Public Investment Corporation responses to Standing Committee

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Finance Standing Committee

10 May 2016
Chairperson: Mr Y Carrim (ANC)
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Meeting Summary

The Committee was due to hear briefings not only from the Public Investment Corporation (PIC), but also from the Government Employees Pension Fund and the Government Pension Administration Agency. However, due to time constraints and a number of pointed questions put to the PIC, that some Members felt were politically motivated, the latter two presentations were not given but postponed.

The PIC explained that it managed the Government Pension Administration Agency and other funds. The core business of the PIC is investment management, and it has sub committees that handle separate portfolios of investment.  Its governance structures were outlined,  and it was noted that the PIC had been compared to its peers and there had been benchmarking done also on the Government Employee Pension Fund (GEPF) cost and returns of performance. PIC compared quite well with the top companies in the investment sector, while the GEPF showed a five year total return of 14.3%, compared to the global median of 9.9% and the peer group median of 10.1%. PIC also played a critical role in economic transformation and job creation, was partnering with very large listed companies and had transformed the number of investors on the stock exchange for greater black representation. It had created numerous  jobs in the housing sector and continues to do so. It had quite a broad leeway on investments, and learnt from its mistakes as it had to take some calculated risks. It had invested approximately R33.9 billion in numerous portfolios aimed to drive transformation and create jobs. The PIC has the task of taking calculated risks, but does not take risks that it cannot manage. It was pointed out that the mandates of the Unemployment Insurance Fund and  Compensation Commissioner were also similar, although the benchmarks and portfolios differed, but all depended on the country achieving real economic growth. The PIC addressed previous questions from Members around the initiatives to help SMMEs, transformation, and access to the banking sector by lower income sectors, as well as the results from Barclays and Anglo American activities on the stock market. Unlisted investments were also briefly described, noting that the rationale for transactions as well as costs, returns and current values must be carefully weighed. Questions in relation to student accommodation returns were also explained by noting that whilst PIC does work for students by way of loans, it does not expect a large return from the accommodation. The PIC assured Members that allegations that the PIC had transferred money to the ANC were currently being investigated by the Public Protector, and the PIC assured the Committee that the allegations were false.

A DA Member asked whether the PIC had directly or indirectly invested in any Gupta-owned enterprises, wanted to see confidentiality clauses, insisted that they should be disclosed to Parliament, and wanted to know the current outstanding amount of the shareholder loan, and when payment could be expected, as well as the effect of “9/12” dismissal of former Finance Minister Nene on the PIC asset portfolio. In answer other Members urging the PIC to be careful when answering the questions, this Member asked whether this implied that information was being hidden, and the Chairperson made the point that the views were those of the Member individually and not of the whole Committee. Concerns raised by other Members were public servants who fell into the “missing middle” and were unable to afford housing, when the smaller players would start to get the support offered to large players, how the PIC was assisting rural communities and women in mining. Other questions related to how investments could be assessed against cost containment, the position of SAB Miller and whether buy-in to government bonds was encouraged. Some Members thought benchmarking should not be done against USA and Europe, others felt that it should strive to benchmark against world best. They wanted more information on the main critical areas in relation to unlisted investment, comment on what it was doing to help counter food security issues. One Member pointed out that although this Committee had an oversight responsibility, it should not attempt to act as a second board for the PIC. The Chairperson asked the legal advisors to consider whether the PIC was obliged to disclose certain information. PIC was asked how much was considered to be “good bank” and “bad bank” amounts, and their ratio. The PIC replied it would give the amounts of loans outstanding after the meeting once its independent internal review was concluded.  

 

Meeting report

Public Investment Corporation (PIC): briefing
Dr Daniel Matjila, Chief Executive Officer, Public Investment Corporation referred Members to slide 5, which set out that the Corporation (or PIC) had been set up to manage the Government Pension Administration Agency (GPAA) and other funds. The core business of the PIC is investment management, and it has sub committees that handle separate portfolios of investment. The board of the PIC has been strengthened with five additional board members and this has given the PIC better capacity to deal with management and risk investment properly. The Human Resources department is important to ensure that  employees are well taken care of and supported, in order for the PIC to function swiftly.

The executive committee is responsible for the day to day operation of the PIC.  The investment decision making process goes through the mandates of the clients and makes sure that any proposals are in line with this, and then through policies and frameworks, and finally, the transaction approval process is done, from the executive committee, through to the Government Employees Pension Fund (GEPF) depending on the size of the exposure.

