Public Investment Corporation briefing

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Finance Standing Committee

08 September 2005
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Meeting report

FINANCE PORTFOLIO COMMITTEE


9 September 2005
PUBLIC INVESTMENT CORPORATION BRIEFING

Chairperson:
Mr K A Moloto (ANC)

Documents handed out
Public Investment Corporation Annual Report 2004/05 (

www.pic.gov.za)
Presentation to the Portfolio Committee on Finance

SUMMARY
The Public Investment Corporation told the Committee that its transition to a modern asset management company was now far advanced. It had addressed all the concerns raised by the Office of the Auditor-General in its last audit report, most of which were of a technical nature. The Corporation’s biggest client was the Government Employees Pension Fund, and the majority of the assets under its management were currently held in bonds and equities. Members commented favourably on the Corporation’s presentation. Of particular concern to members were the protection mechanisms that the Public Investor Corporation had in place to dispel fears over favour and undue influence in the execution of its investment transactions. Other major issues raised in the discussion included the lack of activity on the side of infrastructure investment on the continent, and the ill-aligned nature of the reported remuneration packages paid to senior management.

MINUTES

Public Investment Corporation briefing
Mr Brian Molefe (PIC CEO) said that the positioning of the PIC to become a modern asset management company and the growth of the assets under its management to R461 billion were distinct highlights of the previous financial year. In addition the PIC had upgraded its information technology infrastructure, increased the pace of its Black Economic Empowerment (BEE) funding, upgraded its retail properties to the tune of R157 million and increased its impetus on shareholder activism.

The PIC had also addressed all concerns raised by the Office of the Auditor-General. These included putting the necessary systems in place to ensure full compliance with Generally Accepted Accounting Practice (GAAP) and accounting standards AC133 and AC135. It had established an internal audit section, appointed a compliance officer, developed a risk management framework and resolved all issues relating to its property ownership.

The majority of the assets under the PIC were held in bonds (48%) and equities (39%). Nine percent of the assets were held in cash, while the weight carried by the Isibaya Fund (2.6%) and properties (0.8%) was nominal. The Corporation's biggest client was the Government Employees Pension Fund (GEPF), which accounted for 91.56% of the assets under PIC management. Over the 2004/05 financial year, the Public Investment Corporation delivered a consolidated return of 20.6% to its clients, with a risk-to-return ratio of four points. The comparable figures for the GEPF were 21.6% and 3.4 points respectively.

Discussion
Ms B Hogan (ANC) asked for confirmation that a board of trustees was being established for the GEPF. Mr Molefe answered in the affirmative.

Ms Hogan asked how this would impact on the PIC’s investment decisions, and its relationship with the GEPF.

Mr Molefe stated that the GEPF had an interim trustee who had given the PIC a mandate to invest in certain asset classes. The day-to-day tactical decisions within those asset classes were left to the PIC Board. The Board had seven directors that was chaired by the Deputy Minister of Finance, Mr Jabu Moleketi, and made up of six independent individuals. The Board had an investment committee that excluded the Deputy Minister, and was chaired by Ms N Mtoba (Deloitte Chairperson). All PIC’s activities were reported on to the board, and informed by their guidance. The understanding was that the investment mandate that was provided by the GEPF was informed by their liability profile. Going forward the mandate might be revised in line with a new assets and liability study that was being conducted by the GEPF’s new Board of Trustees.

Ms Hogan wanted to know what, besides BEE, guided the PICs investment decisions with regards to the Isibaya Fund.

Mr Molefe reminded the Committee that the Public Investment Commissioners Act of 1984 — which was only repealed on 1 April, 2005 — had specified that 3.5% of the assets under management should be invested in the Isibaya Fund. The Act also listed the types of investments that were to be made.

Ms J Fubbs (ANC) required clarification on how the exposure of the Isibaya Fund was distributed with regards to the "socially responsible" requirement attached to its (the Isibaya Fund’s) investment mandate.

