Deputy Minister of Finance on 2011 Annual Strategic Plans of Public Investment Corporation (PIC) and Financial Services Board (FSB)

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Finance Standing Committee

31 May 2011
Chairperson: Mr T Mufamadi (ANC)
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Meeting Summary

The Public Investment Corporation presented its Annual Strategic Plan for 2011. The Deputy Minister of Finance, as Chairperson of the Corporation, said that it had established a record that was living testimony to its attempt to talk to the developmental agenda of Government. The Government Employees Pension Fund represented 90% of assets under the management of the Corporation, which was owned by the state but could fulfil its mandate only if financially sustainable.  Human resources and information technology support plans were outlined. The Corporation explained why it would not be declaring a dividend to Government and referred to the importance of building social infrastructure. On 02 May 2011 the Corporation had reached its 100 years anniversary. The average South African was touched by tangible investments. On 07 June 2011 the Corporation would complete the transaction of the Victoria and Alfred Waterfront, Cape Town. The Corporation’s new ten year outlook responded to the underlying understanding that with the Government Employees Pension Fund as the biggest supplier of assets it needed to take a long term view. As part of the Developmental Investment Policy it was necessary to externalise assets; part of this was investing some of these resources on the African continent. Underlying all this was the need for changes in systems, especially in regard to information technology. The Corporation hoped to have achieved substantial progress in this direction before its next visit to the Committee.

Members asked why the Corporation was a high cost, low margin business, why the operating expenses were so high, if the Corporation had a retention strategy, if the Corporation had set itself any tangible goals in ensuring a contribution in terms of the green economy, about fluctuations in the assets managed by the Corporation, what the current status of information technology infrastructure was in order better to understand why there was such a quantum link from the baseline, about the impact of dividends not being declared for this financial year, if there was any clear plan to fill the two vacancies on the board, how credible the figure for R111 million net profit after tax was, what the job creation targets were, what criteria the PIC used to allocate investments so as to assist development, and what were the bench marks and who set them. Members appreciated the elaborate, precise, and quantitative presentation which really assisting Members in checking on the Corporation’s progress, but failed to understand many of the acronyms, and asked for elucidation to enable Members better to understand the presentation and discussions. Members appreciated the Corporation’s efforts in developmental investment, but sought the clear alignment of the Government Employees Pension Fund and the Public Investment Corporation. The Chairperson thought it important to make a visit to the PIC to obtain a deeper understanding of its work and give informed advice. Priority number one in the country was job creation; 50% of job creation would not be in corporate South Africa, but in the development of small, medium and micro enterprises to which resources should be allocated. Job creation must be measurable.  The financial sector in this country did not accept that it was its responsibility of assuming the risk of developmental issues. This was left to state owned enterprises and development finance institutions.

The Deputy Minister pointed out the importance of the Financial Services Board as a regulatory institution of the non-banking financial sector. In these challenging economic times, its legislative mandate was clear and crucial.  The Chairperson of the Board said that every South African was impacted by its work, which, however, was taken for granted. The Chief Executive Officer said that the Board was proud of what its pioneers had achieved and what the present staff continued to do. The Board indicated its various departments, including all the collective investment schemes, the portfolio or the investment managers in South Africa, the insurers, the pension funds and the friendly societies, financial advisers and the intermediaries. The intermediaries were the latest addition to the Board's regulatory mandate. The Board explained its legislative mandate from 1990. The Board believed that internationally and at home the Board was regarded highly. South Africa was in the top ten worldwide of countries with well-regulated pension schemes, and was rated by the Organisation of Economic Cooperation and Development as the best in consumer education on pensions. The Board would participate with the Organisation in a conference on pensions in October 2011. Members had previously accused the Board of not really touching the matters that concerned the ordinary people of South Africa. The Board had therefore promised to use the churches and the traditional leaders to that end and would report further in its next annual report. In accordance with the guidelines from the National Treasury, the Board was in transition from three year to five year strategic plans.  All its Acts and actions were focused towards a financially sound investment environment in South Africa and protecting the consumers of financial services. The Board’s structure was described. As with the Public Investment Corporation, the skills needed by the Board were not easily accessible. It sought the kind of individual who could be a judge: individuals who would do their work without fear or favour or prejudice to other people. One needed a thick skin as insulation as insults were thrown at the staff of the Board on a daily basis. The Board sought the establishment of university courses to graduate regulators. The Board promoted consumer education and protection.  The Board was worried about fraud and theft especially as they affected pension funds. There was need for a serious discussion on the pension industry. The Board needed the Standing Committee’s support, because, it alleged, the perpetrators seemed to think that they could run to individual Members of the Standing Committee. The issue of the curator fees had been ongoing. The Board stood up and fought against liquidation. Notwithstanding its challenges, the Board was steadfast in developing a regulatory framework to include the regulation of credit-rating agencies, hedge funds, and the promulgation of the Financial Market Act, which would replace the Financial Securities Act.  Other major initiatives taken by the Board included the amendment of Regulation 28 of Pension Funds, continuous professional development and regulatory examinations for key individuals in the financial services industry. It was hoped that more foreign and local investors would be drawn into South Africa’s markets. The Board had set up an enforcement committee which empowered it to impose administrative penalties for contraventions.  The Board was developing relationships with other regulators, such as the South African Reserve Bank, and also with the Financial Intelligence Centre, and with international organisations. The Board’s information and communication technology systems needed to be revamped and it envisaged a move towards something like the South African Revenue Service e-filing system. The Board had budgeted for a deficit. The Board emphasised treating customers fairly. The guiding line must be that one could be confident enough in the integrity of a financial product to sell it to one’s mother or father.

