South Africans are accustomed to government mismanagement and corruption. They've suffered for years from periodic blackouts at state-owned power utility Eskom Holdings SOC Ltd., seen money flow out of the national airline and are routinely asked to pay off cops who've pulled them over.
The latest scandal, though, has the potential to reach wider and deeper. It's about whether the company that manages $150 billion of retirement funds for more than 1.2 million government workers has invested its money properly — a question that could touch every taxpayer in Africa's most industrialized economy.
The unfolding crisis at the Public Investment Corp. shows just how deep South African President Cyril Ramaphosa will have to dig to eradicate endemic corruption and restore the reputation of the government. Even the country's powerful unions, which in the past have steadfastly supported the ruling African National Congress, are raising questions, and national elections lie ahead in May.
Public hearings have revealed that the PIC, which invests on behalf of the Government Employees Pension Fund, is highly exposed to Eskom, which is struggling with power-station outages, regular blackouts and 419 billion rand ($30 billion) in debt. Not only does the PIC own 20% of all outstanding bonds of Eskom, it holds a fifth of South African-listed bonds and inflation-linked debt and nearly 10% of the Johannesburg benchmark stock index.
The PIC's "investments in government-issued bonds and state-owned entities have been made in line with clients' mandates and that large portions of these are government-guaranteed," said Dean Botha, PIC's head of corporate affairs. "Both the government and state owned entities have been honoring their debt to the PIC."
Other PIC deals highlighted at hearings of the ongoing commission of inquiry include the purchase of shares in Ayo Technology Solutions Ltd. and a plan to invest in the initial public offering of Sagarmatha Technologies, a listing that was eventually blocked by regulators. Both companies are ultimately linked to businessman Iqbal Surve, who is said by former PIC fund manager Victor Seanie to be friends with PIC's ex-Chief Executive Officer Daniel Matjila.
Seanie, who was suspended as a result of an internal investigation into the Ayo deal, also testified that the prices paid for shares in alcoholic drinks-maker Distell Group Holdings Ltd. and Vodacom Group Ltd.'s Tanzania unit were too high.
"It looks like the PIC overpaid for assets and it seems this has been going on for a long time," said Asief Mohamed, chief investment officer at Cape Town-based Aeon Investment Management. "It's unclear if there were kickbacks, but this certainly raises the question."
Mr. Matjila declined to comment because he's yet to appear before the commission. A spokesman for Surve said in a statement that the businessman welcomes the inquiry and the opportunity to set the record straight, should the commission of inquiry into the PIC request his presence.
The government employees' pension fund, formed in 1996, not only offers retirement benefits but also funeral and death payouts. The gap between contributions received and benefits paid has jumped to 25 billion rand, the highest level in three years and the fifth straight year of shortfall.
If the PIC ever got to a point where it couldn't make sufficient returns to cover payments, the government would be on the hook for the pensions of civil servants, which are guaranteed by the state. Mr. Ramaphosa already is under pressure to bail out or assume part of the debt of Eskom, while other state enterprises are suffering from a chronic lack of funding.
The president is also striving to narrow a budget deficit of about 4% of gross domestic product. South Africa's economy hasn't grown by more than 2% since 2013, while unemployment of 27% remains near a 15-year high.
"There is a pipeline of problems for Mr. Ramaphosa and I think he is probably in the most difficult position any South African president has been in since at least 1994," said Andre Duvenhage, a political science professor at North-West University in Potchefstroom, west of Johannesburg. "What will be interesting is to see how all these factors play into the election."
The fallout from the scandal has been dramatic: Nine PIC directors, including the chairman — who is also the deputy finance minister — resigned en masse earlier this month. Allegations against some of them "have been unbearable to us as individuals and have undoubtedly had a negative impact on our professional integrity," they said in a letter to Finance Minister Tito Mboweni. They offered to stay on until a new board is found.
The move leaves an oversight vacuum at the state-owned company just as its reputation is at its lowest. Over the past year, half of the PIC's executive committee have been suspended or resigned, including Mr. Matjila, who is still due to testify to the commission.
Mr. Ramaphosa set up the commission in October after an anonymous whistleblower made allegations about PIC financial wrongdoing. Chaired by former Supreme Court of Appeal President Judge Lex Mpati, its job is to investigate and make recommendations on the validity of the accusations. It will also rule on whether any legislation, PIC policy or contractual obligations have been broken and resulted in undue benefit for any director, employee or their family members.
Ways to strengthen PIC governance suggested at the inquiry include an end to the post of PIC chairman being held by South Africa's deputy finance minister. The pension fund isn't obligated to hold its 1.8 trillion rand of assets with the PIC, and the Federation of Unions of South Africa, the country's second-largest labor union grouping, said in September 2017 it would agitate for the PIC to be replaced if it was forced to help bail out state funds.
The Congress of South African Trade Unions, the country's biggest labor federation, wants the PIC to be more transparent and free of political interference — but isn't demanding the funds be moved, according to spokesman Sizwe Pamla. Local investment funds have added more assets than has the PIC in three of the last four years.
At his annual state of the nation address last week, Mr. Ramaphosa reiterated a pledge to beat corruption that's been his watchword since replacing Jacob Zuma as president a year ago.
"Our greatest efforts to end poverty, unemployment and inequality will achieve little unless we tackle state capture and corruption in all its manifestations and in all areas of public life," he said. Revelations of graft "reveal a breadth and depth of criminal wrongdoing that challenges the very foundation of our democratic state."
While several people have been named at the ongoing PIC inquiry and in a parallel review of corruption at state-owned enterprises, there have to date been few arrests.
There were signs last week that is set to change, as South Africa's Hawks special investigative unit detained seven people following revelations that Bosasa, a services company, looted billions of rand from the state by bribing officials.
"This commission of inquiry is a very good way to try and stamp out corruption, but ultimately people would have to go through a court of law for it to be truly effective," Aeon's Mohamed said. "This inquiry needs to get to a conclusion quickly and appropriate action needs to be taken against any wrongdoers."