The biggest ever financial scam of all times was perpetrated by a financial services firm. Bernard Madoff, shook the American regulation regime from its deep slumber.
The big ponzi scheme, which involved the staggering amount of $50 billion (P500 billion), was perpetrated by a person once a non executive director of the NASDAQ stock exchange, who was widely regarded as the epitome of clean business. Madoff used a scheme, which lures investors in by guaranteeing unusually high returns. The name originated with Charles Ponzi, who promised 50 percent returns on investments in only 90 days.
Ponzi schemes are run by a central operator, who uses the money from new, incoming investors to pay off the promised returns to older ones. This makes the operation seem profitable and legitimate, even though no actual profit is being made. Meanwhile, the person behind the scheme pockets the extra money or uses it to expand the operation. To avoid having too many investors reclaim their "profits," Ponzi schemes encourage them to stay in the game and earn even more money.
Bringing it back home, Botswana has not experienced misconduct in the pension fund sphere, “by the grace of God,” as an observer has put it.
And now the pension fund sector will be required to be more transparent, communicate better and be more explicit in laying out how it operates, because of new legislation.
Parliament last year, approved the Retirement Funds Bill of 2014 which will regulate pension funds in Botswana. The Act will repeal the Pension and Provident Funds Act and re-enact it under a new name, the Retirement Funds Act.
The latest available figures show that management companies and asset managers held total Assets Under Management of P59.7 billion as at March 31, 2014 being a 7 percent growth from P55.9 billion recorded as at March 31, 2013.
In a question and answer session with BusinessPost, the organisers of a workshop aimed at familiarizing industry stakeholders with the new Act, gave some insight on the new Act.
“The big stick here is that those who breach this Act will face punitive action,” said Jeremy Andrew, the facilitator of the workshop, who had an integral role in the drafting of the new law.
“Many will say that NBFIRA is toothless; this new law gives it the power to perform its oversight role,” Andrew said succinctly.
“What has impressed me most is that code of conduct as it has come to make the trustees to look more inwardly and ask themselves if they are doing the right thing,” explained Edna Dambe, CEO of Money Matters, the facilitators of workshop to school local service providers in the pension fund spectrum, on the ramifications of the new legislation.
“It is a service they have promised and they are going to append their signatures to this promise. If you look at how the required communications, investment and risk policy feed into each other, they really offset the possibility of making risky investments with members’ monies,” said Dambe.
Juliana White, an independent consultant said that the new Act would not only bring transparency, it will ensure that there are no perceptions of malpractice.
“Investment strategies should be laid out so that there are no questions about investments that are made; members of the funds will see for themselves that investments made are in line with the investment policy,” said Mrs White.
In the period ended December 31, 2013 there were ninety-three (93) active Standalone Pension Funds licensed in Botswana, including six (6) Umbrella Funds with two hundred and fourteen (214) sub-funds. On the part of asset managers, Afena Capital managing director, Bakang Seretse, said that they “highly embrace new Act as it improves the whole ecosystem of retirement funds.”
Seretse said that with the law requiring service providers to be locally domiciled or having their principal offices in Botswana, it gives the regulator the power to perform its role of oversight.
“Botswana is approaching a period of transition and structural changes. So the challenge for pension funds, regulators, service providers such as ourselves, and Government is to reassess how to best achieve the investment objects of retirement fund long-term savings with a consideration for the long-term development objectives of the country,”
“Yes, pension Funds are already being used in Botswana to finance infrastructure projects, real estate development and other forms of private equity. Yet, the average asset allocation to these alternative asset classes is still relatively low for most pension funds at below 2 percent so there is definitely scope for more “new investments” to be designed to create long term, sustainable opportunities,” Seretse said.
However, a public servant who preferred to remain anonymous, told this publication that the reduction of the number of board members is actually a reduction in the representation of employees as the public service is a very broad constituency that needs represented well.”
“I prefer the Namibian model that sets out two boards for every fund; one that oversees governance and another that oversees investments,” said the source.
“Currently there is some semblance independence as the different committees; with the new Act, there will be no segregation of roles as the same few people will sit in the same committees and oversee themselves.” Seretse said the new legislation goes a long way in addressing some of the risks associated with the industry.
The regulator, NBFIRA (Non Bank Financial Institutions Regulatory Authority), articulated in its 2014 annual report that the pension fund landscape in Botswana are faced with risks such as:
Interest Rate Risk: The possibility that the demand for money market instruments may decline due to an increase in interest rates. Increased interest rates mean less borrowing by consumers;
Concentration Risk: Of the twelve (12) registered asset managers; seven (7) handle pension funds, six (6) of which are mandated to manage the government pension funds.
This exposes the Asset Managers to concentration risk as they are largely dependent on the one client;
Valuation Risk: The local market faces risk in the companies’ valuation processes and abilities, arising from the fact that the processes are carried out by the group companies in South Africa while local staff is not fully equipped with knowledge of the processes and consequently, are unable detect marginal errors as only reasonability tests are performed;
Over Reliance on Group or Foreign Counterparties: Asset Managers and Management Companies that are part of a group or have foreign counterparties tend to adopt groups policies and fail to align them to the specific businesses they are undertaking, resulting in policies that do not capture the essence of their operations.