Members asked about the distinction between insurance and assurance,
appreciated the work of the Board, asked for more information about progress on new legislation,  asked about the roles of the Ministers of Trade and Industry and Health in relation to the Board and the regulation of medical aid schemes, noted that the Board had asked for the Standing Committee’s support, asked how the Board’ strategic plan was legally proper for the Standing Committee to consider without being properly signed-off, failed to detect adequate time frames in the plan - in certain focus areas it was ‘just a blank’, and sought a more formal way of communication between the Standing Committee and the Board, more especially where individuals were used to hinder the work or the performance of the FSB; it was worse if those individuals were alleged to be Members of the Standing Committee. A Democratic Alliance Member asked for a concrete response to his question on the unallocated surpluses: 4 000 ex-workers of big companies in the clothing and poultry sectors had applied to the Board, apparently without success. The Chairperson said that if there were Members of Parliament who put pressure on the Board it must report them to him. Pensions needed a national dialogue.


Meeting report

Apologies
Apologies were received from Mr S Swart (ACDP) and Dr D George (DA).

Introduction
The Chairperson welcomed
the Hon. Nhlanhla Nene, Deputy Minister of Finance, who was also present in his capacity as Chairperson of the board of the Public Investment Corporation (PIC), delegates from the PIC, and Members.

The Chairperson pointed out that it was much more convenient for Members if copies of presentations could be provided to the Standing Committee well in advance.

The Chairperson emphasised the importance of the Public Investment Corporation (PIC) and the Financial Services Board (FSB) which like all institutions in the Treasury family formed the engine room of economic activity in this country. It was vital for the health of the economy that the strategic objectives of these institutions were aligned to the developmental objectives of the Government.

Public Investment Corporation (PIC). Annual Strategic Plan 2011. Presentation
The Deputy Minister, in his role as the Chairperson of the PIC, introduced the non-executive directors. The list of the delegation was provided in the presentation document. Among the non-executive directors were Mr Zakhele Sithole, Mr Veli Ntombela, and Mr Patrick Mngconkola, who was a member of the Government Employees Pension Fund (GEPF) board. The PIC board had taken a decision to cross-pollinate the boards of the GEPF and the PIC in order to strengthen their relationship.

The Deputy Minister, as Chairperson of the PIC, said that since corporatisation, the PIC had established a record that was living testimony to its attempt to talk to the agenda of Government. In particular, in the corporate plan being presented, the PIC was beginning to talk more to this developmental agenda than in the past, both because of its mandate, and also because of its location as an asset manager that mainly invested in the GEPF.

Mr Elias Masilela, Chief Executive Officer, PIC, introduced three members of the management team. These were Dr Daniel Matjila, Chief Investment Officer, Ms Petro Dekker, Acting Chief Operating Officer, whose appointment was effective from that day, and Ms Kameshni Naidoo, Chief Financial Officer, CFO.

Mr Masilela mentioned that the presentation was in three parts– the corporate plan and key elements, what had happened since the PIC previously submitted to the Standing Committee, and looking forward. Thereafter, he referred to the organisation’s vision and mission (slide 5). The PIC was a key asset manager for the sector and was owned by the state (slide 6). In this regard the average person on the street would identify tangible things that touched the souls of South Africa. Mr Masilela referred to investing on the rest of the continent of Africa and gave an overview of clients: the GEPF represented 90% of assets under the management of PIC.

The distribution of assets was getting more critical going forward. Currently the bulk of these assets were directed to local entities and bonds. The PIC could fulfil its mandate only if financially sustainable.
It was important to be able to deliver on an ongoing basis so the PIC needed to ensure that it had sound systems and not exist in isolation. The PIC needed to ensure that it had the right skills, and achieved a balance at being commercially and socially driven. Information Technology (IT) was one of the biggest drivers. Mr Masilela outlined human resources (HR) and IT support plans.

It was essential for the PIC to remain financially healthy. However, the PIC expected a reduction in net profit. PIC wished to emphasise that it would not be declaring a dividend to Government (slide 14).

Mr Masilela referred to the importance of building social infrastructure. The next generation must benefit, otherwise it would be a serious indictment on today’s generation. There were no areas in which the PIC could not operate. The PIC could come back and talk about the details of these projects. There were three big projects. PIC was almost at the tail end of an institutional transformation.

The PIC reached its 100 years anniversary on 02 May 2011. The average South African was touched by tangible investments. On 07 June the PIC would complete the transaction of the Victoria and Alfred  (V & A) Waterfront, Cape Town, which had many facets to it as it was a housing and cultural and tourist contact point.

Mr Masilela noted that the expertise in the PIC might have to be expanded. In the long term, having considered the global and domestic environment and the expectations of South Africans, the PIC had to decide what it wanted to do as an institution. It had had to extend its outlook from three years to ten years. The ten year outlook basically responded to the underlying understanding that with the GEPF as the biggest supplier of assets to the PIC, the PIC needed to take a long term view. Three years was not long enough. The PIC now had a ten year programme which it was trying to grapple with and which was partly to respond to the developmental investment agenda. The PIC had much to do in order to live up to that ten year outlook, for example, to identify partners.

As part of the Developmental Investment Policy (DIP) it was necessary to externalise assets; it had already begun doing this. Part of this was investing some of these resources on the African continent. That meant that the PIC had to increase its capability in understanding an analysing the different organisations that it would be going into. The partnership engagement was taking place both within South Africa and outside.

The PIC was determining its capacity requirements for the changes in the investment and risk environment– which meant that risk management would also have to change. It was unlikely that the PIC would be able to deliver on all its obligations while operating from Pretoria: it had to ask what its geographical footprint was supposed to be for the future.

Underlying all this was the need for changes in systems, especially in regard to information technology (IT), in order for the PIC to be predictable and avoid any errors: all this required a huge overhaul. Probably before the PIC’s next visit to the Standing Committee, it would have achieved substantial progress in this direction.

Discussion
The Chairperson thanked the Deputy Minister for finally making sure that the PIC had a permanent CEO. He observed that Mr Masilela shouldered a huge responsibility as the CEO and, as such, the accounting officer. 90% of what the PIC managed was from ‘the toiling masses of the country who had nothing to loose but their chains’ a slogan that the Chairperson said was coined in the trenches internationally.

Mr N Koornhof (COPE) asked what ‘impacted by the acquisition of CBS’ stood for (slides 13 and 14). Why was it a high cost low margin business?