Dr Matjila noted that there had been comparisons between the PIC with its peers, by the GEPF, and there had also been benchmarking done, comparing GEPF's cost and return performances. In terms of performance, the PIC compared fairly well with the top companies in the investment sector. The GEPF five year total return was 14.3%, which was above the global median of 9.9% and the peer group median of 10.1%.

The PIC also played a critical role in economic transformation and job creation. It was currently partnering with some of the listed companies such as AB-Inbev. In the listed equity, PIC has transformed the number of investors on the stock exchange to reflect more black people.

Dr Matjila reminded Members that the PIC had presented some of its strategies in the last Committee meeting that it had attended so that it would now focus on the slides in relation to  economic growth, job creation and property investment. In the last meeting, the PIC mentioned that it had created numerous jobs in the housing sector and continues to do so.

Some investments work and others did not. The PIC was learning from its mistakes as it was  investing. The PIC has invested approximately R33.9 billion in numerous portfolios aimed to drive transformation and create jobs. The PIC has the task of taking calculated risks, but does not take risks that it cannot manage. The mandate of the PIC allows it to invest in almost every sector except in arms and game reserves, so by and large the PIC has a lot of flexibility in investments.

The Unemployment Insurance Fund (UIF) has a similar type of mandate and invests in developmental investments to create and save jobs as well as drive the economy. The mandate for the Compensation Commissioner is also similar in terms of the type of investments. Economic growth is necessary for the PIC to grow. Without economic growth it becomes hard to make worthwhile investments. The benchmarks and portfolios may not necessarily be the same, but the GEPF and UIF also perform in line with the mandate of their clients.

The total allocation for PIC investments, including GEPF and UIF, is approximately R400 billion. The PIC is definitely looking at partnering with other stakeholders to make sure they make maximum benefits.

There was a concern expressed that there is too little of an initiative to increase the amount of supplies from Small Medium Enterprises (SMMEs), and this is something the PIC is working on. It is currently in discussion with groups such as the Spar Group and Woolworths to make sure that small businesses are represented.

The portfolio of listed investments in the last five years had grown from R495 billion to R892 billion, with a 12.5% growth per annum. The PIC saw that continued access to the banking sector by low income sectors was important and strategic for growth. Anglo American had a profound impact on South Africa given that Anglo’s assets were held in this country. Barclays Africa has been in the news recently, and was selling down because it wanted to de-consolidate. Shares were being sold on the market. PIC was of the view that as Barclays Africa sells down, the liquidation will force an increase on the JSE, and it is important for PIC to participate further since more shares will be made available on the market. Overall, PIC has invested in many international and local companies that have assets within South Africa in order to drive economic growth and increase job creation.

In relation to unlisted investment, the main question was with the rationale for transactions as well as costs, returns and current values. The history of these businesses was from 0% interests, since they are international and they do not align with BEE mandates. The PIC holds to the principle that there is a need for BEE compliant businesses, so that PIC attracts a portion of the government expenditure. Unlisted investments have large share of the market, with roughly R55 billion allocated to this form of investment.

There was also a question with regard to the returns expected from student accommodation. The approximated return is between 9% and 14%. Not a lot of money is expected to be made from student accommodation because the main focus here is the students, since they are the future of the economy.

The PIC does engage quite extensively on governance frameworks to ensure the right mix of skills, qualifications, experience, background and gender. There was a question raised on whether the PIC transferred money to the ANC, for whatever the purpose, but that issue is currently with the Public Protector and management was confident that those allegations are false.

Discussion
Mr D Maynier (DA) asked what the effect of the decision on “9/12” [dismissal date of former Finance Minister, Nene] was on the value of the assets under the management of the PIC. He then pointed to page 103 in the presentation document which dealt with the question of the Guptas and quoted the PIC’s reply was that “to the best of our knowledge, the PIC has not made any direct investments in a Gupta owned entity”. This meant it is possible that the PIC has made a direct investment and also that an indirect investment may have been made in a Gupta owned entity. He asked for response to his observation. He would assume that the PIC initiates or requires a confidentiality clause before engaging in investment, and he asked to be provided with a copy of the clause. Mr Maynier asked whether the GEPF is comfortable with the fact that the PIC has confidentiality clauses in place and refuses to disclose these to Parliament. He asked what the current outstanding amount of the shareholder loan was, and when the payment would be required for this loan? He also noted that Erin Energy had recently made an R858 million loss and had R60 million worth of cash available and liabilities of around R2.8 billion. He asked whether the PIC regretted making an investment in Erin Energy and if something could have been done during their due diligence process to prevent their losses. He also wanted to know more about the decision taken to remove the former Minister of Finance. He finally asked on the question of documents that the Committee had requested the PIC to search for. Of all the documents discovered, the PIC did not discover the “Government's strategic intent statement” and asked for reasons the document was not discovered.

