Public Finance Commission: briefing

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Finance Standing Committee

26 June 2003
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Meeting report

FINANCE PORTFOLIO AND SELECT COMMITTEES: JOINT MEETING
27 June 2003
PUBLIC INVESTMENT COMMISSION: BRIEFING

Chairperson:
Ms B Hogan (ANC)
Co-Chairperson: Ms D Mahlangu (ANC, Gauteng)

Document handed out:
Public Investment Commission: (PowerPoint Presentation)

SUMMARY
Discussion focused on Public Investment Commission (PIC) investments in BEE initiatives, the performance of Isibaya Fund investments, investment policy and strategy, and how the PIC plans to deal with risk management. Clarity was also sought on a possible merger with the Government Employees Pension Fund (GEPF).

MINUTES
Public Investment Commission (PIC)
The Chair welcomed the representatives of the Public Investment Commission (PIC) to their first appearance before the Committee.

Mr M Mpahlawa, Deputy Minister of Finance and PIC Chairperson, said that the PIC was the largest and best-performing asset management institution in South Africa, reflecting international and domestic economic development trends. It worked in close collaboration with the Office of the Auditor-General.

His presentation focused on the value of the portfolio, asset allocation, investment performance between 1999 and 2002, issues raised by the Office of the Auditor-General and the PIC's future plans.

Discussion
The Chair asked that members avoid detailed questions on the Auditor-General's Report since this had been dealt with by the Standing Committee on Public Accounts (SCOPA).

Ms R Joemat (ANC) asked about the relationship between the strengthening rand and the shift towards investment in equities.

The Deputy Minister replied that the performance of the rand was one aspect of this trend. However, the 1994 target of 35% investment in equity investments by 1999 had not been achieved.

Ms Joemat asked whether the PIC Board and the Board of the PIC's biggest client, the Government Employees Pension Fund (GEPF) had been established.

The Deputy Minister replied that the PIC had a Board that met regularly. However, the GEPF Board had not yet been established. The Minister of Finance (the Minister) was currently the sole trustee of the GEPF. Treasury understood that there had been problems with the trade unions taking up their seats on the GEPF Board. This matter was being given priority attention and was something the PIC wanted to see resolved.

Ms Joemat asked whether the PIC also invested in community based organisations (CBOs) and, if so, what percentage of their total investment this comprised.

The Deputy Minister replied that the PIC's mandate did not allow for this. Neither, currently, did the PIC have a social responsibility programme.

Mr B Maree, PIC Portfolio Manager, added that, although the PIC had not been involved in CBO projects, it had been involved in black economic empowerment (BEE) initiatives such as toll roads where targets for employing historically disadvantaged individuals (HDIs) had been exceeded. Further, the value of work contracted out to small and medium enterprises (SMEs) had been in the region of R350 million, which was also above target.

Dr P Rabie (DA) asked about the value of investments through the Isibaya Fund that had gone sour and which projects had been involved.

Mr Maree replied that the book value of the Isibaya Fund investments stood at approximately R506 million. Their market value at the end of March 2003 had amounted to R202 million, a drop in value of R300 million. These investments had included a number of Special Purpose Vehicles (SPVs) created to give empowerment groups the opportunity to invest in listed shares. Most of these investments had been made between 1997 and 1998 and had performed badly for a variety of reasons. However, the PIC's investments in toll roads, including the N3 and N4, had not lost any value.

Mr Maree then elaborated on specific Isibaya Fund investments that had performed badly as well as others that had recovered.

Dr G Koornhof (ANC) asked for clarity on the reasons for low levels of investment through the Isibaya Fund.

Mr Maree replied that this was due to the fact that the Fund's original investments had all been made in SPVs. They had been structured in such a way that rising share prices would benefit the PIC as an investor as well as the empowerment groups that had been funded. Instead, the drop in share prices that had characterised most BEE listings towards the late 1990s had resulted in the diminishing value of a great many of those investments. The PIC Board had then decided to re-look at ways of investing through the Fund. SBVs had not worked because they had been based on incorrect market assumptions.

The Deputy Minister added that many of these investments had been made during the early stages of the drive towards BEE in South Africa. The PIC had learnt lessons from this. Mechanisms and frameworks for BEE had evolved since then and the PIC was refining its approach accordingly in order to properly consider the numerous BEE proposals submitted to it. While the PIC saw itself as a player in BEE, it did not expect to be a major stakeholder.