Mr T Mahloele (PIC Head of Corporate Finance and the Isibaya Fund) explained that the last financial year had been spent cleaning up and consolidating the Isibaya Fund’s position; to bring its management in-house; and, to scrutinise the interpretations of the legislation that underlay it and the investment mandate that was to inform its management. The human resources for the aggressive management of the Fund and its infrastructure development mandate had yet to be properly aligned. Some investments had been made over the 2004/05 reporting period. This included a new BEE mining initiative, which had created 1 500 jobs and which had done very well. It also had exposure to the Bakwena Platinum Corridor which involved infrastructure development. There was also an investment in an infrastructure fund and commitments to investment in a small-medium enterprise (SME) fund and a tourism fund. The pace of activity would grow significantly over the next year as the goal of growing the Isibaya Fund's transactor team to twelve was realised.

Ms Hogan suggested that full details of Isibaya Fund investments also be made available in future reporting publications of the PIC.

Ms Hogan asked what protection mechanisms the PIC was instituting to ensure that its investment decision-making was transparent, and that it was not vulnerable to political pressure in this regard.

Mr Molefe replied that he was not aware of any political pressure that had been exerted on the PIC. The PIC took guidance from the Investment Committee of its Board with regards to the investments it made. As an indication of the Investment Committee’s involvement, Mr Molefe pointed out that they met a total of nineteen times over the course of the 2004/05 financial year.

Ms Hogan was interested to know how investment propositions came to the attention of the PIC. She asked for an indication on whether the PIC took a pro-active or a reactive stance with regards to new investment opportunities. She stated that over the past couple of years a number of parastatals had courted significant political comment because of the investment decisions that they had made. Ms Hogan was of the opinion that Investment Committees of public companies such as the PIC should take extra measures to allay perceptions that there was a back door through which they could be approached, or that they were open to what was commonly referred to as "schmoozing". She emphasised that no insinuations were being made and she noted the contrary stance and eventual influence of the PIC in what appeared to be a reference to the Telkom/Elephant Consortium deal. She expressed her interest in seeing that the PIC and, by extension, the GEPF were sufficiently protected against any untoward influence in this regard.

Mr Molefe reiterated that the PICs Investment Committee exercised its mind on each and every investment decision made by the PIC. Members’ interest were declared and dealt with in "the normal way". The process was not as sophisticated that it took "conflict of friends" into account. Mr Molefe conceded that a critical approach was appropriate.

Mr Molefe told the Committee that the PIC's involvement in the Telkom deal had happened purely on a commercial basis. It had made a profit of R1.5 billion over a period of six months for the GEPF through the warehousing of Telkom shares.

Mr Mahloele further emphasised the commercial basis of the PICs involvement in the Telkom deal. Since the closure of the deal, about R500 million was yielded in addition to the initial R1.5 billion because of dividends. In addition, he explained that the PIC's involvement was also an opportunity to improve the financial structure of the deal, as in the PIC's opinion, there was a lot of "leakage" to the financiers of the deal. There had also not been enough in the deal structure from a BEE point of view.

Ms Hogan suggested that a transparent paper trail be designed to outline how potential investment deals arise and come before the PIC's board, and how they are dealt with so that any notion of untoward influence could be dispelled.

Mr Molefe agreed with Ms Hogan’s concerns. He undertook to suggest to the PIC Board that a deal-flow outline be included in future report publications on the Isibaya Fund. He indicated that this could include every potential investment opportunity that comes before the board, so that this Committee could also see how many deals were turned down and on what grounds.

Mr Y Bhamjee (ANC) stated that he saw no indication of the existence of a strategic plan in the PIC's annual report, but references to benchmark returns as an alternative. He emphasised that if, instead, key performance indicators were identified in a strategic plan, it would create a solid base for meaningful engagement by interested parties such as the Committee.

Mr Molefe told the Committee that the PIC had a strategic plan with key performance indicators, which had been submitted to the shareholder on 1 November 2004. The PIC had recently also completed a shareholder’s compact as per the Public Finance Management Act (PFMA). Mr Molefe apologised for not having made the latter available to the Committee for the purposes of the briefing. The PIC was under the impression that the briefing would be retrospective. He suggested that another meeting be held so that its strategic plan could be discussed. He indicated that Board members could be present at such an opportunity.