Ms P Kekana (ANC) noted that the PIC always referred to “calculated risks”. Whilst she was aware that the investments made by the PIC were providing good returns, she had a concern, and wanted the PIC to look into the fact that public servants were not able to afford housing, and wanted to know what the PIC was doing to try to mitigate this situation. She noted the mention of  black asset managers and the fact that the PIC had started making its mark felt on that point. She also noted that  government wanted to assist the less advantaged to have a share, and thus asked when this would happen, and when the PIC would begin to assist the smaller players in the same way as it was dealing with  big firms such as Lonmin. She asked where the PIC stood on assisting rural communities with the prime land being given to them for agricultural activities. Finally she noted that she would continue to be worried about its true attention to necessary matters until such time as she could see it dealing properly with women in mining, and assisting to close the gap in public property ownership.

Ms T Tobias (ANC) asked how, when dealing with unlisted investments, the PIC would disclose all its information.  Given the cost containment measures, how could the Committee look at the output of investments? She also wanted more clarity on the performance of SABMiller. Finally she asked why the PIC was not encouraging the public to buy in on government bonds?

Mr B Topham (DA) noted that  all the political parties in South Africa agreed on the problem of unemployment and the need to have economic transformation. The main issue was how economic transformation would be measured?  Commenting on the benchmarking, he said that it was impossible to compare South Africa with the USA or Europe because interest rates and inflation rates were different. An important comparison would rather be to compare South African markets with other markets on the same level. While confidentiality agreements had a place, for a number of reasons, these might be concerns, but at the moment government was a major investor and it was necessary for people to know why and in what South Africa was investing.

Dr B Khoza (ANC) expressed her view that if comparisons were to be made, then she was pleased that the PIC was comparing itself with the best in the world. With regard to unlisted investments, she wanted to understand what were the main critical areas that the PIC looked at within its internal credit system. She believed that the PIC was doing well. She asked for the PIC’s take on the global investment space, given the current environment with the loss of 500 000 jobs? Given the major threat of food security, she also asked what the PIC was proposing for getting more black people to participate in the economy.

Mr S Buthelezi (ANC) said that no matter how hard they tried, Members of this Committee would not be able to do the job of the PIC, but Members had oversight over the PIC. The board of the PIC had a fiduciary responsibility and this Committee should not be attempting to act as a “second board” of the PIC. He asked the PIC to provide its guarantee to the Committee that there were indeed checks and balances in place. He asked what type of training was given to board members, so that they understood that their mandate went further than the bottom line of the business, and also addressed transformation. While focusing on job creation, the PIC needed to find creative ways of including small businesses and integrating rural communities.

The Chairperson asked why Dr Matjila thought that the PIC was subject to constant criticism? He agree that it was important to have BEE in the sector and to be balancing the different strata of investment. He asked if the PIC had any role in increasing the share of rural businesses.

Mr A Lees (DA) thanked Dr Matjila for such a comprehensive report, despite the fact that there were some shortcomings. He asked how much is “in the good bank” and how much is “in the bad bank”, how these figures related to each other proportionally, and what were the chances of PIC recovering these amounts.

Dr Matjila firstly responded to the questions of Mr Maynier, and said that the PIC stood by its earlier answer that it had not invested in any Gupta owned enterprises.

Ms T Tobias requested that the PIC think critically and carefully, and would not become entangled in its answers relating to any alleged Gupta investment.

The Chairperson agreed with Ms T Tobias.

Mr Mcebisi Jonas, Deputy Minister of Finance also supported the Chairperson in this remark.

Mr Maynier asked why the PIC needed time to think through its answer, and whether this implied that the PIC was not sure of its facts.

