PIC faces questions over R760m Efora investment

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JIMMY MOYAHA: There once was a company called Efora [Efora Energy] – or SacOil, depending on which name you remember it by. Back in 2007/2008 this was a company that was meant to be the oil play of the Public Investment Corporation [PIC] and other stakeholders. It was listed on the Johannesburg Stock Exchange.

Over the years since then, between 2011 and 2018 at least, that business received around R760-odd million in financial injections from the PIC as the significant shareholder in the business. Today the business remains listed on the JSE with its shares suspended for trading. The business, according to its share price, is worth only around R19 million.

We’re going to be looking at this in more detail with the founder and chair of Public Interest SA, Tebogo Khaas, who joins me on the line now. Tebogo, lovely having you on the show. Thanks so much for taking the time.

Quite the story behind this particular entity which, I suppose, given its listing, might not have been considered a state-owned entity. But, from your perspective, give us a background around what you remember about this company and why it was initially something that was of interest to the PIC.

TEBOGO KHAAS: Thanks, Jimmy, for having me. You’d recall that this company did a reverse listing on the JSE to be listed for acquisition of an existing entity.

The intention was to ensure that it broadened its access to capital as it sought to explore other markets across Africa insofar as oil energy is concerned.

The central problem appears to be an escalation of exposure, despite accumulating warning signs which were ignored.

And for us, what really matters – and the question which I would like to pose, or maybe I’ll probably answer it myself – is if your investment in a company has already generated sufficient concern to warrant an independent forensic investigation, what changed thereafter to justify committing hundreds of millions of rands more?

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That is what the board and the management have to answer and really give clear answers and not obfuscate, because there were reports, even before parliament and through for instance [the] Gobodo investigation, that pointed to that type of escalation looming, as well as it continuing to happen.

And then a lot more and more money was pumped into Efora.

JIMMY MOYAHA: Tebogo, as it stands at the moment, Efora is staring down the barrel of an application it is opposing in the Gauteng High Court. That is an application for liquidation which suggests that the assets of the business – worth around R41 million according to the audited numbers – would need to be sold off and the creditors would need to be settled.

Now, if we take the JSE share price at the moment and the market cap based on that, the business is effectively only worth just under R20 million. So it’s a business looking very, very different from the more than R700 million that the PIC has injected into it.

This is an obvious concern and something that the market and the board need to look at, the board needing to address this. What do we make of where the business finds itself today? It doesn’t seem like there is a lot to save from a business perspective, but obviously accountability, as you mentioned, is still something that’s very important.

TEBOGO KHAAS: Yes. The sad thing is there are lives and livelihoods at risk when such an occurrence takes place, such as a company staring down the barrel of a potential liquidation.

And the question – as the company or the board deals with that question – that you should be asking yourself is: What went wrong, or could the PIC have done and managed the risk any better than they currently have? The obvious answer is yes.

But we should qualify that.

We should remember or remind ourselves – or even the listeners – that asset managers themselves are paid to take risk.

Not every investment will succeed, as we all know, and it would be unfair to judge all investments – such as those in SacOil – purely with the benefit of hindsight. Oil exploration itself is an expensive business, and a risky business for that matter. And emerging market energy investments are inherently risky themselves.

So the most serious issue is therefore not whether the PIC investment is in a company that eventually failed; it is rather why the PIC repeatedly increased its exposure as risk factors or indicators accumulated.

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That is why the distinction between ‘investment risk’ and ‘governance failure’ has become critical.

JIMMY MOYAHA: To your point, Tebogo, we did reach out to the Public Investment Corporation for comment on this particular matter. They noted, of course, the high court application and the subsequent confirmation that Efora intends to oppose this liquidation application.

They also said that as a matter of principle, the Public Investment Corporation does not comment on matters that are sub judice.

So, unfortunately, from that perspective, the concluding comment is that ultimately the board of Efora exercises control over the company’s affairs and will be best positioned to comment on that.

I think that speaks to your point around the distinction between investment risk and governance risk. From a governance risk perspective, what do we learn from these sorts of developments, especially where it relates to investing public funds?

TEBOGO KHAAS: There are four quick points I’d like to make just on that question alone.

First, public investment institutions must distinguish commercial confidentiality from accountability. The PIC cannot be expected to publish every piece of commercially sensitive information while transactions are effective.

That reminds me of what is likely or expected to happen with Eskom, where it must be confined to PFMA [Public Finance Management Act] rules when it liberalises, while the rest of its competitors would not be subject to that.

But once hundreds of millions of rands of beneficiaries’ money appear to have been lost, there must be meaningful retrospective transparency.

And the second point I’d like to make is accountability must follow the decision, not merely the outcome.

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A bad outcome from a sound, properly governed investment process is unfortunate. A bad outcome resulting from ignored warnings as in this case, inadequate due diligence or repeated departures from investment mandates, is something altogether different – and I think it’s a sorry state.

Which leads me to the third dimension, which is there must be accountability for follow-on investment decisions, which in this case doesn’t seem to have been the case.

The initial R75 million investment may have been defensible on the information available at the time, but each subsequent R329 million or R360 million commitment was a new decision requiring a fresh investment thesis and fresh assessment of risk.

And lastly, institutional memory suffers when there are changes. If an earlier transaction had already generated a forensic investigation, as in this case the Gobodo one, those findings should have become part of the risk assessment for every subsequent decision involving that company.

If the PIC nevertheless decided to invest further, it should now be capable of explaining why.

But, as you’re saying, they’re now playing smoke-and-mirrors, hiding under the sub judice principle.

JIMMY MOYAHA: Some serious questions need to be answered and even more need to be dealt with by management as to how the business finds itself in the precarious position it is in today.

We’ll have to leave the conversation on that note, though.

Founder and chair at Public Interest SA, Tebogo Khaas, joined us to take a look at the Efora investment made by the Public Investment Corporation, where that business stands today, and its latest liquidation challenges.

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