The new Public Investment Corporation (PIC) board has just been announced. Most of the analysis of the recent goings-on at the PIC, and the resignations (voluntary or otherwise) that followed, seem to have focused more on governance, politics and board composition, ignoring the root cause of the problems.
You can apply all the oversight you like, but if the people responsible for executing the mandate don’t know what they’re doing or, worse still, are being told what to do, failure will be inevitable.
I’ve found myself in meetings of people who are present for reasons other than their knowledge and expertise and, if you’re lucky, they’re just a waste of space.
The real issue, gauging only from information in the public domain, is that the loss of pensioners’ money could have been avoided if only the basic tenets of investment, corporate finance, banking, legal contract and fair market value had been understood and applied.
The names don’t matter, but for the sake of reference I’m going to examine the construct of the loan made by the PIC to Acapulco to buy a 25% stake in Lanseria. The actual numbers also don’t matter (though they’re big enough to be of concern in this case), but the principles certainly do.
You can’t borrow money to buy shares, and no sensible bank will lend you that money. Loans have to be serviced, regularly, through the payment of interest. Shares, even if they pay dividends (out of after-tax profits) do not typically offer sufficient yield to service the interest rate on the loan (not to mention tax inefficiency). Allowing interest to accrue only compounds the problem.
Where exceptions to this rule are tolerated at least two conditions must be present: the cover (the ratio of the value of the shares to the outstanding loan) must be very high, say a multiple of 10 times and, most importantly, such value (in sufficient volume) must be objectively known from time to time (or at least be capable of objective determination in terms of a mutually agreed formula at the outset of the deal). Listed shares often satisfy this rule (subject to liquidity); private company shares certainly do not.
Security given for a loan is worthless unless it can be realised, in short order on default and in enough volume to settle the outstanding balance of the loan, including any accrued interest. Such tests are applied frequently, and the loan is either settled, adjusted or extended in the light of current, factual, realisable values.
The onus remains on the borrower to settle all obligations, always, not the lender. The money to do so must come from the borrower or an independent purchaser of a sufficient proportion of the shares to settle the outstanding obligation. Some of this may well have been in place in the PIC-Acapulco deal, but the outcome was flawed.
What on earth possessed the PIC to accept the valuation and then pay out the money itself? If the PIC wanted to end up with the Lanseria shares why didn’t it just buy them at fair market value in the first place?
I’ve no doubt there are many such flawed structures still alive within the PIC balance sheet; the example we’ve just worked through is one of the simplest to be found in the complex world of investment choices. In fact, this deal was a lending transaction — what business did it have being funded outside of our well-regulated, well-overseen and competent banking system?
Either the PIC didn’t know what it was doing, or it knew damn well what it was doing. But let’s assume it was arms-length ignorance and not complicit foresight, or anything more sinister. Mistakes are acceptable if it’s your money and only you stand to lose. That’s clearly not the case in the PIC, which manages trillions of rand of public employee pensioners’ money. They would clearly rather have people who know what they’re doing managing their retirement assets, above those who are politically connected.
Incompetent people can neither make nor defend investment decisions. Instead, they spend most of their time making sure they can’t be accused of doing so — by abstaining or deferring or anything that allows them to cower under some umbrella where they’ll be found to be blameless, yet compliant.
How to fix it
Now that it’s out in the open, there is an opportunity to fix it. Properly, once and for always. For starters, let’s appoint the right people to the board. While various important stakeholders and representatives will be required to be at the table, competent executives and experts must be the primary drivers of the selection process.
It would not take much effort to identify at least 10 South African prospects whose CVs and track records would qualify them for consideration. Sadly, it doesn’t look like that’s happened. We’re going to end up with much of the same old, same old. I mean, why fix it if it’s broken?
Apparently, the chair has to be a deputy minister of something (anything). What an absurd rule. If the past is anything to go by, the nonexecutives will be chosen by political acceptance over merit (but you can’t become an investment expert by popular vote).
Even worse, according to news reports, the PIC is looking to appoint consultants who, among other requirements, will help with “facilitation of courageous conversations”. I’m not making this up.
*This column was updated to reflect that a new PIC board was elected and the writer’s views on it
• Barnes, an investment banker with more than 35 years’ experience in various capacities in the financial sector, is a former CEO of the South African Post Office.