Regulatory Challenges: The key challenge for the Investment Institutions section is the process that is undertaken in the promulgation of legislation, this process has delayed the section’s efforts to issue licenses to CMIs (asset managers).
This century is always looking at improving new super high speed technology to make life easier. On the other hand, beckoning as an emerging fierce reversal force to equally match or dominate this life enhancing super new tech, comes swift human adversaries which seem to have come to make living on earth even more difficult.
The recent discovery of a pandemic, Covid-19, which moves at a pace of unimaginable and unpredictable proportions; locking people inside homes and barring human interactions with its dreaded death threat, is currently being felt.
Member of Parliament for Kanye North, Thapelo Letsholo has cautioned Government against excessive borrowing and poorly managed debt levels.
He was speaking in Parliament on Tuesday delivering Parliament’s Finance Committee report after assessing a motion that sought to raise Government Bond program ceiling to P30 billion, a big jump from the initial P15 Billion.
Government Investment Account (GIA) which forms part of the Pula fund has been significantly drawn down to finance Botswana’s budget deficits since 2008/09 Global financial crises.
The 2009 global economic recession triggered the collapse of financial markets in the United States, sending waves of shock across world economies, eroding business sentiment, and causing financiers of trade to excise heightened caution and hold onto their cash.
The ripple effects of this economic catastrophe were mostly felt by low to middle income resource based economies, amplifying their vulnerability to external shocks. The diamond industry which forms the gist of Botswana’s economic make up collapsed to zero trade levels across the entire value chain.
The Upstream, where Botswana gathers much of its diamond revenue was adversely impacted by muted demand in the Midstream. The situation was exacerbated by zero appetite of polished goods by jewelry manufacturers and retail outlets due to lowered tail end consumer demand.
This resulted in sharp decline of Government revenue, ballooned budget deficits and suspension of some developmental projects. To finance the deficit and some prioritized national development projects, government had to dip into cash balances, foreign reserves and borrow both externally and locally.
Much of drawing was from Government Investment Account as opposed to drawing from foreign reserve component of the Pula Fund; the latter was spared as a fiscal buffer for the worst rainy days.
Consequently this resulted in significant decline in funds held in the Government Investment Account (GIA). The account serves as Government’s main savings depository and fund for national policy objectives.
However as the world emerged from the 2009 recession government revenue graph picked up to pre recession levels before going down again around 2016/17 owing to challenges in the diamond industry.
Due to a number of budget surpluses from 2012/13 financial year the Government Investment Account started expanding back to P30 billion levels before a series of budget deficits in the National Development Plan 11 pushed it back to decline a decline wave.
When the National Development Plan 11 commenced three (3) financial years ago, government announced that the first half of the NDP would run at budget deficits.
This as explained by Minister of Finance in 2017 would be occasioned by decline in diamond revenue mainly due to government forfeiting some of its dividend from Debswana to fund mine expansion projects.
Cumulatively since 2017/18 to 2019/20 financial year the budget deficit totaled to over P16 billion, of which was financed by both external and domestic borrowing and drawing down from government cash balances. Drawing down from government cash balances meant significant withdrawals from the Government Investment Account.
The Government Investment Account (GIA) was established in accordance with Section 35 of the Bank of Botswana Act Cap. 55:01. The Account represents Government’s share of the Botswana‘s foreign exchange reserves, its investment and management strategies are aligned to the Bank of Botswana’s foreign exchange reserves management and investment guidelines.
Government Investment Account, comprises of Pula denominated deposits at the Bank of Botswana and held in the Pula Fund, which is the long-term investment tranche of the foreign exchange reserves.
In June 2017 while answering a question from Bogolo Kenewendo, the then Minister of Finance & Economic Development Kenneth Mathambo told parliament that as of June 30, 2017, the total assets in the Pula Fund was P56.818 billion, of which the balance in the GIA was P30.832 billion.
Kenewendo was still a back bench specially elected Member of Parliament before ascending to cabinet post in 2018. Last week Minister of Finance & Economic Development, Dr Thapelo Matsheka, when presenting a motion to raise government local borrowing ceiling from P15 billion to P30 Billion told parliament that as of December 2019 Government Investment Account amounted to P18.3 billion.
Dr Matsheka further told parliament that prior to financial crisis of 2008/9 the account amounted to P30.5 billion (41 % of GDP) in December of 2008 while as at December 2019 it stood at P18.3 billion (only 9 % of GDP) mirroring a total decline by P11 billion in the entire 11 years.
Back in 2017 Parliament was also told that the Government Investment Account may be drawn-down or added to, in line with actuations in the Government’s expenditure and revenue outturns. “This is intended to provide the Government with appropriate funds to execute its functions and responsibilities effectively and efficiently” said Mathambo, then Minister of Finance.
Acknowledging the need to draw down from GIA no more, current Minister of Finance Dr Matsheka said “It is under this background that it would be advisable to avoid excessive draw down from this account to preserve it as a financial buffer”
He further cautioned “The danger with substantially reduced financial buffers is that when an economic shock occurs or a disaster descends upon us and adversely affects our economy it becomes very difficult for the country to manage such a shock”