Mr Wayne van der Vent, General Manager: Properties, PIC, replied that CBS Property Management was a property management company and the final stage of the institutional consolidation of properties that had been raised under the intervening issues. It had been a property management business that carried out the business of issuing rental statements, maintaining the properties, and related issues. As the number of properties had increased over the past few years through acquisitions, it had been necessary to increase the scope of that business, and so CBS was acquired from the GEPF; because when the PIC acquired a set of buildings for the GEPF in 2007 it came with a team of people and PIC separated that team of people from the asset while the asset remained at the GEPF. However, CBS Property Management had been a property management business and was labour intensive with many people working in it compared with the asset management end of the business. The fee earned from the CBS for property management was also markedly lower than the fee earned for asset management. There were two fees earned from the GEPF: one for property management and one for asset management. So the profit margin on the property management end of the business was low for two reasons. One was that the fee was quite low, and the second was that property management was quite labour intensive.

The Deputy Minister trusted that this explanation was sufficient.

Mr Koornhof asked why the operating expenses were so high (slide 13).

Ms Kameshni Naidoo, Chief Financial Officer, CFO, replied that the financial strategy of the PIC had to be closely aligned to the business strategy and the growth plans in the business. For a CFO one of the principal aims was to make profits, but that aim had to be tempered by what the business would like to do. That would be seen as clearly reflected in the operating expenditure line.  If one looked at the growth in revenue, the revenue was a function of the asset management. So as asset management grew, so did the figures.

The Chairperson observed that operational expenses were almost 40% and queried why this was the case.

Ms Naidoo explained that revenues were increasing because of acquisitions in the property business and the asset management growth. The assets in the management growth came from the projections in the PIC’s equity portfolio and its fixed income which was its capital markets and its bonds which were the main driving factors. Generally PIC’s revenue was volume based, since its fees were generally lower than the market’s fees. Secondly, if one looked at the PIC’s operating expenditure line, PIC was driven by employee costs and by its investment in infrastructure. If one considered PIC’s human resources (HR) costs as a percentage of revenue, 55% of the revenue was allocated to employee costs. If one considered the PIC’s IT infrastructure, 10% of the PIC’s revenue was allocated in investing in systems that allowed the PIC to offer sound, accurate and reliable financial reporting to its clients. Those two amounted for 65% of the PIC’s revenue, which at the operating expenditure line became 85% of the PIC’s operating expenditure, which in turn was made up of PIC’s employee costs and its infrastructure. That resulted in quite a high number of the entity’s operating costs reflected by fixed costs.

Dr Z Luyenge (ANC) appreciated the elaborate and precise presentation. He was excited by the way in which the PIC presented its objectives and goals. The quantification really assisted Members in checking on the PIC’s progress and was ‘progressive’.

Dr Luyenge asked if the PIC had a retention strategy for the existing staff to ensure that the prevailing climate was sustained.

Ms Petro Dekker, Acting Chief Operating Officer, replied that the PIC did have a retention strategy. It had an employee value proposition that had been rolled-out. Three of the bigger components of this strategy were bench marking remuneration philosophy and a short-term and long-term incentive scheme rolled out in 2009/10. These initiatives were very successful. Over the past three years the staff turnover reduced from almost 20% to 8.6% as at 31 March 2011. 

Dr Luyenge asked the PIC to reflect on the staff establishment. In addition, Dr Luyenge applauded the PIC for appointing a permanent accounting officer instead of continuing with an acting one.

Ms Dekker said that on average the PIC had a vacancy rate of 27%. However, that included new business for the new three years.

The Deputy Minister said that there was a whole section on HR in the corporate plan.

Dr Luyenge referred to the upcoming Conference of the Parties (COP) 17 in South Africa. Had the PIC set itself any tangible goals in ensuring a contribution in terms of the green economy?

Mr Masilela replied that the PIC was in the progress of putting together an environmental sustainability policy. Once that was in place, it would give the PIC a very good indication of what the PIC ought to be doing. However, when one reviewed the debates and discussions that were taking place one of the challenges was funding technological advancement through making sure that production was sustainable and efficient in the future. The PIC saw that as a very key role for itself. However, technological advancement was not the only objective. There was need for some form of regulation to support it. Engagement with the public sector, the policy-making part of the economy, would ensure that the PIC could reach the next level of sustainable investment. 

Mr D van Rooyen (ANC) concurred with the Chairperson and welcomed Mr Masilela.

Mr Van Rooyen asked about fluctuations in the assets managed by the PIC (slide 7). He wanted Members to be informed about factors attributed to these fluctuations with reference to the Unemployment Insurance Fund (UIF) and the Compensation Commissioner. On one side there was positive fluctuation, but on the other side there was negative fluctuation.

Dr Daniel Matjila, Chief Investment Officer, PIC, replied that this was a technical issue in so far as it was a function of markets. It was related to the nature of the mandates that the PIC was managing. At any time when equities did well, the GPEF portfolio became bigger relative to the other clients’ portfolios. One would see a drop in the percentage allocation. When equities did badly, one would see the others increasing, and that fixed income did well. It was just a technical matter.

Mr Van Rooyen said that it was clear that the PIC would be incurring many expenses around IT infrastructure. The increase was close to 69%. He asked what the current status of IT infrastructure was in order better to understand why there was such a quantum link from the baseline.

Ms Dekker replied that over the past five years the PIC had implemented most of the required systems to support the investment process and the operating environment. There were still some big systems that needed to be rolled-out over the next year. Thereafter, the PIC could focus on automation and system integration.

Mr Van Rooyen asked about the impact of dividends not being declared for this financial year (slide 30). Here there was an indication that for 2011 there would be a net profit after tax of 54.17%. He did not know if the PIC wanted to accommodate projected expenses. He wanted to know what the impact of not declaring dividends.

The Deputy Minister replied that Mr Masilela would explain not declaring the dividend. The declaring of the dividend was in terms of the legislation and PIC was referring here to declaring to the shareholders and not to the clients. With the clients it was meeting the targets and benchmarks which were of concern.  However, declaring of the dividend was to the shareholder, which, in this case was the Government. That was only done if there were particular requirements to be met as regards declaration. Declaring was a matter of informing Government that whatever remained was for the sustainability of the institution.

