A divided and conflicted board of questionable independence, dishonesty and material nondisclosure by CEO Dan Matjila, and a "systematic pattern of control, intimidation and victimisation" of staff. These are among the key findings of the judicial commission of inquiry into allegations of impropriety at the Public Investment Corp (PIC).
Measures are now promised to boost governance, hold those responsible to account — with potential criminal prosecution on the cards — and recover funds lost in dodgy deals at the R2-trillion asset manager, which oversees the assets of the Government Employees Pension Fund (GEPF).
President Cyril Ramaphosa released the much-anticipated report last week — and it did not disappoint.
The 955-page document provides a scathing assessment of how the asset manager was used by Matjila to disburse funds improperly, and how senior PIC executives failed in their decisionmaking duties.
"The commission makes recommendations which require urgent attention and action by different state institutions, including the criminal justice system, National Treasury and the reconstituted PIC board," Ramaphosa said on releasing the report.
He said the report would be forwarded to the National Prosecuting Authority for consideration.
At the same time, Ramaphosa released a roadmap for fixing governance issues at the PIC, and a detailed implementation plan is expected to be announced by the Treasury.
"The commission implicates a number of individuals in wrongdoing. The commission gave relevant persons the opportunity to be heard at the hearings it held. Any follow-up investigations … will follow due process," he said.
Criminal behaviour that led to the loss of funds will be followed up by law enforcement agencies, and money will be recovered through civil action. This will be tracked by the Treasury, given that the PIC itself has so far shown no urgency in this regard.
Adverse findings were made in respect of many transactions (see boxes for just five of these) and, in several, it was found that PIC policies and processes had been disregarded by management and the board.
The report found that the involvement of employees and nonexecutive board members in investee companies has to be reviewed, by no later than June.
Also to be reviewed is the legislation governing the PIC (the PIC Act of 2004), given lapses in internal corporate governance. This will entail an overhaul of the board and the way board members are selected.
Another key recommendation is the overhaul of the PIC’s operating model. The commission found the model is no longer "fit for purpose", as it is too centralised and is out of line with international best practice.
The overhaul is set to decentralise operations to speed up decisionmaking and bolster efficiency and transparency. The new organisational design will be decided by the PIC and its board, with oversight from the Treasury.
Processes to combat political interference also need to be strengthened. In this regard, the commission has recommended that the PIC’s "politically exposed person policy" must be reviewed and overhauled.
Key among the recommendations on bolstering governance is improving the relationship between the PIC and its customers, such as the GEPF. This relationship is governed by the Financial Advisory & Intermediary Services (FAIS) Act.
Under the current agreement between the PIC and the GEPF, the PIC is required to make "prudent" investment decisions. However, the questionable decisions highlighted in the report indicate that the PIC, in some instances, failed to comply with the FAIS Act.
Not everyone has welcomed the commission’s report. Cosatu, for one, has opposed the recommendations — particularly around board appointments and overhauling the legislative framework governing the PIC.
Cosatu spokesperson Sizwe Pamla says the trade union federation does not agree that the PIC should appoint its own board. Not having cabinet, Treasury, GEPF and labour representation would, he says, be an attempt to "privatise the PIC through the backdoor".
He also describes the recommendations as "political", and the commission itself as "not ideologically neutral".
Cosatu is named in the report for apparently seeking a donation from the PIC — but says the commission did not give it an opportunity to respond to the allegation. The report does not say if a donation was actually provided.
For Unisa political analyst Somadoda Fikeni, the commission’s recommendations mean little by themselves — implementation is the first yardstick of success. Its recommendations need to be taken up by law enforcement agencies, and the individuals implicated held to account.
"That is the missing link," he says, "implementation and accountability." Without these, the commission will simply have been "a commission for a commission’s sake".
The measures identified in the report are not, however, the end of the road in ensuring accountability at the PIC. The commission has recommended forensic investigations into other deals entered into by the asset manager (the commission’s work covered only 14). These may give rise to new insights into the ways in which governance at the PIC can be bolstered — along with new avenues for accountability.
Sekunjalo and Sagarmatha
PIC loans to Sekunjalo Independent Media (SIM) in 2013 allowed that company to buy 75% of Independent News & Media SA (INMSA). In the same transaction, the PIC acquired a 25% stake alongside SIM, and extended a loan to INMSA. The loans were never serviced and in 2017 it became clear INMSA and SIM would not be able to repay them when they fell due. In exchange for the cancellation of the debts, Iqbal Survé’s Sekunjalo Investment Holdings — the holding company of both SIM and INMSA — offered to issue shares in a new venture it planned to list on the JSE, called Sagarmatha.
