Capital Markets

February 21, 2017

SO…NO: Radical Economic Transformation vs the Truth Hidden in GEPF Investing


Written by Pietman Roos, Senior Consultant, South Africa

Some may wonder why we chose to discuss the State of the Nation Address (SONA) so very retrospectively, especially with the Budget Speech imminent.  However, a little digging into some Government Employee Pension Fund (GEPF) investment vehicles caused us to ask a few questions around the veracity of our President’s pronouncements. Is there reason behind his rhetoric or does the data demonstrate – to quote Donald Trump’s counsellor, Kellyanne Conway – an ‘alternative fact’?

Rad like the 80s  
President Jacob Zuma delivered his SONA on Thursday 9 February 2017, members of parliament fought with security before being kicked out of the National Assembly, a heavy security contingent including 400+ troops stood watch outside parliament…and most of South Africa shrugged off the substance of the SONA. If coverage in the Sunday newspapers was anything to go on, there was frankly more interest in the public funeral of the late rugby legend, Joost van der Westhuizen – with only City Press mentioning Zuma on the front page (“Zuma era raped our dignity”).

The deployment of troops to a major urban centre drew widespread condemnation and will reportedly be challenged as unconstitutional by the official opposition, the Democratic Alliance (DA). Military deployment is a very sensitive matter in South Africa, most especially because the apartheid regime regularly deployed the army to brutally crush protests. Whereas the SONA over the years often talks about the economic and social legacy of apartheid, the security detail and protests outside parliament hearkened back to South Africa’s troubled past in a much more visceral way.

Another 80’s hallmark, the word “radical”, featured strongly in SONA 2017, as in “radical economic transformation”. In the South African context, “transformation” refers to measures that aim to distribute economic opportunity and wealth to previously disadvantaged South Africans as a way to grow a more representative economy and compensate for centuries of white oppression. The big questions is: do the policy suggestions under the radical economic transformation agenda have a chance of materialising as promised, or are they part of the populist bluster of a politician under increasing criticism, even from inside his own party?

Words forth fighting for

“We are saying that we should move beyond words, to practical programmes   President Jacob Zuma

President Zuma cited the following policy developments in the SONA:

  • New regulations making it compulsory for big contractors to subcontract 30 percent of business to black owned enterprises have been finalised and were gazetted on the 20 January 2017
  • A provision to criminalize cartels and collusion which came into effect on 1 May 2016
  • The Department of Economic Development (DED) will bring legislation to Cabinet that will seek to amend the Competition Act. It will amongst others, address the need to have a more inclusive economy and to de-concentrate the high levels of ownership and control we see in many sectors
  • Continuation of the Black Industrialists programme
  • Pursue direct state involvement in mining. The Mining Company of South Africa Bill will be presented to Cabinet and Parliament during 2017

The policies are hardly new and have been doing the rounds for a long while now. Of all the proposals, the state owned mining company is by far the most controversial, seeing as many state owned entities (SOEs) such as South African Airlines (SAA), have been mismanaged into dire financial straits.  This is a true bone of contention with the National Treasury which has been called upon to finance several rounds of bailouts and also, because of serious corporate governance contraventions. However, the Minister of Finance, Pravin Gordhan, can effectively throttle the proposed mining company even before it starts; in the 2016 Medium Term Budget Policy Statement (MTBPS) Gordhan announced guiding principles for the oversight (and reform) of SOEs.

While government is prone to unwittingly imply that it stands apart from the private sector (by for example calling on the sector to make social contributions) the reality is that as the single biggest employer of people in South Africa, the lines have blurred in one important way:  Government pension funds becoming major shareholders of listed corporates.

The fact is that where the Government Employees Pension Fund (GEPF) puts its money is an excellent indication of where, theoretically, government does not want disruption – radical or otherwise.

Conversely, the industry exposure is also a good indication of what government really thinks are the actual industries with the best long term growth potential.