Mr Van Rooyen asked if there was any clear plan to fill the two vacancies on the board.

The Deputy Minister asked Mr Masilela and members of the PIC team to respond.

Mr Masilela asked if he would be allowed to delegate upwards.

The Deputy Minister responded that the board was awaiting the outcome of the Cabinet process to which the latter was giving attention, and the matter should be reported to the Standing Committee quite soon.  

Mr S Marais (DA) asked how credible the figure for R111 million net profit after tax was (slide 13). This figure was unaudited. What was the possibility of actually realising this figure?

Ms Naidoo focused on the net profit after tax. The 2011 figure was indeed unaudited.  As CFO she normally made cash flow forecasts as well as prepared the financial statements. She had forecasted what PIC was going to close on, as well as declared financial statements for audit purposes, and these were the numbers that she had put down. When the PIC returned for presenting its annual report, one would then see the final result of this.

Mr Marais referred to the budget for 2012. He asked the PIC to explain the enormous expected increase in revenue. These were difficult economic times. Nevertheless, the PIC was budgeting for a quite substantial increase in revenue. This sounded contradictory. He noted a decrease in net profits. If PIC did not declare a dividend now, there was no justification in declaring dividends up till 2015.  If PIC was an investment corporation and a fund manager, then PIC must perform and deliver dividends and profits to its clients.

Ms Z Dlamini-Dubazana (ANC) observed a negative figure of about 47.75%, yet later the PIC spoke about its increased revenue (slide 13). What factors was the PIC going to use to ensure that this increase did take place.

Ms Naidoo replied that the budget for 2012 showed a marked reduction from 2011. This was related to the PIC’s business strategy as well as other important factors. Firstly, there was no dividend. Previously, PIC possessed Advent, which was a property business which had been decorporatised into the PIC. Also the PIC had dividends reflected in the revenue line. As PIC ‘ramped up’ it had lower investment income levels projected for its capital investment programme for its new building over the next few years. This translated into a lower net profit together with the effects of the increased operating expenditure. If one considered PIC’S dividend position, PIC had a dividend policy that had been agreed with its shareholder, which laid down various components of how PIC arrived at a projection as to whether PIC declared a dividend or not. That was based on various models around the projection as well as the need for the PIC to remain financially sustainable, with neither excessive profits but a middle of the road solution. Also if PIC ‘ramped up’ on capital expenditure it would want to do it internally-generated using PIC’s own reserves as opposed to debt funding or looking to the shareholder for further cash injections. That culminated in final numbers or assessments around dividend projections for the next three years. (Slides 13 and 14.)

[Please see also the Deputy Minister’s response to Mr Van Rooyen above.]

Mr Marais said that at this stage it seemed as if, for the GEPF, it was quite a risky investment, because these funds needed to grow as well and increase in value, and if these were the PIC’s projections, also in dividends, it had to be asked if this was in the best interest of the Government workers in terms of providing for their pensions. There were some very hard questions that one must ask and receive answers.

Mr Marais noted that the PIC wanted to expand and asked what made the PIC different from other fund managers in the private sector. There were enormously successful fund managers. At this stage it seemed that the PIC’s capabilities for drawing investments from anywhere else outside the Government sector were extremely limited. Therefore it had to be asked how the PIC could see itself as a serious role player in this market. He asked why the GEPF put its money with PIC if it could obtain better returns from other fund managers with a broader portfolio not only in terms of from where they obtained investments but where they invested money and where they had successes in terms of profitability and dividends. These were was the hard questions that one must ask. As the PIC had rightfully said, one of its objectives was developmental, and developmental was from an economic perspective a higher risk. This was a natural phenomenon. How would the PIC be able to draw from outside the state fraternity or environment to enable it to develop into a serious stakeholder and role-player?

The Deputy Minister pointed out that the PIC’s clients were the happiest ever. Perhaps Mr Masilela and Dr Daniel Matjila, Chief Investment Officer, would explain further, but the biggest difference was that because of the legislation passed by Parliament the PIC was a corporation for public investment so it could therefore only invest public funds, so it was not in its mandate to do private investment. The PIC’s performance in the area of investing public funds spoke for itself. The PIC had done extremely well in meeting the targets for investing public funds. As the legislation and the name of the institution said, the PIC was a corporation for public investment. Drawing from the private sector would be outside the PIC’s mandate.

Mr Masilela added that a private asset manager had one objective – the bottom line, maximising profit, and such institutions tried to do that as well as they could. In contrast the PIC had a two-pronged objective: it had to deliver according to its mandate, and to be seen to contribute effectively and proactively to economic development. That made the PIC a slightly different animal. This was why the character and quality of people working at the PIC was slightly different. The PIC was ‘an asset manager with a heart’. This was how Mr Masilela defined the character of the people working at the PIC.

Mr Masilela also said that, if one considered the unit costs of the PIC’s delivery, starting from the premise that on a performance basis, the PIC performed as well as any other asset manager. However, if one looked at specific periods, particularly during the financial crisis, the PIC outperformed a lot of asset managers. Despite that, the unit costs of delivering in the PIC were a fraction of what one saw in the private sector, and that enabled the PIC to generate more value for the client.

Mr Masilela said that Members would recall that one of the triggers of the social security and retirement fund performance was the issue of assets, and one of the asset issues was cost. The PIC had been established to service the official sector. It did not compete with the rest of the asset management industry. This defined PIC’s unique relationship between the PIC and its principals – the entities which deposited their money with the PIC. The PIC had to understand its principals’ psyche and respond to their long term objectives. Key to this was to ask under what circumstances the owners of these assets wanted to retire. For example, with the GEPF, if the PIC was concerned only with the bottom line, and making the highest return possible, and ignoring social infrastructure and economic infrastructure, and ignoring the income inequality and inequities with which we were faced in the economy, it would mean effectively that the owners of this capital, when they retired, would be forced to retire behind high walls because of a high rate of crime around them. So the PIC’s thinking was to invest in such a way that one redistributed the wealth now so that when the owners of the capital, when they retired, could enjoy their retirement fully. This was the first area that was important to understand.

