within a stringent governance framework and utmost transparency.

The commission of inquiry appointed by the president has been sitting for two weeks under judge Lex Mpati.

While it is focused on corruption allegations over the past few years, it also has the opportunity to set out a new vision for the PIC. That might be the most important legacy it could leave us with.

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