Ms S Nqodi (ANC) commented that the report on the Isibaya Fund did not look at all good. She asked for details on its status, the extent of the funds available for BEE and whether the PIC was likely to consider further investment in BEE in the context of its plans for reviewing risk management strategies.

The Co-Chair asked whether the PIC investments had been in line with Government's BEE strategy? Were there mechanisms for ensuring that HDIs had the necessary capacity for sustainable BEE ventures? Was the SPV the best mechanism for getting HDIs into business?

The Deputy Minister replied that the investments referred to earlier by Mr Maree had to be considered in context. They had been made in 1998 and had reflected Government's approach towards BEE at the time. BEE strategy had evolved since then. Also, BEE investments were a relatively new field for the PIC. The PIC's capacity to properly evaluate BEE ventures, monitor the investments made and manage related issues needed to be developed.

On a more positive note, the PIC's involvement in infrastructure projects had been generally successful.

The PIC continued to be involved in BEE investments. However, the rate at which this was done reflected the PIC's early experiences, as well as its capacity constraints. The PIC followed particular processes when it received a proposal. An investment committee evaluated each proposal and short-listed those that qualified for consideration by the Board. Projects supported by the PIC needed to be viable and sustainable in order to minimise risk.

The Co-Chair asked whether the PIC, in deciding on the investments to be made, ensured that organised labour understood its role in ensuring the success of a project.

The Chair sought clarity on the extent to which, if at all, the Isibaya Fund had drawn from the experience of organised labour in handling its own pension funds, as well as its mandate to invest in social responsibility projects.

The Deputy Minister replied by saying that the best thing the unions could do for the PIC would be to take up their seats on the GEPF Board, because it was the unions that would need to give the PIC a broad mandate on how they wanted their assets invested. The PIC had to operate on the basis of an investment policy framework approved by its major client, the GEPF. Currently, the PIC was operating on the basis of a broad mandate that it had been given some time ago. This was a matter for the GEPF to resolve.

Mr Brian Molefe, PIC CEO, added that the losses incurred had represented 0,1% of the PIC portfolio that had otherwise performed extremely well. The PIC Board remained convinced that it would be able to fund BEE in such a way that profits were made.

Mr K Moloto (ANC) asked how SPVs were structured.

The Chair asked whether the latest Investec investment had been along the same lines as an SPV.

Mr M Tarr (ANC) asked for clarity on the structure and actual operation of the Investec investment.

The Deputy Minister replied that he was reluctant to give details of the structure of the deal in a public forum. Broadly speaking, the Investec deal involved BEE groups buying a major stake in Investec. This deal had been concluded on the basis that all the parties concerned had put money on the table and had not simply approached the PIC for funding without committing any resources themselves.

Mr Tarr said that a concerted effort should be made to address the issue of union representation on the PIC Board.

The Chair said that it was important to understand that the GEPF was totally separate from the PIC. The PIC had its own Board. It was the GEPF that did not have the required number of employee trustees. The legislation allowed for the Minister, in the absence of those trustees, to sit in. In her understanding of the matter the unions themselves were discussing their needs regarding representation on the GEPF Board. The Minister had complained on many occasions about the situation.

Dr Koornhof asked whether the PIC allowed start-up businesses access to the Isibaya Fund.

The Deputy Minister replied that venture capital was a high-risk area for which, currently, the PIC did not have the required capacity. However, it had been involved in a tin mine project in Limpopo Province that, using basic technologies, had successfully combined job creation, rural development and BEE.

Dr Koornhof asked whether the PIC had developed or submitted a strategic plan in compliance with the requirements of the Public Finance Management Act (PFMA) and whether this had been submitted to Treasury.

Mr Molefe replied that the PIC had submitted a strategic plan to Treasury, in compliance with the requirements of the Act. The PIC's structure might have to be reconsidered in keeping with its vision.

The Deputy Minister added the PIC also managed some equity portfolios in-house with a view to developing capacity and building skills within the organisation.

Dr Koornhof asked when the PIC would have information on the year ending March 2003.

Dr G Woods (IFP) asked about the balance between capital and equity investments.