Mr Van Rooyen sought clarity on what the job creation targets were (slide 17). To what extent did these investments contribute to the objective of job creation in terms of numbers?

Mr Masilela replied that the PIC had set no job creation targets. The PIC was in the process of ‘putting flesh on its long term thinking’. Probably with time the PIC might be able to come up with certain targets. However, it was unlikely that this would be the variable that would drive the PIC. It would be ‘an added cherry on the cake’ if the PIC was able to push up employment going forward.

Ms Dlamini-Dubazana failed to understand many of the acronyms, and asked the PIC to expand them to enable Members better to understand the presentation and discussions.

The Deputy Minister apologised for the use of acronyms. He understood that the PowerPoint presentation was a summary of the corporate plan, which Members had, he took for granted, read extensively.

Ms Dlamini-Dubazana appreciated the PIC’s efforts in developmental investment. However, she sought the clear alignment of the GEPF and the PIC. She had studied the PIC’s objectives and its goals but wanted clarity on the PIC’s alignment with the developmental approach.

The Deputy Minister replied that there was a whole section in the corporate plan on the alignment of the GEPF and the PIC and the new investment strategy that had been launched. It was in line with the mandate given by the PIC’s clients. In the PIC’s accounting processes it reported on those targets set out by the clients.

Ms Dlamini-Dubazana was not sure, with reference to the national agenda in which job creation was the first priority and in which the allocation was R4 billion, as to what criteria PIC used to allocate those investments so as to assist development.

The Deputy Minister referred to risk management and Appendix F.

Ms Dlamini-Dubazana asked PIC to bear in mind that the majority of people came from the small, medium and micro enterprise sector, and asked to what extent the PIC was going to assist that sector, so that more jobs would be created.

This question was not responded to.

The Chairperson asked if there were any follow-up questions.

Ms N Sibhidla (ANC) referred to the first strategic goal. What were the bench marks and who had set them?

The Deputy Minister replied that the bench marks were set by the PIC’s clients as per its mandate.

Dr Matjila added that the PIC wished to outperform its benchmarks.

Ms Sibhidla
found the strategic plan difficult to follow in terms of her role as a Member of Parliament.

Ms Sibhidla asked about the third strategic goal. There was too much shorthand. She did not know if this was deliberate, so that Members would not play their oversight role effectively, or if it was just an omission. .

Ms Sibhidla asked about the risk management plan. Had the PIC’s risk management register been approved? If so, how was it going to be incorporated in the second strategic objective?

The Deputy Minister referred Ms Sibhidla to Appendix F of the strategic plan document. The register had been approved.

Ms Sibhidla asked if the PIC had received approval with reference to its second strategic objective.

Mr Marais asked if PIC was far from the 2% target for employing persons with disabilities. If so, what were its plans?

Ms Dekker replied that the PIC was engaged with recruitment agencies on engaging persons with disabilities. It currently employed three people with disabilities. Its previous building had not catered for people with physical disabilities. Now that it had moved it was actively recruiting staff with disabilities through the agencies.

Mr Marais thanked the PIC for its comprehensive response to questions on slide 13.

Mr Marais asked what the element was that had contributed to increased revenue.

Ms Naidoo referred to the portfolio allocation on slide 8. PIC considered the individual portfolio performance.

Mr Marais asked further about the effect of not declaring dividends. How much was that? What was the expectation from National Treasury?

The Deputy Minister replied that the PIC did not budget for dividends; it wanted to be sustainable so that it would not have to ask Government for bail-outs.

Mr Marais asked about the Isibaya fund. Mr Marais asked who the ‘other investors’ were (slide 18). 

Dr Matjila replied that this fund managed about 5% of GEPF assets, with a focus on developmental and high social impact investments. PIC would like to grow this portfolio over time. 

Mr Van Rooyen appreciated the detailed responses. He noted that this year was declared a year of job creation. However, job creation could be a key variable. How did PIC marry that to its approach? He felt that for the PIC job creation was a side issue and not a priority. 

PIC responded that it was very much alive to the importance of job creation, which was one of the criteria or gatekeepers considered when PIC received investment projects. PIC could not afford to turn a blind eye to job creation.

The Deputy Minister said that the potential for job creation was one of the most important criteria considered when investment proposals were evaluated, together with the sustainability of the project itself that was applying for funding from the PIC. The difficulty from the perspective of the PIC was to know the actual numbers of jobs that would be created.

Mr Van Rooyen could not establish any procurement targets for the PIC. One could not ignore the need for Black Economic Empowerment (BEE) as we were still in the process of development.

Ms Naidoo replied that PIC’s procurement targets were higher than those for the private sector. The PIC had achieved a level four, even with an ownership of zero. This was a very good level. The PIC’s rating agency was currently assessing its level for the current year. PIC expected to maintain or exceed that level.

The Chairperson thought it important to make a visit to the PIC to obtain a deeper understanding of its work and give informed advice.

The Chairperson said that priority number one in the country was job creation; there were people who were ready to work because they had nothing to do. He feared that the PIC, from its offices, did not see what was happening in the city, in which there were throngs and throngs of people. There were so many able-bodied people outside the labour market.

The Chairperson asked at what cost the V & A Waterfront had been acquired. That asset had belonged to the state before it belonged to the private sector.

The Chairperson said that the Presidential Review Commission on development finance institutions (DFIs) would help to align their mandates, otherwise past challenges would continue to present themselves.

The Chairperson said that 50% of job creation would not be in corporate South Africa, but in the development of SMMEs and resources should be allocated to them. Job creation must be measurable.

The Chairperson urged taking account of how transformed institutions were before investing funds in them. The financial sector in this country did not accept that it was its responsibility of assuming the risk of developmental issues. This was left to state owned enterprises and DFIs.

The Chairperson warned the PIC that it was necessary to strike a balance between exceeding clients’ expectations and developmental investments.

Financial Services Board (FSB). Annual Strategic Plan 2011. Presentation
Introduction
The Deputy Minister pointed out the importance of the FSB as a regulatory institution. In these challenging economic times, its legislative mandate was very clear and even more crucial. 

