By Bongani Mankewu - is the Director of the InfraFIN

We should applaud General Bantu Holomisa's suggestion to seek cooperation with the commercial sector to bolster SANDF. He stated that these partnerships must be carefully planned and evaluated in light of national security requirements, affordability, procurement laws, ownership, and long-term financial implications. To investigate long-term infrastructure investment options, institutional investors, such as the Public Investment Corporation (PIC), must be included in the funding formula, he emphasized.

It is disconcerting that the PIC's governance issue is aggravating amid internal power struggles. Most state-owned enterprises (SOEs), which are expected to spearhead infrastructure development, exhibit widespread annoyance and contempt for governance. PIC is expected to be a sacred and sacrosanct financial institution in this country.

It is noteworthy that Regulation 28 might make the Public Investment Corporation (PIC) a crucial player in infrastructure lending in South Africa. But rather than requiring infrastructure investment, the regulation allows retirement funds, such as the Government Employees Pension Fund (GEPF), which is overseen by the PIC, to make bankable infrastructure investments while upholding fiduciary responsibility and prudent diversification.

Upon diversification and trustee agreement, retirement funds may invest up to 45% of their assets in infrastructure across asset classes.

Notably, with over R3 trillion in assets under management, PIC is the largest asset manager in Africa. Most infrastructure projects require long-term financing, which aligns well with pension funds' long-term commitments.

This makes it possible for the PIC to act as a catalyst for funding long-term commercial infrastructure, such as the military, to promote industrialization and employment growth.

Due to South Africa's financial limitations, the public-private partnership proposed by Holomisa makes a great deal of commercial and developmental sense. However, it is critical to take into account private actors' propensity to socialize risk and privatize gains (profits) when invited to public participation.

The involvement of PICs as catalysts might ease the burden on government borrowing, lower sovereign borrowing costs, attract private investment, and improve fiscal sustainability.

This aligns with Treasury's goal of promoting retirement fund participation while delegating investment choices to fund trustees.

Pension capital is inherently better suited to long-term investments than commercial banks, which favor shorter maturities. Because PIC serves as a trigger to draw private participation finance, infrastructure investment has one of the highest economic multipliers. This might boost GDP growth, employment, industrialization, logistics efficiency, and export competitiveness.

Improved infrastructure also attracts private investment from both domestic and foreign sources since infrastructure assets often generate consistent, predictable, and inflation-linked cash flows.

Because these cash flows closely match pension obligations, infrastructure is a potentially attractive asset class.

Although Regulation 28 has created an enabling framework, it fails to address the structural challenge of a lack of bankable projects. There are some who believe this is the biggest problem facing South Africa.

The Treasury itself noted during Regulation 28 reforms that the key constraint was not investment limits but the availability of bankable infrastructure projects.

Added to the structural challenge is the fiduciary duty, as the PIC's primary responsibility is to protect pension members' savings. Therefore, projects must demonstrate commercial viability, acceptable risk-adjusted returns, strong governance, and predictable cash flows, as developmental objectives alone are insufficient.

Due to previous governance failures at state-owned enterprises, government-created governance risks have been a hindrance to economic growth.

Leading pension investors, like those in Canada and Australia, make significant infrastructure investments for a variety of reasons—strong project preparation, independent regulation, transparent procurement, dependable concession agreements, and skilled asset management.

Despite having significant institutional capital, South Africa does not yet have a pipeline of projects ready for investment.

The Public Investment Corporation (PIC) has improved its governance since the Mpati Commission, but it still has a number of structural flaws when compared to top sovereign wealth funds and public pension investment managers like Norway's Government Pension Fund Global, Canada's CPP Investments, Singapore's GIC and Temasek, Australia's Future Fund, and New Zealand Super Fund.

Rather than just investment performance, the primary issues are governance, independence, accountability, and investment discipline.

The crisis of political influence, which leads to corruption, cronyism, and rent-seeking, is the root cause of South Africa's massive structural impediments.

In accordance with worldwide best practices, an asset manager must make investment decisions largely based on fiduciary considerations, or in the interests of beneficiaries.

However, the PIC works in a setting where investment choices may be influenced by political goals.

Political meddling and an improper board were discovered by the Mpati Commission.

Most international asset managers have boards composed of experts in a variety of fields, including economics and capital markets, actuarial knowledge, risk management, and pension governance.

