Forget the R100m-odd of government employees’ pensions that the Public Investment Corporation (PIC) overspent on CBS Asset Management (nose124). It has now emerged that, under the watchful eye of CEO Brian Molefe, the PIC appears to have outdone itself, secretly writing off over R1.3bn of government pensioners’ savings that it had used to prop up one of the biggest BEE deals ever concluded.
Many believe the July 2008 investment of government pensioners’ money was made in a bid to spare the political reputation of then President Thabo Mbeki – who was driven to resign just two months later.
The initial July 2007 deal saw a consortium of BEE investors agree to pay R6.82bn to acquire 46% of Southern Africa’s largest hardware and cement supplier, Holcim SA, from its Swiss parent company, Holcim AG. This initial deal reduced the Swiss shareholding in the local company, which was then renamed AfriSam, to just 8%.
Unnoticed in all the excitement about the ultimate BEE deal, Aveng, Holcim AG’s previous “white” South African partner in the business (with a 45% shareholding), took the gap and got out of the business by way of a share buy-back deal that cost AfriSam several more billions. Then the BEE shareholders somehow contrived to merge their debt-ridden investment vehicle with the company itself – all of which left the BEE shareholders with 85% and Holcim AG with 15% of AfriSam – and the company with a R16bn debt load.
The whole exercise was financed with foreign loans arranged with the help of Holcim AG, prompting many observers to note at the time that the “biggest ever” BEE deal was actually a smart way of disguising one of the biggest ever disinvestments from South Africa.
Faced with growing controversy, representatives of Holcim AG secured a meeting with President Mbeki and persuaded him to give the deal his personal stamp of approval. In one of his weekly online newsletters, the president lambasted those sceptical of the deal, suggesting that their real objection was to a major – “hugely profitable” – company falling into black hands. The Mail & Guardian quoted the president as saying that the deal would “facilitate black ownership and control, despite the current and future excellent market conditions, with virtually guaranteed good profits”.
Yet, exactly one year later, it was announced that the PIC, acting on behalf of the Government Employees’ Pension Fund (GEPF) was investing R6bn in AfriSam. Of this R4.3bn bought the pensioners a 20% stake in the BEE shareholders’ consortium, and was to be used to repay that amount of bridging finance that had been provided to the BEE partners by Holcim AG itself. The remaining R1.7bn of pensioners’ money was a loan to AfriSam “to sustain existing operations”. Which, of course, rather suggested that “existing operations” weren’t going that well.
|PIC CEO Brian Molefe|
At that time PIC CEO Brian Molefe vehemently denied that the BEE investors were in trouble and that he was funding a “bail-out operation”.
“If we were not going to make a good return, we wouldn’t make the transaction,” he bravely assured Engineering News. He went on to tell the Mail & Guardian that the return would be “in excess of 20%”.
No surprise, then, that the PIC and pension fund trustees haven’t hurried to tell the public, or even their pensioners, that, only a year later, they were having to write off (“impair”) 20% (R1.35bn) of the pension fund’s investment in AfriSam.
Noseweek has had sight of an, until now, secret document, headed “Draft 2009 Audit Findings”, compiled by one or all of a group of audit firms – Gobodo, Deloitte, PWC and Xabiso – contracted by the Auditor General to do audits on his behalf. This document was intended as the basis of the Government Employees’ Pension Fund’s 2008/2009 annual report.
Of particular interest is section 2.3.3 of the document: “Impairment of Investments by the PIC on behalf of the GEPF. Audit finding.”
It reads as follows:
“Fund investments include a material balance of unlisted investments. The investment in AfriSam Consortium (Pty) Ltd entered into by the PIC during the 2009 financial period on behalf of the GEPF in their capacity as the fund’s asset managers is likely to be exposed to significant impairment for the 2009 financial period. Based on an impairment analysis performed by the PIC, including review of the group’s financial performance and cash flow performance, a recommendation has been made that the 31 March 2009 valuation of R6,768,403,442 (consisting of equity, preference shares and a payment in kind) be impaired by 20%, amounting to R1.35bn. Of major concern is the fact that the AfriSam assets on which investment decisions were based included Intangible assets, accounting for 78% of total assets.
“This 20% impairment will represent an impairment of the investment to below its original cost price.”
As the investment into AfriSam is an investment into an unlisted company, the PIC’s valuation committee is the party responsible for considering its valuation and making a recommendation to the board. Yet this note does not appear to have come from the valuation committee, but from an “audit finding”. Did the valuation committee miss it? If so, what other questionable investments needing to be impaired could the committee and the auditors have missed? (See Letters in this issue.)
Furthermore, with 78% of the investment attached to “intangibles” [such as goodwill] the 20% impairment of R1.35bn appears extremely conservative. If AfriSam is in trouble, then the R1.35bn impairment does not even cover the potential loss of the R1.7bn loan, let alone the R4.3bn equity investment of government pension fund money.
All that is serious, but not half as serious as the discovery that none of this is reflected in the published annual reports of either PIC or the GEPF. The R1.3bn impairment of the investment in AfriSam does not even get a mention. How could the auditors have allowed this – and why?
Note that, in their official response to noseweek’s questions (see below), neither PIC nor the GEPF trustees have denied the impairment: they explain it away as a due to the market deteriorating. They merely omitted to mention to their clients and pensioners the small matter of a R1.3bn loss of pension funds within a year of their having made the investment.