Mr Abel Sithole, Chairperson, FSB board, said that every South African was impacted by the work of the FSB. However, the FSB’s work, like water, was taken for granted. It was a very big institution that regulated all financial entities other than those entities regulated by the South African Reserve Bank.

Adv Dube Tshidi, Chief Executive Officer (CEO), FSB, referred to slides 3-4. This was what the FSB, which was 20 years old this year, stood for. It was established in 1991 by an Act of Parliament and was an independent public entity – independent, in terms of operations. Over the years it had developed a major presence in the regulatory space. Its core mandate was to regulate the non-banking financial sector in the best interests of the citizens of South Africa. It did much more than was obvious. The FSB was proud of what its pioneers had achieved and what the present staff continued to do.  

Mr Gerry Anderson, Chief Operating Officer (COO), FSB, indicated the position of the FSB in the broad regulatory structure of financial services (slide 4). Mr Anderson indicated the FSB’s various departments, including all the collective investment schemes, the portfolio or the investment managers in South Africa, the insurers, the pension funds and the friendly societies, financial advisers and the intermediaries. The intermediaries were the latest addition to the FSB’s regulatory mandate.

Adv Tshidi explained the FSB’s legislative mandate: he indicated the various acts from 1990. He gave a short briefing on what each act was all about.  He commented that he believed that the FSB was a very efficient and well respected non-banking sector regulator. It might not appear that way, but internationally and at home the FSB was regarded highly (slide 6).

During April 2011 the FSB had hosted a conference of the International Organisation of Securities Commission. This brought together the supervisors of the capital markets of the whole world. About 600 delegates came to Cape Town.  Members would be aware that the Johannesburg Stock Exchange (JSE) had been rated number one well-regulated stock exchange in the world. Two years ago South Africa was number two, behind the United States of America (USA). Moreover, South Africa was in the top ten worldwide of countries with well-regulated pension schemes, and was rated by the Organisation of Economic Cooperation and Development (OECD) the best in consumer education on pensions. The FSB would participate with the OECD in a conference on pensions in October 2011.

In the FSB’s annual report presentation, Members had accused the FSB of not really touching the matters that really concerned the ordinary people of South Africa. FSB had therefore promised to use the churches and the traditional leaders to achieve that. That process had started, and FSB would report further when it reported the Standing Committee on next annual report.

Mr Anderson said that the present strategic plan was for three years, 2011/14; the next plan would be for five, in accordance with the guidelines from the National Treasury. The FSB was now in the transitional period. The FSB had reviewed its vision, mission and values statement. Its vision was a sound financial investment environment in South Africa. All its Acts and actions were focused to that end. It sought to protect the consumers of financial services. Service providers must be financial sound. FSB looked at systemic risk and the interests of consumers.

Mr Anderson described how FSB was structured. It had a non-executive board on which a number of vacancies had been filled recently. It usually met five times a year. The executive committee (exco) of the FSB reported to the board. He described functional areas and support services, and the committees of the board – oversight committees and governance committees. All these committees were chaired by board members.

The FSB had prepared a draft of this plan by means of an interactive process; then it appointed a consultant team to assist and looked at previous strategic plans and annual reports. It looked at relevant source documents and followed the balanced score card approach. It was a participatory process in which the SWAT analysis and the environment were considered. FSB reviewed its existing plans and its scorecard. 

Adv Tshidi said that in preparing its strategic plan the FSB looked at its mandate and performance. In day to day language it looked at delivery to its real employer, the people. In that process of serving people, FSB created clear targets for each department and each staff member, and reviewed performance twice a year. With regard to internal environment it looked at the skills and resources needed to carry out its mandate. As for the PIC, the skills needed were not easily accessible. One was looking at the kind of individual who could be a judge: individuals who would do their work without fear or favour or prejudice to other individuals. For such kind of work one needed a thick skin as insulation as insults were thrown at the staff of the FSB on a daily basis. On this score, FSB was approaching a number of universities. It had put a course of study in place, and FSB hoped to sell it to one or all the universities in the country so that FSB could start to develop youngsters who would graduate as regulators. The Standing Committee would be approached shortly about this. Then FSB looked at the outside environment with a view to consumer education and protection.  It was the nature of the market that there would be some failures. Finally, there were some people who were hell-bent on committing fraud and theft. It happened across the board, but affected the pension issues in a big way. There was need for a serious discussion on the pension industry. It seemed that everyone wanted to put his hand in the till of pension funds. The damage they caused was massive. Something had to happen here. The Chairperson had challenged Adv Tshidi in a previous meeting to seek the assistance of the Standing Committee. The assistance that FSB needed was support, because for some reason the perpetrators seemed to think that they could run to individual Members of the Standing Committee to vilify those who were trying to control them.

Adv Tshidi said that the issue of the curator fees had been ongoing. He had explained it to the Standing Committee over and over again. There had that week been reports in the papers. The entities that had disappeared were now applying for liquidation. Once liquidation was granted, what chance did members of those funds have? Adv Tshidi had to stand up and fight against liquidation. If one did not fight liquidation, the money was gone, and the people were gone. Because of the functions of regulating on a daily basis, one very often had to request the help of very specialised people to investigate.  The FSB had to devise a plan to recover that money. It was in that process that the FSB needed the support of the Standing Committee. It would be helpful if the facts could be put before the Standing Committee as a whole. Adv Tshidi could not comment on any question until he had been to court; on these occasions it was reported in the media that Adv Tshidi had refused to answer questions and should be dismissed from the FSB. These were the kind of challenges that the FSB faced. However, FSB must work without fear or favour.

Mr Dawood Seedat, Chief Financial Officer (COO), said that 2010 would remain as a year of uncertainty in the memory of the investment community. In spite of the uncertainty, emerging markets fared much better than developed economies. Gross Domestic Product (GDP) was up in most economies, and South Africa’s overall share index had risen by 14%. South Africa’s market was also given a further boost when it was ranked as the world’s best regulated financial market. This accolade boded well for South Africa in terms of interest in South Africa’s equity market. In the context of the regulatory improvement, FSB had reviewed its parameters of regulation. Its new initiatives which coincided with its G20 mandate would probably give rise to new challenges for the FSB including resource and capacity constraints. Notwithstanding the challenges, FSB was steadfast in developing a regulatory framework which would include the regulation of credit-rating agencies, hedge funds, and the promulgation of the Financial Market Act, which would replace the Financial Securities Act, and would be in line with the International Organisation of Securities Commission directive.  

