The failure of Africa’s largest asset manager to adhere to its investment policies and guidelines was highlighted in the auditor-general report on the company’s financial statements for 2019/2020.
The investment decisions of the Public Investment Corporation (PIC), which has assets under management of R1,9-trillion, came under the spotlight of the commission of inquiry chaired by former judge president of the Supreme Court of Appeal Lex Mpati.
The commission was appointed by President Cyril Ramaphosa in October 2018 to investigate allegations of impropriety and its report was made public in March this year. It made scathing findings against former CEO Dan Matjila, identified lapses in governance and found that while the PIC had in many instances “sound policies, processes and frameworks” these were often not adhered to, were “deliberately bypassed and/or manipulated”.
The PIC then appointed former Constitutional Court judge Yvonne Mokgoro to chair an advisory committee to advise the board on the commission’s recommendations. The implementation of the recommendations was in progress when the auditor-general conducted his audit.
The PIC manages the assets of the Government Employees Pension Fund, the Unemployment Insurance Fund and other social security funds.
“Not all investment activities performed complied with investment policies and guidelines, as required by the Public Investment Corporation Act,” the late auditor-general Kimi Makwetu noted in his report, which is included in the PIC's 2019/20 annual report.
“In some instances, an enhanced due diligence was not performed on politically exposed persons (PEPs) at pre-investment and for PEPs identified after the approval of an investment as required by the established policy. In some instances, I was unable to confirm the adequacy of pre-investment due diligence, including pre-investment valuation of investments deals, due to supporting documentation not being available and inadequate justification of assumptions used in the valuation.
“I was unable to confirm the adequacy of collateral on debt instruments as the entity did not have a collateral management policy/framework,” Makwetu added.
But chair Reuel Khoza stated in the report that the board of directors “is of the opinion that the company complied with applicable laws and regulations”.
Makwetu also flagged concerns over internal controls which are the systems a company puts in place to ensure the integrity of its financial statements, as well as to promote accountability and prevent fraud.
“Instability and/or vacancies in key leadership positions contributed to the deficiencies in internal control identified,” Makwetu said.
“Leadership is undertaking an extensive review of the entity’s policies and a number of the policies were still under review at the financial year-end. However, currently there is no collateral management system in place.
“Management did not ensure that the supply chain management policy and PFMA (Public Finance Management Act) requirements were adhered to, due to the incorrect interpretation of procurement prescripts relating to deviations.”
However, the asset manager's audit committee concluded after a review of the PIC’s internal controls that they were “appropriate for the effective operation of the company”, while CEO Abel Sithole said that “a system of internal controls has been designed to provide reasonable assurance as to the integrity and reliability of performance information”.
Khoza also noted that “nothing has come to the attention of the board of directors that has caused it to believe that the company’s system of internal controls does not form a sound basis for the preparation of reliable financial statements”.
Regarding procurement and contract management, Makwetu found that some services were not obtained through a procurement process “that is fair, equitable, transparent and competitive, as required by the PFMA”.
“The instances of non-compliance related to deviations from the normal procurement process not being in compliance with [a] National Treasury instruction note. Similar non-compliance relating to such deviations was reported in the prior year.”
The auditor-general also found that effective and appropriate steps were not taken to prevent irregular expenditure amounting to R9.8m.
Despite Makwetu's comments the PIC did receive a clean audit on its financial statements that shows the company generated revenue of R1.13bn (compared with R1.2bn in 2018/2019) and made a profit of R189m (R291m in 2018/2019) in the year to end-March. Investment income amounted to R200m. The major cause for the decline in profit was an unrealised loss of R350m on a financial asset
Assets under management declined by 11% partly due to the Covid-19 pandemic with local listed equities and the property portfolio recording losses of about 19% and 24% respectively.
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