Invested in the relationship
The GEPF assets total R825 billion and some spare change as at 30 December 2016 – making it the single biggest fund in South Africa. The Public Investment Corporation (PIC) is the biggest manager at 86% of the fund, but the GEPF uses almost 20 fund manager in total.

It is quite interesting to compare what government touts as priority sectors for South Africa – as mentioned in the SONA – and the actual shareholding of the GEPF.

In the SONA 2017, President Zuma stated:

However, the economy is still not growing fast enough to create the jobs we need….It is for this reason we decided to focus on a few key areas packaged as the Nine Point Plan to reignite growth so that the economy can create much-needed jobs.

The focus areas include industrialisation, mining and beneficiation, Agriculture and agro Processing, energy, SMMEs, managing work place conflict, attracting investments, growing the oceans economy and tourism.

We also added cross-cutting areas such as science and technology; water and sanitation infrastructure; transport Infrastructure; and broadband rollout.”


So how does this commitment compare with the GEPF shareholding? The industries referred to in the Nine Point Plan ranking among the top 20 in the GEPF are:

Ranking Industry Nine Point Plan focus area
3 Mobile Telecommunications Broadband Rollout
4 Mining Mining
8 Oil & Gas Producers Energy
9 Tobacco Agriculture
14 Food Producers Agro Processing
15 Industrial Metals Industrialisation
16 General Industrials Industrialisation
17 Pharmaceuticals & Biotechnology Science and technology
18 Forestry and Paper Beneficiation



The combined investment into the 9 industries amount to R293 billion, or 35% of the fund. Out of the top five GEPF industries not included above (1:media, 2:financial services and 5:banks) alone make up 32.5% of the fund.

It is a statement of fact that the GEPF is less than 50% aligned with stated government priorities. This suggests the GEPF takes a hard view on government rhetoric and for the most part rather sticks to the industries that promise returns for its ultimate beneficiaries.

The solemn promise aired in the 2017 SONA to combat high industry concentration is also problematic in light of the GEPF industry exposure. Media, financial services and banks are by their nature and economic legacy, highly concentrated industries – as are most of the top 20 industries listed below. An aggressive crack-down on industry concentration would result in a loss of shareholder value, and by extension, severe losses to GEPF beneficiaries.

SECTOR % of GEPF fund Invested (R billion)
Media 17.1 R 141.3
Financial Services 9.1 R 75.5
Mobile Telecommunications 7.8 R 64.8
Mining 7.0 R 58.0
Banks 6.3 R 51.8
Life Insurance 5.8 R 47.9
Real Estate Investment Trusts 5.5 R 45.2
Oil & Gas Producers 4.7 R 38.8
Tobacco 4.5 R 37.2
General Retailers 4.5 R 36.9
Health Care Equipment & Services 3.9 R 32.0
Personal Goods 3.7 R 30.5
Food & Drug Retailers 3.3 R 27.3
Food Producers 2.8 R 23.1
Industrial Metals & Mining 2.5 R 20.8
General Industrials 2.4 R 19.9
Pharmaceuticals & Biotechnology 2.2 R 17.8
Forestry & Paper 1.6 R 12.9
Real Estate Investment & Services 1.5 R 12.6
Support Services 0.6 R 4.9


Looking back at sweet nothings on the eve of Valentine

SONA 2017 again posed an urgent question on whether it is still relevant as a way to communicate policy priorities, especially as most opposition parties left the address in protest. President Zuma delivered an unconvincing performance – amidst violent outbursts – and South Africans in general, shook their collective heads at a leader found to have contravened the constitution and yet still refusing to vacate his office.

Is South Africa, like the USA, living in a post-truth world where political rhetoric has little resonance in reality?  For us at least, amid all this existential uncertainty, the data remains – and for the most part, it suggests that the big policy plans of the President are merely populist pipe dreams.

With thanks to VACO Holdings for the data insight provided.