Other major initiatives taken by the FSB included the amendment of Regulation 28 of Pension Funds, FSB’s new financial soundness requirements, continuous professional development and regulatory examinations for key individuals in the financial services industry. In terms consumer education, the FSB conducted awareness campaigns of the financial products on offer. Although the benefits of consumer education, like the aim to treat customers fairly, could not be quantified, the impact on consumers would go along way to furthering the financial education of consumers. It was hoped that more foreign and local investors would be drawn into South Africa’s markets.

FSB had revisited some of its existing legislation. The most important in terms of the FSB Act was to set up an enforcement committee which empowered FSB to impose administrative penalties for contraventions of all legislation falling under the auspices of the FSB. This was significantly expected to improve the visibility of enforcement and act as a strong deterrent for non-compliance.   He referred relationships with other regulators, such as the South African Reserve Bank, and also with the Financial Intelligence Centre (FIC). He referred to relations with international organisations. FSB’s information and communication technology (ICT) systems needed to be revamped. FSB envisaged a move towards something like the South African Revenue Service (SARS) e-filing system. FSB attached great value to institutional development and becoming a value driven organisation. Management training and achieving financial sustainability was emphasised. Mr Seedat explained how FSB collected its levies, operational systems, managing its budgets much more efficiently, financial implications for the current period, financial implications in respect of the budget, and how the deficit was funded out of accumulated funds. FSB had budgeted for a deficit. Mr Seedat explained why.

Adv Tshidi highlighted treating customers fairly. The guiding line must be that one could be confident enough in the integrity of a financial product to sell it to one’s mother or father. This was the project that FSB had embarked on (slide 13). 

Adv Tshidi said that the FSB needed support on investor protection (slide 14). FSB would come back again with a number of requests for pieces of legislation to regulate credit agencies, micro insurance and over-the- counter trades. In terms of way forward, FSB had learned from the crisis and the guidance of the Group of 20 (G20) and the whole regulatory framework was going to be revisited. FSB had a three year plan to achieve that.

Adv Tshidi recommended that Members read a document on the FSB’s objectives. This contained 32 pages and was available at the Parliamentary Office.

Adv Tshidi invited the Standing Committee to visit the FSB.

The Deputy Minister thanked the Standing Committee and hoped that Members would take their lunch at the FSB so that they could visit the PIC afterwards. He referred to the various pieces of legislation in progress, including related legislation such as the Consumer Protection Act, the latest Companies Act – all of which spoke to how this area should be regulated and kept on a sound financial footing. In order to protect the most vulnerable, he was anxious not to delay legislation, but the Standing Committee would be fully consulted though the Parliamentary Liaison Office as to the time frame and given enough time to deliberate.

Discussion
After a burst of interference with the sound system, The Chairperson asked, with good humour, that mobile telephones be switched off: ‘Don’t leak our discussions!’
 
Dr Luyenge asked about the interpretation of insurance and assurance. Did car tracker policies fall into the category of insurance?

Adv Tshidi responded that the Board wanted to have the small print removed from insurance policies; because this is where the devil was housed. He gave an example of how these things could be cruel. There was a new tag that had come into the insurance area; this was ‘car-prehensive insurance’:  to the consumer this would mean that his or her car was comprehensively insured, but to the insurer it meant that the car must be comprehensively damaged before the insurer would entertain a claim. This was away from the normal thinking of the consumer. The Board had a huge task in this regard. 

Ms Dlamini-Dubazana appreciated the work of the FSB. She noted 11 acts, but FSB had about eight functional areas. Was each act being taken care of? She asked for more information about new legislation and progress with its processing.

Adv Tshidi responded that it was true that the functional areas were divided into eight slots, but there were many people in each and every slot. There were over 75 people in the section for financial advisory intermediaries. In pensions there was another 70. As he had said earlier, it was difficult to obtain the necessary skills. Retaining this people became a challenge because in the private sector such people had benefits such as share options. The regulator did not have such a good retention strategy and benefits for its staff. However, the Board had many staff members who had worked there from the beginning and were working well. With the new legislation, the Board would need more resources. For micro insurance it would have to create a new department. Once the Board was mandated to regulate market conduct, it would have to create a new department. For regulating credit agencies and hedge funds, it would need the required resources. However, the Board was developing people so that it could meet that challenge.

Ms Dlamini-Dubazana asked about the roles of the Minister of Trade and Industry and the Minister of Health in relation to the FSB. She noted the remarks of the Minister of Health the previous day on how people were exploited by the private sector. Was regulation of medical aid schemes included in the legislation that was to come?

Adv Tshidi replied that this was an issue that had to be resolved at the political level. The Members had heard about the demarcation line between insurance and medical schemes. To answer the question whether medical schemes were insurance business or not required political intervention. He gave a simple definition of insurance. Insurance was paying a premium for something that might happen in the future. If you followed that definition logically you might say that medical aid was insurance but there had been some debate and the two Ministers were in discussion to resolve that demarcation. The FSB hoped that this issue would be resolves.

Ms Dlamini-Dubazana noted that the FSB had asked for support, but said that everything came to Members through the Chairperson, so Members were aware of what was happening.

Adv Tshidi said that he would need guidance from the Standing Committee. His principal, the Minister of Finance was bombarded with questions which came straight out of court papers on issues that were pending, and on which the Board had to go to court. Of course, for the Minister to respond, he must come to the Board. Then the Board spent time going through those court papers preparing answers for the Minister only to come to the Standing Committee. ‘It goes on and on, and all the questions are – the slant is to defend the perpetrators.’ On this Adv Tshidi was pleading for support.  

