1 restructuring of public investment commissioners presentation to ad hoc committee on finance and...

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RESTRUCTURING OF PUBLIC INVESTMENT COMMISSIONERS

Presentation to

Ad Hoc Committee on Finance

and

Select Committee on Finance

18 JUNE 2004

Public Investment Commissioners 2

CONTENTS

Section 1 Purpose of PIC Bill

Section 2 Introduction to PIC

Section 3 Limitations of Current Legislation

Section 4 Resultant Operational Problems

Section 5 Proposed Restructuring

Section 6 Conclusion


PURPOSE OF PIC BILL

SECTION 1


STRATEGIC SIGNIFICANCE OF PROPOSED BILL

Allows PIC to operate as modern, professional, world-class investment manager

Board responsibility and accountability for performance of PIC

Allows PIC to compete for scarce investment management skills in the market

Enables PIC to address operational constraints as raised by AG

FSB oversight on PIC operations will improve control environment


INTRODUCTION TO PIC

SECTION 2


BACKGROUND

PIC was founded in 1911 as the Public Debt Commissioners

Its mandate is to manage investments on behalf of public sector entities

It is the largest investment management operation in the country

It is governed by the PIC Act of 1984


PIC’S KEY CLIENTS

Client % of Assets

Government Employees Pension Fund 91.29

Compensation Commissioner* 3.20

Associated Institution Pension Fund 2.61

Unemployment Insurance Fund 1.65

Guardian Funds 0.65

Political Office Bearers Pension Fund 0.13

* Pension Fund and Compensation Fund


ASSET ALLOCATION

R’ Billion Percentage

Capital Markets 182,6 59,2

Money Markets 16,3 5,3

Equities: Externally managed 77,1 25,0

Equities: Internally managed 11,7 3,7

Property Investments 1,3 0,4

Other Investments* 19,7 6,4

Total

(31 March 2003, audited)

308,7 100

* Isibaya Fund and Structured products


STRATEGIC SIGNIFICANCE OF PIC

Management of public service pension assets

A critical player in the financial markets

Controls 8 – 10% of JSE market cap

Largest holder of government and corporate bonds

Can positively influence financial markets behaviour

Empowerment

Corporate Governance

Corporate Citizenship

Through Isibaya Fund, PIC is a key funder of BEE and infrastructure investments


FIXED INCOME In-house management of all bonds and money

market investments

Money Market Investments Domestic banks, which have a credit rating

higher than A2 Corporate bond issuances by companies listed on

the JSE

Bond Investments Largest investor in government, parastatal and

municipal bonds


EQUITY INVESTMENTS

Managed through a combination of in-house and external managers

PIC uses the following external Managers: RMB Asset Management Stanlib Futuregrowth Sanlam Investment Management Old Mutual Asset Management


PROPERTY INVESTMENTS

Size of property investments is capped at 5% of GEPF funds under management

Asset management function is performed in-house Property management is outsourced

Investments are made directly by acquiring properties or through participation in listed and unlisted funds


ISIBAYA FUND Established in 1999 by amendment of legislation

governing the PIC The Fund’s investment universe comprises the

following asset categories: Infrastructure development Black economic empowerment Private sector development capital

Size of the Fund is capped at 3,5% of funds under management Approximately R10.6 billion at current fair

value


LIMITATIONS OF CURRENT LEGISLATION

SECTION 3


PIC ACT (ACT 45 OF 1984) Section 2 – Appointment of Commissioners Commissioners responsible for investment of

funds on behalf of public bodies - Largest depositor is GEPF

Secretariat appointed by National Treasury Director-General: National Treasury seconds

officials to PIC to assist Commissioners in discharging their duties

Prescribe asset classes that PIC is empowered to invest in – Government, parastatal and corporate bonds; equities (listed and private), property and social and infrastructure investments


PIC GOVERNANCE STRUCTURE

MINISTER

DIRECTOR-GENERAL

BOARD

MANCO

EXCO

AuditComm

InvestComm

STAFF

Appoints

Appoints staff toprovide secretariatservice


Act does not provide for PIC to be legal and corporate entity - creates uncertainty around legal standing of the PIC