The Chairperson addressed the innuendo in the answer, but said that he was agreeing with Ms Tobias that a carefully worded answer was needed, and the majority of the Committee would agree. He told the PIC that the views being expressed by Mr Maynier were his own personal views.

Dr Matjila responded that the Committee must not read into his statements any insinuation that the PIC is protecting information that should by nature be public information. What the PIC was being asked to do could cross the line of disclosing private information. The names can be made public, but the terms and condition of the agreements cannot be made public.

The Chairperson addressed the need to have the legal rules for the Committee, to distinguish what was the role of this Committee, and what was the role of Parliament, in relation to the PIC, as well as looking to the issue of why documentation was not being disclosed. If it was found that legally, the documentation should be disclosed, then the Committee would follow the appropriate steps to obtain such information.

Ms T Tobias agreed that if the PIC does not disclose information, there would have to be justification given for not doing so.

The Chairperson commented at this point that although the GPAA was due to make a presentation to the Committee, it would not be able to do so. There had been continuous debate between Committee Members that had resulted in the PIC not being able to respond to all the questions. The Committee would therefore request the GPAA to return and make its presentation to the Committee at a later date. It would be preferable if the PIC could use the time still available to finish its responses.

Dr Matjila continued to answer the questions put to him. He noted that the PIC was indeed giving black people as individuals and small enterprises an opportunity to grow on the JSE, similar to the kind of support that many of the big businesses had had previously.

The PIC had recognised the need for products for GEPF members. In relation to its assistance to students, the PIC had provided Eduloans for students to study.

The PIC noted that the impact of “9/12” had led to a situation where the PIC recorded significant losses. The GEPF lost R95 billion, the UIF lost R7 billion, and Compensation Fund lost R3 billion. The Compensation Fund has two funds, one is a pension fund and the other is a cash fund. The pension fund lost almost R1.2 billion. Following that incident, there has been an increase in profits being recovered, even more than what the PIC had lost within those two days.
 

Mr Maynier mumbled something that was not clear enough to make out since his microphone was not on, but the Chairperson intervened to say that if anyone had evidence that proves contrary to the amounts the PIC stated it lost, then this needs to be brought to the attention of the Committee.


In terms of agriculture, there is a wider strategy in place to grow the economy and stimulate growth.

PIC was looking into the issue of spaza shops and rural communities, and the SMMEs are definitely part of the initiative to integrate on the market.

With regard to SABMiller, he explained that AB-Inbev will be taking over SABMiller. The PIC had requested that AB-Inbev be listed on the JSE.

Dr Matjila then addressed the question of “good and bad” banks. In relation to African Bank, there was currently a debit balance according to the books of around R5 billion. PIC would capitalise on the good bank books, and the positive balances here were around R20 billion.

Dr Khoza interjected to ask whether the PIC was saying that it was only on the side of the good bank and not the bad bank.

Ms Matshepo More, Chief Financial Officer, PIC, said that the good bank was a new entity to which all the entities of PIC subscribed to, when African Bank and the bad banks were collapsing.

Dr Matjila spoke to the concerns of Ms Kekana by saying that the PIC was currently looking at dealing with more strategies for women and this included pushing for more disabled women in management structures. Food security issues were covered under the broader strategy of agriculture mentioned above.

The PIC was audited by the Auditor-General, and the PIC reported to the clients as well, so there were definite guarantees that there were checks and balances in place to monitor the PIC.

Dr Matjila made the point that it was very important to secure jobs in small and medium enterprises. The PIC is saving up an SMME fund to address job enterprises for small businesses and not just large businesses.

Loans fell due in five years. Companies are usually given two years to pay back, but it would accrues interest until the 5 year term runs out.

Mr Maynier commented that his questions had not been answered. This was now the fifth time that he had asking his question as to the exact amount of the loan outstanding.

Dr Matjila responded that the PIC was about to finish its independent internal review and would provide the exact figures for the amount of the outstanding loan at that stage. The PIC does have the preliminary figure and would make this available to the Committee; he did not have the figure with him at the time of making the presentation. He concluded that he thought the questions had been answered.

The Chairperson thanked all for attending the meeting and asked the Committee’s legal advisors to meet and go over the legal laws and rules of the Committee, to determine whether the Committee could indeed legally require the PIC to disclose the documents that Members were requesting.

The meeting was adjourned.
 

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