As part of the due diligence on Sagarmatha, the PIC’s analysts recommended that any decision regarding the debt owed by SIM and INMSA be considered separately from the decision to acquire shares in Sagarmatha.
Findings:
• Parallel negotiations between Survé and PIC CEO Dan Matjila were taking place while the PIC performed due diligence on Sagarmatha.
• Matjila went ahead and signed a sale of shares and claims agreement, discharging about R1.5bn of debt against shares in Sagarmatha at a price of R39.62 a share. Matjila acted in direct contravention of a resolution by a PIC investment committee, and before the PIC had attached a value to the Sagarmatha shares. The PIC deal team subsequently valued Sagarmatha at 706c a share.
• Matjila showed “complete disregard” for the PIC’s investment processes. Proper governance was “absent or poor”, and suspected share price manipulation “demonstrates a lack of ethics, lack of compliance with laws and regulation, and a disregard for the best interests of the PIC and its clients”.
Erin Energy
New York Stock Exchange-listed oil exploration company Erin Energy, founded by American businessman Kase Lawal (a friend of Jacob Zuma), sought a secondary listing on the JSE in 2014. The PIC took a 30% stake in the business for $270m, and later provided a R100m guarantee to a Mauritian bank to support a loan advanced to Erin.
Findings:
• Evidence leader Jannie Lubbe could not locate documentation relating to the initial investment, so could not make any finding on it.• Erin was technically bankrupt at the time of its listing — a fact that was not disclosed to the JSE. • The investment committee that approved the guarantee to the Mauritian bank “acted improperly”, disregarding the recommendation of its own analysts to steer clear.
VBS Mutual Bank
The PIC’s investment in VBS, which predated Dan Matjila’s promotion to PIC CEO in December 2014, was found to have been made without impropriety.
However, two senior PIC executives — Ernest Nesane (head of legal) and Paul Magula (head of risk) — were appointed to the board of VBS in March 2012. The PIC subsequently, in 2014, provided a revolving credit facility of R350m that was “ring fenced”, meaning the PIC’s ranking as a creditor was separate from any other form of debt the bank issued.
Findings:
• Between the approval of the loan facility agreement and its implementation, additional clauses were inserted that allowed the facility to be “subordinated”. This meant the PIC would be the last creditor to receive proceeds if the bank were to be liquidated (as happened).
• Another clause stipulated that the loan could be converted to equity (shares) at the discretion of the PIC. These two additions substantially altered the terms of the loan, making it much more attractive to the borrower, VBS.
• Magula and Nesane “egregiously violated” their responsibilities by colluding to withhold critical information that would have raised red flags about looting at the bank. They received R14.8m and R16.6m each for looking the other way.
• Both men “used their positions of trust and responsibility to unduly enrich themselves at the expense of the depositors, clients and investors of VBS”.
Lancaster Group
The PIC made a R15bn commitment to make former union leader Jayendra Naidoo a shareholder in Steinhoff and Steinhoff Africa Retail (Star). As part of the deal, his investment holding company, Lancaster Group, earned R22.8m and an “underwriting commission” of R114.8m.
Findings:
• The two entities through which Naidoo borrowed the money were supposed to incorporate a broad-based BEE trust, which would hold a quarter of the shares in each entity. This was replaced by a nonprofit company under Naidoo’s control, allowing “significant enrichment” to accrue to a single individual.
• In removing protection against a drop in Steinhoff’s share price so Naidoo could take a loan to buy shares in Star, the PIC ignored “cumulative and counterparty risk”.
• Naidoo testified that he had informed the PIC deal team about the underwriting commission and mentioned it to Dan Matjila (who denied this). Naidoo’s assertion “could not be substantiated”.
• Matjila’s conduct in reducing the initial loan for the Steinhoff leg of the transaction from R10.4bn to R9.4bn so it wouldn’t require board approval was “wholly improper” and could indicate collusion.
Ayo
The PIC bought a 29% stake in Iqbal Survé’s Ayo Technology Solutions for R4.3bn when it listed on the JSE in December 2017, giving the company an implied value of R14.83bn.
Findings:
• It seems Survé manipulated the valuation of Ayo from the initial estimate of R2.3bn to the implied R14.83bn valuation.
• PIC CEO Dan Matjila testified that the valuation was reasonable.
• No determination of cumulative group exposure to Survé entities was performed, meaning that the PIC entertained the deal while managing a defaulting loan to Survé-controlled Sekunjalo Independent Media.
• Proper governance was absent or poor, and risk identification was downplayed.
• Matjila signed the agreement to buy the shares at R43 a share before the meeting to appraise the investment was held.
• The PIC didn’t have the money to pay for the shares at the date of listing, so sold other investments to fund its purchase.
• The close relationship between Matjila and Survé created top-down pressures on the deal teams.
Warren Thompson