With R1-trillion under management, Public Investment Corporation (PIC) chief executive Elias Masilela is arguably the most powerful man in South Africa’s R5-trillion savings industry.
He is also well connected within the ANC and government circles, entertaining party cadres on Tuesday at the Market Theatre in Johannesburg at the launch of Mbongeni Ngema’s Number 43, a musical adaptation of Masilela’s award-winning book Number 43 Trelawney Park, KwaMagogo. The musical will be the centrepiece of the ANC’s 100th birthday celebration, which kicks off on January 8 next year.
So it’s not surprising when he says that his biggest challenge is to manage the expectation that he is Mr Fix-It. “When people think R1-trillion, they think we can make all of South Africa’s economic and social problems go away,” Masilela told the Mail & Guardian this week. “But the PIC cannot be expected to rescue the economy.”
Just 10 months into the job, Masilela, who replaced Brian Molefe in the top seat, is fast realising that the pressures on the PIC to play a more developmental role in the economy are far greater than in the private sector, where he was head of pension policy at South Africa’s second-largest life assurer, Sanlam.
“The PIC can invest in power generation or roads, but our mandate restricts us from putting money in a particular project. So we can’t fix the country’s economic and social ills,” he said. “When we invest in power and roads, for example, the thinking is that we will attract private investment. We can shape the outlook for future foreign and domestic investment.”
For South Africa to grow by 6% a year, the World Bank estimates the country needs an investment rate in excess of 25%. The PIC plays a strategic role in the economy by virtue of the huge sums of money it has to invest. It holds the key to the wealth of Africa’s single biggest Government Employee Pension Fund (GEPF), which accounts for 90% of its assets and a third of the assets of the South African retirement-fund industry.
A hybrid of a single asset manager and a multi-manager, the PIC turned 100 this year, a record not many investment institutions in the developing world can boast. It started out in 1911 as a debt manager tasked with managing surplus government money (originally only bonds) and later government-related pension funds, evolving into a state institution that is now relied on to fund economic growth and development.
Most of the PIC’s assets (about 45%) are invested in listed South African equities (it is a shareholder in most of the top 100 JSE companies) and about 30% in bonds.
Its mandate from the GEPF has been expanded to allow for 10% of assets under management to be invested outside South Africa — 5% on the African continent and 5% offshore in passive funds (in a combination of United States dollars, euros and yen).
But Masilela does not believe the sovereign-debt crisis in Europe and the United States leaves it exposed. “We are a long-term investor and we believe that, even if the global economy is faltering, there will be a recovery in a year or two and our investments will benefit. It’s good to go offshore for diversification.”
Private-sector pension funds have been investing offshore since 1995 and are now allowed to hold 25% of their assets abroad and a further 5% in the rest of Africa. Masilela said the PIC would buy listed shares in Africa, but its investments would lean towards development and private equity. The GEPF is already an investor in the Pan African Infrastructural Development Fund, which is invested in transport, energy and communications infrastructure, including the Seacom cable.
“The challenges are the political risk and economic instability on the continent. There is inadequate information to make sound investment decisions because of the thinness of listed markets and liquidity in Africa,” said Masilela.
In South Africa it also has a development mandate from the GEPF to invest 5% (about R45-billion) into infrastructure and development-related assets through its “socially responsible” fund, Isibaya.
The investment mandate is driven by four pillars: to reduce the economic infrastructure backlog, to close the social infrastructure gap, to contribute to the green economy by investing in renewables technology and environmentally friendly buildings and to develop small, medium and micro enterprises. But it has been falling behind on these targets, having invested only about 2% so far.
Masilela understands that the stakes are high in meeting those targets. He is one of 24 commissioners of the National Planning Commission (NPC), which recently produced a national development plan for the country. “We need to play a bigger role in increasing the efficiency of the economy, with the aim of reducing poverty and creating jobs. But growth goes beyond investment.
Productivity levels will have to step up, business costs must come down, labour markets need to be restructured and our global competitiveness must be enhanced. You can’t rely on monetary policy to stimulate or sustain the economy. The entire economy needs to be restructured.”
Shareholder activism
Corporate South Africa, too, needs reform. With the world in financial flux and corporate governance in the spotlight, Masilela has stepped into his predecessor Molefe’s shoes as a shareholder activist, tackling companies and their boards on sustainability concerns.
The PIC recently concluded a sustainability index of its investments, identifying the bottom-20 worst performers. “These companies, both listed and unlisted, small and large, will now be targeted for reform and restructuring over a period of three years.”
A recent Organisation for Economic Co-operation and Development study shows that companies that have internalised sustainability targets as part of their business principles produce better returns. “That means good governance, accountability, investing in an environmentally friendly way, employment equity and black economic empowerment will contribute positively to profit, which will be good for the PIC and the pension funds it manages,” said Masilela. “This is why we need to instil that discipline in companies in terms of corporate governance.”
But whereas Molefe, now chief executive of parastatal Transnet, used a big-stick approach in public to discipline poorly performing companies in the areas of governance and transformation, Masilela is cracking the whip behind closed doors. “We’ve had to change our approach this year. Instead of shouting down companies in public, we’re using moral persuasion behind closed doors.
People will be more attentive and accommodative of a proposal that is presented to them in a reasoned way instead of feeling attacked. We will gain more traction that way.”
Executive pay
Executive pay is another contentious area that Masilela and his team are investigating. Finance Minister Pravin Gordhan has many times this year flagged executive pay as a perversity and government has rumbled about capping corporate remuneration in a bid to reduce the pay gap and inequalities in the country.
The PIC recently completed a study of the top 100 JSE-listed companies, scrutinising the links between performance, productivity and executive pay. It is also looking at payment to board members and chairs.
The findings were confidential, said Masilela, but broadly the probe found a varied picture in which there was no consistency in profitability, productivity, the size of the company and what executives or board members were paid. “It is important for us not to make uninformed judgments. We need to arrive at a scientific approach to that exercise because it is uncharted territory.”
According to the 2011 PricewaterhouseCoopers (PwC) executive directors’ remuneration report, the average fee for non-executive directors has increased 18% since a year ago. This is because the new Companies Act and the King III Code of Corporate Governance have imposed onerous responsibilities on non-executive and independent directors. And globally there is growing demand for a high proportion of board directors to be independent, with little or no shareholding in the company.
The PwC report indicates that in South Africa these requirements are far from being met. Among JSE-listed companies the percentage of independent non-executive directors varies from 47% in basic resources, 48% in financial services and 53% in industrials to 56% in services. By contrast, in the United States more than 80% of S&P 500 boards have independent directors and 77% of the United Kingdom’s FTSE 100.
Said Masilela: “Predominantly, the experience in the US shows that a lot of the Wall Street entities didn’t take account of sustainability issues and continued to pay lucrative bonuses and salaries even though their balance sheets were and still are under stress. This is starting to creep into South Africa. It is why we have to deal with this issue on an individual company basis. Salaries should be a recognition of output and an incentive to attract and retain skills.”
Masilela’s many skills
Elias Masilela’s book, Number 43 Trelawney Park, KwaMagogo, an Alan Paton nominee for 2007, celebrates the life of his mother Rebecca Makgomo Masilela, described as the godmother of the ANC in exile, who opened her home, 43 Trelawney Park in Swaziland, to cadres.
The book is one of Masilela’s many achievements. He holds a BA degree in social sciences and a MSC in economic policy and analysis, specialising in money, banking and international economics. He held the position of deputy director-general of economic policy at national treasury, its head of social security and retirement reform, as well as chairman of the South African Savings Institute.