Run on Numbers: UIF Investment Portfolio - how does it benefit ordinary workers?
Does the Public Investment Commission (PIC) have a mandate from the private workers' Unemployment Insurance Fund (UIF) to invest or deviate from objective commercial investment decisions to assist the government in funding essential functions? By the close of the previous financial year to March 2023, the UIF was the second largest client of the PIC, after the Government Employees Pension Fund (GEPF), with 5.14% of the portfolio of Assets under Management, which grew by 13% to R135 billion in the period under review.
In the recent review of its investment portfolio, it was stated that “alongside sustainable financial returns, there are developmental, or impact investments designed to produce socio-economic returns that include job creation, empowering and funding black firms, and providing essential infrastructure (housing, accommodation, healthcare services, etc.). Job retention and job preservation are priorities for the UIF and the PIC. “The question should then be asked if the decision-makers have a mandate to undertake these functions as they lay squarely in the national governmental sphere. The government uses designated workers funds to obtain government goals. Why should those employees sponsor BEE deals structured around the beneficiation of a selected few tenderpreneurs or create jobs for others with money saved up to benefit people who may or have lost their jobs? South African Civil servants do not contribute to the UIF.
1. According to the quarterly review, “four exciting property investments in the UIF portfolio will be executed in the current financial year and over the medium term. A total of R459 million has been earmarked for the construction of student accommodation that will provide 5,352 beds and state-of-the-art learning facilities in four tertiary education nodal points across the country. These construction projects will create thousands of jobs over the medium term and will produce lasting housing and education infrastructure for underprivileged university students.” This is the perfect example of how the government's strategy is to use money that does not belong to the National agenda. The BEE company Adowa is the recipient of capital from the PIC and UIF to create student accommodation, which in itself is no doubt good, but if one looks at the shareholding of Adowa, it is to be questioned whether the workers who contribute to the UIF are aware that three individuals of Adowa Infrastructure Managers holds 40% of the R2 billion investment and the UIF and GEPF that has advanced the money only holds 60%. The return on total investment in student accommodation will not easily exceed 12%, and if 40% of that is lost to beneficiaries, the fund will have a sub-standard return. They will take the full risk but not the full return associated therewith.
2. It is not surprising that the quarterly review reports that “since its inception, the Internal Rates of Return was a negative 5.12% due to several developmental or impact investments in the Fund’s unlisted portfolio under-performing or being in distress, and this remains a concern for the Investment Committee. The Committee can start by examining the shareholding structure of their transactions. There is evidence that the PIC has created “free carry” positions for an elite group of privileged individuals. The Lancaster transaction is perhaps the best example, and then the Harith transaction, where an investigation emanated from a recommendation by the Mpati commission, which probed allegations that the PIC had been reckless in some of the investment decisions it had been making. Adowa may fall in the same category. A free carry is created when someone invests money, and an individual or group obtains undue benefit as their contribution of value creation does not match their input. This then results in the capital investor not obtaining his required rate of return as a part of the total return is distributed to the free carry beneficiary.
3. According to research by the Economist, the share that labour receives of the GDP on average for the world ranges between 50% and 52% over the last ten years. According to the graphic, South Africa is in the group that is well above the world average. This may come as a surprise to many. In addition to UIF Fund II’s approval of investments totalling R3.814 billion to qualifying firms in the most recent round of funding, the following other transactions took place:
- 33 Small and Medium Enterprises funded with R1.713 billion for transactions expected to create 5 310 jobs and preserve 7 278 jobs.
- Six investments of R311 million into firms with 26% youth ownership that are expected to create 560 jobs and preserve 68 jobs.
- 24 investments of R1.032 billion for companies owned and managed by women that are expected to create 4 602 jobs and preserve 7 293 jobs.
- Investments of R2,452 billion to 50 firms in the IDC’s Black Industrialist programme that are expected to generate 9 428 new jobs and preserve 17 833 jobs.
- Funding of R1.712 billion to 36 start-ups that are expected to create 6,856 new jobs.”
4. In the point above, I have divided the capital invested by the number of jobs expected. The wording “expected” is good and well, but one would like to see some measures taken to ensure that the numbers of jobs promised to materialise and if they miss that mark, what are the consequences? The measures taken to verify these numbers should be verifiable upfront with proper job descriptions and skills required and key performance areas sufficiently addressed. Otherwise, numbers are merely quoted to satisfy the investment evaluators by transaction promoters.
5. The question arises of how this number would compare with the open market. I randomly chose some JSE-listed companies, that topped my mind, and I did a similar calculation as above. Instead of value invested, I used the market capitalisation of the company as a substitute which obviously differs somewhat, however, there is good reason to compare the value of an investment company with the number of employees that are required to create that value. The table below will no doubt be thought-provoking- as it was for me. The numbers need a substantial deeper investigation to make sense of it all. Shoprite is my personal pick of the bunch as they have the most workers and have created value for shareholders far exceeding the average company. One must also consider many other factors, but in a country that needs jobs, we can do a lot worse than study the Shoprite model of value and job creation.
It would be good to further scrutinise the mandates of public funds created for employees to see if the workers/ contributors to the funds are prepared to invest money in the manner that the custodians of their money see fit.
* Kruger is an Independent Analyst
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