The Deputy Minister replied that property investment was an area that the PIC was looking at growing. The target set for this in 1994 had not yet been met.

Mr Maree added that, although the PIC had made some major investments during recent years that had virtually doubled its property portfolio, capital investment constituted only 1% of PIC's total portfolio. The money market provided better potential returns than the bond market. As far as asset allocation changes in 2003 were concerned, these had not been significant and the performance figures contained in the presentation had not yet been formally audited.

Dr Woods asked how the PIC's investment policy decisions were made. Did the PIC receive mandates from its clients? Did the PIC keep separate records of the accounts of all its clients?

The Deputy Minister replied that work was currently being done within the GEPF to refine the broad mandate given to the PIC in 1994. There was a difference between the funds managed on behalf of the GEPF and those of the PIC's other clients required by law to invest with the PIC. The PIC hoped to extend the level of service offered to the GEPF to each of the clients on whose behalf it managed funds.

Mr Maree added that each portfolio was managed separately. The mandates for most of the PIC's other clients did not include equities and other long-term asset classes because they tended to be short-term cash mandates. The GEPF was therefore the only client with property, equities, structured products, capital market and money market products in its portfolio. Cash or money market instruments, together with limited capital market exposure by way of mechanisms such as short-term bonds, were used for most of the PIC's other clients.

The Deputy Minister added that, in order to manage risk, the PIC had set limits on the extent of its holdings in a particular financial institution and tended to remain well below those limits.

Dr Woods asked the PIC to explain its plans for dealing with risk management. He also asked for more detail on critical risk management issues and the internal controls in place to address them.

Mr Y Waga, PIC Commissioner, said that there were different processes and structures in place to deal with risk management including an audit committee, an investment management committee and an executive committee. Strict procedures for evaluating and monitoring investments were followed. The PIC was in the process of appointing a risk manager to refine and drive these.

Ms F Mtoba, PIC Commissioner, added that, although the Auditor-General's Report had indicated that the PIC did not have a risk management framework in place, this referred to the required documentation. The necessary processes and procedures were already in place.

The Co-Chair asked how many PIC investments had benefited women as role players in BEE.

Ms Mtoba replied that, as the Deputy Minister had already indicated, the PIC's earlier BEE transactions had been in line with policy at the time. The funding of BEE initiatives driven by women was one of the areas PIC would be exploring, in line with Government's broad-based BEE strategy.

Mr W Bezuidenhout, PIC Acting Chief Financial Officer (CFO), urged members to measure the PIC in terms of its performance.

The Co-Chair asked for clarity on a statement made during the presentation regarding a possible merger between the GEPF and the PIC.

The Deputy Minister replied that the PIC had been given the go ahead to explore this option, although no decisions had been taken. The PIC faced many challenges in achieving its operational objectives because of the huge risks entailed in managing such large portfolios. Ensuring that the PIC was equipped with the necessary skills was a priority at present. The GEPF faced its own challenges, one of which was to address the delays experienced in accessing retirement benefits. Both organisations were facing critical challenges that needed to be addressed before a merger could be realistically considered. The autonomy of the PIC also needed to be considered and this could impact on any plans for a merger.

The Co-Chair asked whether the current review of the PIC's organisational structure would look at the functioning of the Board and the personnel issues alluded to during the discussions.

The Deputy Minister replied that the PIC would report back to the Committee soon with more detail on the outcome of the organisational review.

Mr Molefe added that legislative amendments might be required to bring the PIC in line with the organisational structures and institutional arrangements in place in other public enterprises such as the South African Revenue Services (SARS) or the Development Bank of Southern Africa (DBSA).

Mr B Mnguni (ANC) asked whether the PIC had an investment strategy in place. If so, how was it that certain BEE investments had crashed?

The Deputy Minister replied that, although an investment strategy was in place, it was evolving all the time and would be affected by a new GEPF mandate should one be forthcoming.

Mr Molefe added that the PIC Board set guidelines on where and how the PIC should invest funds. Also, the portfolio managers were in regular contact with traders about market developments and trends.

The Chair asked for details of the GEPF's annual cash flow liquidity requirements.

Mr Maree replied that he did not have the exact figures to hand but would make the information available to members as soon as possible.

The meeting was adjourned.

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