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FINANCE AD HOC COMMITTEE
18 June 2004
PUBLIC INVESTMENT CORPORATION BILL: BRIEFING; TAXATION LAWS AMENDMENT BILL: FINALISATION
Chairperson: Ms B Hogan
Documents handed out
Restructuring of Public Investment Commissioners
Taxation Laws Amendment Bill (B8-04)
Public Investment Corporation Bill (B6-04)
Draft Public Investment Corporation Bill
SARS highlighted some changes made to the Taxation Laws Amendment Bill. The Committee accepted the changes and adopted the Bill.
Members were concerned that clause 6(3) of the Bill gives a very much open-ended mandate to the Minister. It allows the Minister to give directives to the Board regarding the management of the corporation. The powers of the Minister should be balanced by the need to make the Board of Directors autonomous.
The Bill also seeks to exempt the corporation from paying fees in respect of its registration as a financial services provider.
The Minister is empowered, in terms of clause 3(3) to dispose off all or any part of the shares held by the state in the corporation. This is one reason why Members felt that there is a need to limit the Minister's right to issue directives regarding the management of the corporation.
Taxation Laws Amendment Bill
Mr F Tomasek (SARS: Assistant General Manager: Legislation) highlighted changes to the bill:
- Clause 2 has been expanded to cover reconnaissance permissions. This was done after consultation with the Chamber of Mines.
- Clause 4(b) was slightly restructured but the contents remain the same. The words "in writing" have been added.
- Clause 12 removes the deadlines for municipal councils to designate development zones.
- The words "at the option of the employer" were added in Clause 21.
- Clause 22 was inserted after the submission by the Life Offices Association.
Having considered the amendments, the Committee adopted the Bill.
Public Investment Corporation Bill
Mr B Molefe (CEO: PIC) briefed the Committee on the purpose of the Bill, limitations of current legislation and the proposed restructuring of the current legislation and structures (see presentation document attached).
Mr K Moloto (ANC) asked the presenter to motivate the need for clause 6(3) given the fact there would be a shareholders compact between the Minister of Finance and the Board of Directors. The clause allows the Minster to issue directives to the Board regarding the management of the corporation. One would assume that the general directions and policies that the Minister might want to propose would have been covered in the shareholders compact. This clause seems to contravene or interfere with principles of good corporate governance.
The Chairperson shared Mr Moloto's concern. By giving a shareholder the power to issue directives to the management one might significantly undermine the authority of the Board of Directors.
Mr Molefe replied that the provision only enables the Minister to issue directives when situations compel. One hopes that the Minister would use this power reasonable. The Public Investment Commissioners manage assets valued at about R360 b. It might be the case that some aspects are inadequately covered by the shareholders compact and the Minister believes that some directives are necessary. This clause removes the possibility of the corporation going against government policy priorities.
Mrs R Joemat (ANC) said that PIC had in the past used external managers to guide investments. She asked if the new structure would also rely on the guidance of external managers.
Mr Molefe replied that it is anticipated that from time to time some portion of the PIC's assets would be given to external managers to manage. At present external managers manage only 25% of assets under PIC's management.
Mr Moloto welcome the CEO's to Ms Joemat's question. A decision was taken to make the PIC a corporation so as to avoid the hindrances that were associated with the old structure and the Act. Without the explanation one would think that the Bill defeats the whole point of making the PIC a corporate entity.
Mr Molefe replied that the provisions in the old Act were more draconian than this provision. It is not anticipated that the Minister would easily issue directives unless there is an issue of national importance involved.
Mr B Maasdorp (Director: Hofmeyer, Herbstein and Gihwala Inc.) added that there is a distinction between the shareholders' compact and clause 6(3). A shareholders' compact is an agreement between the corporation as represented by directors and the shareholder represented by the Minister. The agreement might be breached at anytime. There are huge policy considerations underlying clause 6(3) and for this reason there is a need for the Minister's oversight.
Mr N Nene (ANC) suggested that clause 6(3) should identify the circumstances under which the Minister might use directives.
Ms Hogan replied that the Minister might issue directives in the exercise of his oversight role or upon breach of the shareholders compact.
Mr M Stephens supported the idea of specifying and limiting the circumstances under which the Minister would be entitled to issue directives. In the case of a breach of a contract one would follow the legal precepts set down in the common law and various legislation. This would ensure that there is certainty regarding what the Minister could do.
Mr Molefe replied that the PIC manages funds on behalf of clients. The client gives a mandate to manage the funds and its trustees inform the PIC on where to invest them. The PIC only makes tactical decisions on the management of the funds. The PIC charges a fee for the management of the funds. The directives contemplated on clause 6(3) are about the operations of the PIC and not the funds managed.
There was a general consensus that the clause gives a far broad mandate.
The Chairperson wondered if there is a need for clause 6(3). If the intention is to make the PIC a corporation so that it operates like any investment fund manager one wonders why the Minister is given the power to issue directives concerning the management of the corporation. Clause 3(3) of the Bill allows for the transfer of any part of shares held by the state in the corporation. If the Minister disposes of all the shares one would have shareholders being a different set of bodies. There would be the board of directors and the Minister who is empowered to issue directives. This would be a very unholy situation and one wonders if this is what the government wants.
