Defence Minister Bantu Kholomisa stated that South Africa should study new financing models and public-private partnership (PPP) mechanisms to enhance the country's defence capabilities.
Proposals for Collaboration
Kholomisa welcomed the idea of seeking interaction with the commercial sector to support the South African National Defence Force (SANDF). He emphasized that such partnerships must be carefully planned and assessed considering national security requirements, accessibility, procurement laws, ownership issues, and long-term financial implications.
He stressed the need to include institutional investors, such as the Public Investment Corporation (PIC), in the financing formula to explore options for long-term infrastructure investments.
PIC Governance Issues
Concerns are raised that governance issues at PIC are exacerbated by internal power struggles. Most State-Owned Enterprises (SOEs), which should lead infrastructure development, show widespread dissatisfaction and disregard for governance principles. PIC is viewed as a sacred financial institution in the country.
It is important to note that Regulation 28 could make PIC a key player in South Africa's infrastructure lending. However, instead of mandating infrastructure investment, this regulation allows pension funds, such as the Government Employees Pension Fund (GEPF), which oversees PIC, to invest in infrastructure while adhering to fiduciary duty and prudent diversification.
Pension Fund Potential
After diversification and agreement from trustees, pension funds can invest up to 45% of their assets in various classes of infrastructure. PIC, managing assets exceeding 3 trillion rand, is the largest asset manager in Africa. Since most infrastructure projects require long-term funding, this aligns well with the long-term obligations of pension funds.
This allows PIC to act as a catalyst for financing long-term commercial infrastructure, including military, aiming to stimulate industrialization and job creation. The PPP proposed by Kholomisa has significant commercial and developmental merit, given South Africa's financial constraints. Nevertheless, it is critical to consider the tendency of private participants towards socializing risks and privatizing profits when involved in public processes.
Economic Impact and Barriers
Involving PIC as a catalyst can reduce the burden on the national debt, lower the cost of sovereign borrowing, attract private investment, and improve fiscal sustainability. This aligns with Treasury's goals of encouraging pension fund participation when delegating investment decisions to trustees. Pension capital is inherently better suited for long-term investments than commercial banks, which prefer shorter repayment periods.
Since PIC serves as a trigger for attracting private finance, infrastructure investments possess one of the highest economic multipliers. This can promote GDP growth, employment, industrialization, logistics efficiency, and export competitiveness. Improved infrastructure also attracts private investment from both domestic and foreign sources, as infrastructure assets often generate stable, predictable, and inflation-linked cash flows.
Structural Problems and Governance
Despite the favorable foundation laid by Regulation 28, it does not solve the structural problem of a lack of bankable projects. Some consider this to be South Africa's biggest problem. Treasury itself noted during the reforms of Regulation 28 that the key limitation was not investment capacity but the availability of such projects. Added to this structural problem is the fiduciary duty, as PIC's primary mandate is to protect pensioners' savings.
Therefore, projects must demonstrate commercial viability, acceptable risk-adjusted returns, strong governance, and predictable cash flows, as development goals alone are insufficient. Due to past governance failures in SOEs, state-created risks have hindered economic growth. Leading pension investors, such as those from Canada and Australia, make significant infrastructure investments for several reasons: high quality project preparation, independent regulation, transparent procurement, robust concession agreements, and qualified asset management.
Despite substantial institutional capital, South Africa currently lacks a portfolio of investment-ready projects. PIC has improved its governance following the Mpathe Commission but still has several structural shortcomings compared to leading sovereign wealth funds and pension managers such as Norway's Government Pension Fund Global, Canada's CPP Investments, Singapore's GIC, Temasek, and Australia's Future Fund, as well as New Zealand's Super Fund. The main issues lie less in investment performance and more in governance, independence, accountability, and investment discipline.
Root Causes and Recommendations
The crisis of political influence leading to corruption, cronyism, and rent-seeking is the root cause of South Africa's massive structural obstacles. In line with global best practices, an asset manager should make investment decisions primarily based on fiduciary considerations or in the interest of beneficiaries. However, PIC operates in an environment where investment decisions can be influenced by political objectives. The Mpathe Commission found political interference and an inappropriate board composition.