PWC and Deloittes are massive international operations with controls all the way up to international level: with a huge client base they would probably not risk lawsuits regarding this, just for a single client, even if it is the PIC/GEPF. So it’s unlikely that one of them raised this audit note – and then agreed not to include it as a note to the published annual accounts.
While noseweek is of the view that large audit firms are as prone as smaller ones to produce suspect audits, in many minds the preponderance of suspicion will shift to the other two, smaller audit firms involved.
By comparison these are really small: small enough to be “more accommodating” if they wish to keep a large client like PIC/GEPF. Their websites confirm that both are BEE-connected and weighted towards government work. To quote www.gobodo.co.za/history.asp: “Gobodo Inc. was established primarily as an audit practice providing external audit services to parastatals and government departments.” Xabiso also deals mainly with public sector clients.
This said, though, the Auditor General actually signed off the PIC Annual Financials. Essentially then, the liability for non-disclosure of the impairment lies with the Auditor General’s office. And that’s a bit of a political black hole – a government department that audits government departments.
But centre stage has to be PIC CEO Brian Molefe, appointed to his post by President Mbeki in 2003 after many years in the Treasury, and who has described Trevor Manuel as the most influential man in his life. Molefe was a founder member of the Mbeki-inspired Native Club.
Meanwhile, how have things been going at Afrisam? As it turns out, not very well. On 11 December 2008 Fin24.com reported that AfriSam had posted a shocking R900m loss for the quarter ending September 2008 – the quarter following the PIC’s investment in the company. Surely, had it done a due diligence review of AfriSam, the PIC would have picked up on this pending loss and factored it into its valuation?
GEPF principal officer Maemili Ramataboe insists, in response to noseweek’s question, that “the PIC and its advisers [did] perform a detailed due diligence and valuation of AfriSam. At the time of concluding the transaction, the price paid for the asset was within market valuation ranges for the local and emerging market cement industries”.
The Fin24 report went on to explain that while AfriSam’s revenue grew by around 12% (to R1.94bn), surging costs dropped the operating profits by 11%, and the business’s massive gearing of R16bn caused expensive financing costs of over R1bn, resulting in the massive loss. Of the financing costs, over R387m was attributed to foreign exchange losses, most probably incurred on the Holcim AG (foreign) bridging facility that the PIC refinanced.
And when Fin24 asked AfriSam CEO Charles Naude (in December 2008) whether the business could service its debts from its operating cash flows, he responded that he was “not in a position to discuss it”.
Neither, it seems, are PIC and the GEPF trustees. The massive impairment of their investment – hidden in that draft audit report – suggests the company is not able to finance its debts from operating cash flow.
Concerning the potential impairment of the loan, Ramataboe argues that “the R1.7bn loan is structurally and contractually senior to the equity and preference share investments. At the valuation level determined independently as at financial year end the loan did not require impairment”.
In response to criticisms of the investment, and its subsequent impairment, GEPF’s Ramataboe answers: “The significantly changed global economy since the transaction was concluded in 2008 is the reason for the impairment. The current valuation represents a [...] valuation in accordance with international accounting standards and is not necessarily indicative of the returns that the GEPF can expect to achieve upon exit of this transaction.”
But, given all the facts, numbers, and rough calculations, there can be no way that the PIC saw value in buying its R4.3bn stake and advancing a further R1.7bn to AfriSam. It appears to be another example of a thinly veiled politically motivated investment – be it to protect Mbeki or promote the BEE process, or both.
Ramataboe explains: “In line with the Isibaya Fund mandate the investment was done in order to facilitate a landmark BEE transaction,” and a significant amount of the funding was “utilised to fund the BEE and management and staff groups’ shareholding in the company”.
According to PIC’s website, the Isibaya Fund’s mandate is to “contribute to the socio-economic transformation and development of the country”. It appears that the Isibaya Fund’s job is to utilise PIC funds under management to back or make BEE deals.
Whatever the overall value and importance of BEE, putting pensioners’ retirement savings at risk to back BEE deals (that, generally speaking, simply make the rich richer) has to be highly questionable.
- The Government Employees’ Pension Fund makes up over 90% of the Public Investment Corporation’s total assets under management. While the PIC is wholly owned by the South African government, the GEPF is the largest pension fund in Africa aimed at managing the pension funds of (current and former) public servants and various parastatals.
The two entities are intricately involved – as demonstrated by the fact that the single largest exposure in the PIC’s portfolio (22.85% at the last reporting date) is a stake in Alexander Forbes, who have been the GEPF actuaries for the past couple of years. (Now there’s a spectacular conflict of interest for you. See – inter alia – noses79&119 for more on Alexander Forbes’ suspect role in pension-fund and other deals.)
Individuals and companies named as members of the BEE consortium that controls AfriSam:
Mofasi Lekota, Prof Eltie Links, Sharon Maleka and John Ramatsui (all via a company called Bunker Hills 128, which includes amongst its shareholders a “broad-based” women’s trust called Motheo Wa Basadi Trust) – 35%; AfriSam’s management and employees – 20%; unnamed “charities and community trusts” – 15%. An official document compiled by the Competition Tribunal of SA in May 2007 indicated that the remaining 30% would be held by an “equity partner”, then still unnamed. That, presumably, is where the PIC stepped in to fill the gap – at least partly.
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