Mr Marais observed that one could be proud of the FSB and the work that it had done. That South Africa was highly ranked in the world was ‘a feather in the cap’ of the FSB. He asked about slide 3, which referred to pensioners now being able to smile. In the last week he had seen people with ‘smiles from pain’ that, after so many years, nothing was yet happening with their surpluses. In August FSB had appeared before the Standing Committee and it was reported that R60 billion in surplus was still unallocated. Mr Marais had seen representatives of about 4 000 ex-workers of certain companies which were known. These workers had apparently been in touch with the FSB with very little or no assistance. The last letter that he had in front of him was dated 12 June 2010 and sent from the FSB to them. Since then it seemed that they had had no response. He knew that it was an enormously difficult task and the FSB obviously sat with big companies, but when it came to matters like this, there could be ‘no holy cows’, irrespective of, as it was put in the paper, ‘those with political connections’; because it was the poorest of the poor who were suffering. He had witnessed the agony of the people whom he had seen. It was indescribable. Eventually the FSB would have to interview them. It seemed as if currently and continuously they got to a wall and were frustrated and they said that it was because certain trade unions were involved and ‘they get blocked’; for whatever political reasons they did not get pleasure whatsoever. They claimed that they represented 4 000 ex-workers, predominantly in the clothing industry and the poultry industry. However, these were ex-workers of companies that still existed.  These were big companies with big margins of profits. How would the FSB deal with that? How would the FSB change their smile of agony into a smile of satisfaction? What was the commitment from FSB? What could we tell those people? One could produce the most beautiful strategies, action plans, goals and objectives, but if that picture that FSB had given was not translated into reality then it was a false claim that the FSB was making. This was the last thing that we expected from the FSB. All the other things that it had done were great. If we failed on that matter, then we would fail the people who needed help the most. He asked for a concrete response. 

Adv Tshidi replied that the surpluses issue was quite a tricky one legally. The FSB approved the submissions on the distribution of surpluses submitted by the trustees of the various funds. It was the task and the duty of those trustees to make sure that they dealt with the surplus issues, find people and allocate fairly who got what. Once that was done, the trustees made their submissions to the FSB and the FSB interrogated that.
The issue that FSB had been told was a problem was finding the former members, since a huge bulk of that surplus was there because of people who had left the fund. The trustees told FSB that establishing the contact details of former members was a huge problem. There was one fund with a surplus of over R20 billion and it had asked for extension after extension while it was dealing with the FSB actuarial department. Before the end of the year FSB was going to see to the distribution of this particular surplus. FSB had made recoveries of some monies looted from surpluses in the various funds. The FSB was supposed to go to court on 06 June 2011 on such a matter. Once FSB had extricated that money from the perpetrators, and reported how much it had recovered, then it had to start the process of finding the rightful owners of that money. That was another process. For two or three funds, the submissions were in at the FSB to distribute the surpluses. It was the commitment that the trustees to the rightful owners of those funds that needed to be demonstrated. The FSB had been quite accommodating where trustees were concerned. However, maybe the time had come, since the law allowed the FSB to do so, for the FSB, in cases where trustees were not doing their particular work in this matter, to remove them and move aggressively to appoint independent people to distribute the funds.

Mr Van Rooyen was not altogether comfortable in regarding the FSB’s document as a strategic plan. The first problem was the sign-off. He did not see how it passed the test for presentation without being properly signed-off. He even questioned if it was legally proper for the Standing Committee to consider it. 

Adv Tshidi assured Members that the strategic plan had been properly signed off.

Mr Anderson said that the Board had sent a soft copy of the document to the Parliamentary Officers, so the FSB had not scanned the signatures. However, the Board had now handed over the signed version. It was duly signed off according to the prescription of the National Treasury.

Mr Van Rooyen failed to detect adequate time frames in the plan. In certain focus areas it was ‘just a blank’.

Mr Anderson said that three pieces of legislation – the Financial Institutions General Amendment Bill, which contained amendments to most of those acts the FSB dealt with on a daily basis; the Credit Rating Agency Bill, and the Financial Markets Bill, which would replace the Security Services Act, were expected to be with Cabinet by the end of June 2011 and thereafter introduced into the parliamentary process. That was fresh news. The time frames were referred to in the document that Adv Tshidi had mentioned earlier. Page 10 of the slide presentation showed tasks, all of which had time frames, and every head of the 23 departments had to report and undergo monitoring as to progress. Moreover, the FSB had to report this kind of information to the Auditor-General.

Adv Tshidi said the FSB would ensure that this document was available to assist Members to measure what the Board had done by the time of the next annual report briefing to the Standing Committee.

Mr Van Rooyen sought a more formal way of communication between the Standing Committee and the FSB, more especially where individuals were used to hinder the work or the performance of the FSB; it was worse if those individuals were alleged to be Members of the Standing Committee; because reference was made to the alleged role of individual Members of the Standing Committee – he would appreciate if the leadership of the FSB found a better way of communicating this particular concern to the Chairperson of the Standing Committee, so that it could start adding value to this process; when one considered the immensity of the cases that the FSB was handling, he was worried, because one was dealing with people who might be qualified to be called criminals and there were threats to the lives of persons.

Adv Tshidi replied that, fortunately, the FSB had identified certain security concerns and taken precautionary measures. However, because of what was happening recently, the executive committee (exco) had deliberated on the question of security and concluded that the FSB needed to enlist the services of a security entity, and use it as and when the FSB suspected something untoward.

The Chairperson thanked Mr Sithole, Adv Tshidi, and the team. He acknowledged that the FSB’s work, the end product of which was protecting the consumer of financial services, was difficult. He also noted the need to protect investors’ money. He referred to people taking deposits without observing the Banking Act. He exhorted the FSB to be resolute in the face of threats. He said ‘Cowboys don’t cry.’ The FSB understood its responsibility very well. If indeed there were people, including Members of Parliament, who were putting pressure on the FSB, its response should be very simple: ‘You report to this Parliament through the Standing Committee on Finance.’

The Chairperson said that the issue of pensions needed a national dialogue.

The Chairperson and Members of the Standing Committee looked forward to visiting the FSB in its new offices.

The meeting was adjourned.

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