Most international asset managers have boards composed of experts in various fields, including economics and capital markets, actuarial science, risk management, and pension management. In the past, the PIC board had political appointments and sometimes lacked adequate investment experience. The Mpathe Commission recommended improving the autonomy and competence of board members, as well as clarifying the distinction between management and oversight.
Conducting comprehensive investment due diligence is one barrier that PIC must eliminate in its institutional culture to become a successful investment catalyst. Deficiencies were identified in assessing commercial viability, legal vetting, financial modeling, and valuation in some contentious projects. Weak post-investment monitoring appears to be the norm for most South African Development Finance Institutions (DFIs).
Trusted foreign sovereign funds make significant efforts to monitor investments after deployment. The Mpathe Commission stated that PIC needs a stronger post-investment monitoring and evaluation process. International standards require full reporting, independent ethical review, recusal procedures, continuous disclosure of interests, and robust whistleblower protection. The Commission found several instances of poorly managed conflicts of interest.
Due to all these issues, the integrity of this powerful asset manager, which could serve as a pillar against financial constraints and difficulties, is diminished. ESG voting, reports, asset management programs, portfolio risk, governance ratings, and investment rationales are just some of the crucial and useful details that the corporation fails to disclose.
Ways to Improve PIC
Despite some visible improvements following the Mpathe Commission, transparency still lags behind many international competitors. According to the Mpathe Commission, PIC's operating model is overly centralized and unsuitable for an asset manager of its scale. Large international asset managers typically have separate departments with clear divisions of authority for infrastructure, private equity, equities, bonds, real estate, risk, compliance, and portfolio analysis.
Although PIC has risk management structures, others argue that ineffective risk management has been compromised by governance deficiencies. Unlike traditional sovereign funds, PIC is often expected to support South Africa's development goals. This requires defining risk-adjusted performance criteria, quantitative socio-economic outcomes, commercial return requirements, and clear mandates before investment can be justified. Otherwise, fiduciary duties may conflict with development goals.
Loss of trust resulting from governance disputes is one of the huge intangible costs. Despite reforms, regulatory scrutiny of governance issues persists, as seen in recent FSCA investigations into governance and transparency. However, the following improvements could be implemented if PIC were to engage more closely with large international institutional investors:
- Increasing legislative independence status to prevent political influence on investment decisions.
- More professional appointment of board members through transparent competency-based selection.
- Creation of a dedicated investment committee overseeing major deals.
- Improving due diligence requirements, especially for development projects and unlisted investments.
- Expanding post-investment monitoring using early warning signs and quantitative panels.
- Enhancing transparency by publishing more data on portfolio, governance, and performance.
- Separating fiduciary investment mandates from development mandates, with the government providing clear funding or guarantees for any policy-driven investments instead of relying on pensioners.
The potential adoption by PIC of a dual-mandate framework, similar to what some development finance institutions do, is another reform that stands out in the context of infrastructure and development finance. With its own governance structure, risk tolerance, and performance metrics, this approach would allow commercially oriented pension investments to be separated from infrastructure investments for development. PIC could openly and responsibly support South Africa's aspirations in infrastructure and industrialization, while pensioners are better protected.
Recommendations for Economic Growth
Furthermore, the political recommendation for an effective and successful PIC as a driver of economic growth should include the following. To maximize the benefits of Regulation 28, South Africa must move beyond merely encouraging infrastructure investment and instead create a comprehensive framework for project preparation and bankability. This should include:
- A national portfolio of investment-ready projects.
- Rigorous technical and financial expertise and due diligence.
- Independent technical and financial assessment.
- Blended finance with Development Finance Institutions (DFIs).
- Appropriate government guarantees where warranted, and robust post-investment monitoring.
With such a structure, PIC can invest with confidence and fulfill its fiduciary duties. Significant regulatory barriers to pension fund investment in infrastructure have been removed by Regulation 28. The regulation is no longer the main barrier to increasing PIC participation; rather, it is the lack of bankable, well-managed, investment-ready infrastructure projects. This proposal shifts the focus of political debate from 'How do we unlock pension funds?' to 'How do we create investable infrastructure?' This shift is crucial for South Africa's approach to infrastructure financing.
Thus, the practical PPP action plan proposed by Kholomisa, aimed at modernizing South Africa's defence capabilities, addressing military infrastructure, supporting local industry, and ensuring the sector generates bankable proposals, is neither idealistic nor mere talk.