In the past, the PIC board has seen political appointments and occasionally lacked adequate investment experience. The Mpati Commission specifically recommended improving board members' autonomy and competence as well as clarifying the differences between management and supervision.

Investment due diligence is one of the encumbrances PIC must eliminate from its institutional culture in order to be a successful investment catalyst.

Weaknesses in commercial viability evaluation, legal due diligence, financial modeling, and valuation were exposed in some contentious ventures.

Weak post-investment monitoring appears to be the norm for most South African development finance institutions (DFIs).

Credible foreign sovereign funds devote substantial efforts to investment monitoring after funding is deployed. The Mpati Commission claimed that the PIC needed a stronger post-investment monitoring and valuation process.

International standards demand full disclosure, independent ethics review, recusal procedures, ongoing declarations of interest, and robust protection for whistle-blowers. The Commission discovered several instances of poorly managed conflicts of interest.

Due to all of these challenges, the integrity of this powerful asset manager, which can act as the anchor of financial constraints and difficulties, is declining. Voting records, ESG reports, stewardship programs, portfolio risk, governance evaluations, investment benchmarks, and investment rationale are just a few of the crucial and beneficial details that the company neglects to disclose.

Despite some apparent improvements after the Mpati Commission, transparency still lagged behind many international rivals. PIC's operating model, according to the Mpati Commission, is overly centralized and unsuitable for a company handling assets of that magnitude.

Large international asset managers typically have distinct departments with clear delegations of authority for infrastructure, private equity, listed stocks, fixed income, real estate, risk, compliance, and portfolio analytics.

Although the PIC has risk structures, others contend that ineffective risk management has been compromised by governance shortcomings.

Unlike traditional sovereign wealth funds, the PIC is often expected to anchor South Africa's developmental goals. This calls for defined risk-adjusted performance criteria, quantifiable socioeconomic results, commercial return requirements, and clear mandates before investing can be justified. Otherwise, fiduciary duties may clash with developmental goals.

Reduced trust as a result of governance disputes is one of the enormous intangible costs. Despite the reforms, regulatory monitoring of governance challenges persists, as seen in recent FSCA investigations into governance and transparency issues. Nonetheless, the following improvements may be implemented if the PIC must connect more closely with major international institutional investors:

• Enhancing statutory independence to prevent political influence on investment decisions.
• Making board appointments more professional by using competency-based, transparent selection.
• Establish a separate investment committee that has control of significant transactions.
• Improve due diligence requirements, especially for developmental and unlisted investments.
• Using early warning signs and quantitative dashboards, post-investment monitoring is expanded.
• By releasing more portfolio, stewardship, and performance data, transparency can be increased.
• Fiduciary investment mandates and developmental mandates should be kept apart, with the government providing clear funding or guarantees for any policy-directed investments rather than relying on pension beneficiaries to cover them.

PIC's possible adoption of a dual-mandated framework, which is similar to what some development finance organizations 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 will separate commercially focused pension investments from developmental infrastructure investments. The PIC would be able to openly and responsibly support South Africa's infrastructure and industrialization aspirations, and pension recipients would be better safeguarded.

Furthermore, the following must be included in the policy recommendation for an efficient and successful PIC as a driver of economic growth.

To maximize the benefits of Regulation 28, South Africa should move beyond simply encouraging infrastructure investment and instead establish a comprehensive project preparation and bankability framework. This would include:

• a national pipeline of investment-ready projects,
• rigorous feasibility and due diligence,
• independent technical and financial appraisal,
• blended finance with Development Finance Institutions (DFIs),
• appropriate government guarantees where justified,
• robust post-investment monitoring.

The PIC may invest with confidence and uphold its fiduciary duties under such a structure.

Significant regulatory obstacles to pension fund infrastructure investment have been eliminated by Regulation 28. Regulation is no longer the main barrier to increased PIC participation; instead, it is the scarcity of bankable, well-run, investment-ready infrastructure projects.

This proposal changes the focus of the policy debate from "How do we unlock pension funds?" to "How do we create investable infrastructure?" This change is crucial to South Africa's approach to funding infrastructure. Therefore, Holomisa's proposed practical PPP Action Plan, which aims to modernize South Africa's defence force capabilities, address military infrastructure, bolster local industry, and guarantee that the sector generates proposals that can be implemented, is not idealistic or merely a talk shop.