Mr Molefe asked for an opportunity to reconsider clause 6(3).
Mr Nene commented that since the objective is to register the corporation as a financial service provider it would have to be covered by the Financial Advisory Intermediary Services Act (FAIS). As long as the state is the sole shareholder the corporation would be under the jurisdiction of the Public Funds Management Act. He asked if there are any foreseeable clashes between these Acts and the Bill.
The CEO replied that no clashes have yet been identified. Should any clashes arise they would have to be brought to the attention of the Minister of Finance and the Financial Services Board (FSB). The intention is to comply with FAIS and FSB Regulations.
The Chairperson asked the FSB to indicate if they have ever had to deal with a company that was compliant with both the PFMA and FAIS.
Dr F Van Zyl (FSB: Head of Legislation and Research) said that FAIS is very flexible. It is conceivable that a public entity might have difficulties with complying with FAIS but the Registrar is allowed to grant exemptions from provisions of the Act. The entity concerned would normally apply for an exemption and the application would be considered with due regard to its merits, public interests and the interests of the client. Being a public entity the corporation would have to fully comply with the PFMA. In the event of a conflict between the PFMA and FAIS one would have to resort to exemptions in terms of the FAIS.
Mr Moloto asked the CEO to outline the circumstances under which a company is exempted from paying fees in order to be registered as a financial services provider.
Dr Van Zyl replied that the Minister determines the fee and there is no exemption from paying the registration fee. The PIC Bill says that the PIC would be exempted from the fee. One is not taking of an exemption but a directive it terms of clause 9(2) of the Bill.
Ms Hogan felt that there is a need for the Committee to debate on the justification of the promulgation of a law that exempts institutions from paying registration fees.
Mr Molefe replied that both the FSB and the PIC are under the jurisdiction of the Minister of Finance. It was felt that paying fees to the FSB would be like transferring funds from the right pocket to the left. This would not make any difference because the funds would still be under the control of the very same person.
Ms Fubbs agreed that the Minister heads the two institutions. Perhaps the real issue is that the Bill heavily relies on the discretion of the Minister. It is said that the reason for the Act is to establish a corporate entity, to facilitate good corporate governance and to attract the necessary expertise. She wondered if there is no any other form of entity that could be used but still addressed the concerns raised. Some of the clauses in the Bill do not seem to support the reasons advanced in support of the enactment of the legislation.
Ms Hogan commented that the funds that are managed by the PIC belong in the main to the public. There is amongst others, the government Employees Pension Fund (GEPF) and the Unemployment Insurance Fund (UIF). The GEPF makes the bulk of the funds. It is important to establish a corporation so as to ensure effective management of the funds. The PIC is playing a role of a public trustee. If the Bill is passed as it is then one would be transferring this role to a board of directors. The philosophical question to ask is whether not to accord to the Minister the very same rights and discretionary powers.
Mr Molefe replied that the GEPF is a defined benefit fund. This means that liabilities are known up front and this in turn requires that one should manage the fund in line with the liabilities. The question is whether the Minister should have the power to intervene in case of a deviation that could result in huge risks for the state.
Ms Hogan felt that the important issue is to have a board that would be able to make decisions without undue interference but at the same time one has to ensure that the funds are protected given the risks involved. It is unclear how the Bill tries to strike the balance between these competing interests.
Mr Molefe replied that clause 6(3) represents one mechanism of dealing with this issue. It is the Minister who appoints the board. The state is the only shareholder and this means that the Minister has discretion to take resolutions at the annual general meeting to direct the corporation to a particular way.
The chairperson commented that the problem is not really solved because clause 3(3) introduces a possibility of transferring shares to anybody.
Mr Stephens asked if the investment policy and investment strategy referred to in clause 10 are one and the same thing. The Minster should be able to influence both the policy and the strategy.
The Chairperson replied that one is trying to get a balance between the need to protect the state and the need to ensure that the Board is autonomous. Too much interference undermines the accountability of the Board.
Mr Molefe replied that the PIC has very little money of its own to invest. The PIC has to investment funds in line with an investment policy given by the client. The strategy would relate only to tactical issues relating to the investments.
Mr Stephens supported the objectives of the Bill. There is a need for a refinement of the wording of the bill. It is strange that the word "client" is not used throughout the bill. If the mandate of the client would be of high importance then the bill should say that all monies to be managed would be accepted subject to a proper mandate.
The Committee was generally concerned about clause 11(1) in that it allows for the amounts of money other than deposits to be paid over to the corporation for investment as if those amounts of money were deposits.
The CEO indicated that bail money is one example of amounts contemplated in the clause. The Minister of Justice would act as the client in depositing such money.
Mr Moloto noted that clause 14 allows the corporation to declare dividends once authorized by the Board and approved by the Minister. He asked if the dividends would go to individual funds.
The CEO replied that the dividends would go to the shareholder and this is the state.
Ms Joemat asked if the powers given to the Minister could be delegated to another official.
The COE replied that the word 'Minister' refers to the office of the Minister in general.
The meeting was adjourned.