Governance and organisational structure Employees seconded by National Treasury and

report to Director-General Commissioners held responsible for making and

monitoring investments - have no authority over employees

Disempowering for Commissioners and not conducive to environment in which employees are held accountable for their performance

LIMITATIONS OF PIC ACT


Ability to attract and retain employees – Concern raised by Auditor-General and SCOPA

Regulation of PIC activities – PIC not regulated on same basis as private sector investment managers (Financial Markets Control Act, 1989 and Stock Exchanges Control Act, 1985)

LIMITATIONS OF PIC ACT


CONSTRAINTS ON PIC OPERATIONS

PIC Management has identified further constraints on PIC operations: Not a Legal Entity

Limits ability to act as counter-party in financial transactions

Corporate governance issues Ability to attract and retain scarce investment

management talent Limited capacity to conduct own research and

analysis of investments Need to deploy better IT systems


RESULTANT OPERATIONAL PROBLEMS

SECTION 4


AUDIT QUALIFICATION

Auditor-General has qualified PIC’s 2003 financial statements because: Risk Management Framework had not been

implementedA risk manager had not been appointed

Non compliance with GAAP Valuation of properties in terms of AC135

not performed


EMPHASIS OF MATTER

AG also raised the following as emphasis of matter: Restructuring of the entity Internal auditing Accounting for structured investment products Ownership of investment properties Amortization of premiums and discounts PFMA compliance


ADDRESSING THE AG’S CONCERNS

A risk manager was appointed in August 2003 The PIC’S risk management framework is in the

process of being implemented Additional risk management personnel are

being recruited Risk management systems have been identified

Implementation in 2004/2005 Internal audit function is being set up Compliance officer has been appointed


ADDRESSING THE AG’S CONCERNS

PIC will be GAAP compliant for year ended

31 March 2004 Properties revalued in terms of AC135 All other investments revalued in terms of

AC133 PFMA compliance

Areas of non-compliance expected to be addressed by 31 March 2005

Issues relating to ownership of properties are largely resolved


PROPOSED RESTRUCTURING

SECTION 5


Corporatise the activities of the PIC – Convert to corporate entity namely financial services provider as contemplated by Financial Advisory and Intermediary Services Act, 2002

Corporation will be owned by Government represented by Minister of Finance

Board of Directors to be appointed by Minister of Finance in consultation with Cabinet

PRINCIPAL RESTRUCTURING CONSIDERATIONS


Board shall determine corporation’s policy and direction subject to overall authority of Minister of Finance as shareholder representative

Corporation subject to Public Finance Management Act, 1999

Corporation outside public service but within public sector

PRINCIPAL RESTRUCTURING CONSIDERATIONS


Provide for establishment of juristic person

Commissioners will be succeeded by Board to be

appointed by Minister of Finance

Corporation will be regulated by Memorandum and

Articles of Association

Transfer of all assets, liabilities, rights and

obligations of Commissioners to corporation

PUBLIC INVESTMENT CORPORATION BILL


Investment by corporation of certain money received or held by, for or on behalf of Government, certain bodies, councils, funds and accounts

Regulates certain activities of corporation regarding management of funds

Corporation to be subject to Financial Advisory and Intermediary Services Act, 2002 (FAIS Act)

Public Investment Commissioners Act, 1984, repealed

PUBLIC INVESTMENT CORPORATION BILL


PROPOSED LEGAL STRUCTURE

STATEsole shareholder

MINISTERrepresentative

PIC

INVESTMENT MANAGEMENT

BUSINESS

PIC Clients

BOARD

appoints & approves

controls


PROPOSED PIC GOVERNANCE STRUCTURE

Shareholder(State)

Board(appointed by

Minister)

Corporation

Shareholders Compact

•PFMA•Companies Act•Minister approves memorandum & articles•Report to Parliament•SCOPA•Founding legislation•Protocol on Corporate Governance•FSB regulation


CONCLUSION

SECTION 6


STRATEGIC SIGNIFICANCE OF PROPOSED BILL

Allows PIC to operate as modern, professional, world-class investment manager

Board responsibility and accountability for performance of PIC

Allows PIC to compete for scarce investment management and administration skills in the market

Enables PIC to address operational constraints as raised by AG

FSB oversight on PIC operations will improve control environment


THANK YOU

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