Mr Bhamjee questioned why the PIC had launched no new infrastructure projects in the Isibaya Fund, as it was a key driver for the Fund’s formation. He asked when the PIC would resume its involvement in infrastructure projects.

Mr Molefe replied that there were no new and exciting infrastructure projects on the market of late. The PIC was on the look-out, however. He did mention the possibility of the PIC starting its own infrastructure projects, but emphasised that investments in such projects were demand-driven and not the other way around.

Mr Bhamjee responded that the PIC would be judged against its purpose of deploying pension funds into infrastructure development of the African continent as outlined by the President and the Deputy Minister of Finance.

Mr Molefe indicated that the formation of an infrastructure fund focussed on investment on the African continent would be subject to the approval of the GEPF Board of Trustees. In a study of fourteen African countries it was discovered that the combined worth of their public sector pension funds were R128 billion. The idea was to provide a vehicle for these funds to be channelled into infrastructure development, leveraged with private sector money. The initial goal was to establish a R30 billion fund. Given the growth in certain African economies, there was a firm commercial basis for this project.

Mr K Moloto (ANC) asked how it was that the PIC realised foreign exchange losses for both 2003/04 and 2004/05 (page 53 of the annual report) if there were no listed foreign equities noted for 2004/05 in the "income per investment category" statement in the notes to the appendix (page 61). He asked what the PIC's policy was regarding top offshore investing, and what mandate it had received from the GEPF in this respect.

Mr Molefe responded that the PIC had bought Sterling Bonds, which was a British Government bond, in the mid-1990s. It involved only a small amount of money and had since been unwound. The loss resulted because of the strength of the South African Rand. The reason for its initial purchase was not clear.

Mr Moloto asked why it was that the CEO of the PIC seemed to earn much less (at R752 000 cost-to-company) than other officials, such as the COO (R814 000 ctc), the Head of Corporate Finance and the Isibaya Fund (R1.068 million ctc) and the Head of Risk Management (R1.459 million ctc).

Mr Molefe replied that in the past the Secretary of the PIC's forbearer, the Public Investment Commissioners, used to be a Deputy Director-General seconded from the National Treasury. This was how Mr Molefe came to be appointed to the PIC. With the corporatisation of the PIC, Mr Molefe was transferred to the PIC and he became its CEO. His current salary reflected his public sector origins. As a result of the problems experienced by the PIC, new skills had to be acquired. People were employed on contract, and at more-or-less the same remuneration levels they had earned where they came from in the private sector.

Mr M Johnson (ANC) asked for an explanation on the bonuses that had been paid to PIC officials. In particular, he questioned the bonus that was paid to the Head of Risk Management given the Auditor-General's assertion that the strategy plan did not include a fraud prevention plan as required by the PFMA.

Mr Molefe replied that the Head of Risk Management, Dr D Matjila, was a Doctor of applied mathematics and was recruited from a highly technical environment in the private sector. It was standard practice in the private sector to withhold apportioned bonuses and attach the eventual payment thereof along with the transfer of share options to employees to their continued tenure. In making the move to the PIC, Dr Matjila stood to lose a substantial amount of money and he had to be reimbursed for it to some extent. This was done by increasing the bonus component of his remuneration. Mr Molefe stated that going forward the bonuses paid would be much less a reflection of an organisation in transition, and more indicative of what had been achieved.

Dr Matjila indicated that a fraud prevention plan had been developed and approved by the Auditor-General on 25 April 2005. This was after the conclusion of the reporting period, and the issue was therefore purely technical.

The Human Resources Committee of the Board had since introduced the new salary structure for the PIC, and Mr Molefe expected the figures might seem much better aligned in future financial years. Mr Molefe told the Committee that the new salaries were better than what the civil service normally paid, but still undercut the private market significantly.

Mr Moloto asked why it had taken so long for the PIC to resolve the issues relating to the non-existent title deeds for the properties under its ownership.

Mr Molefe explained that since it had published its Annual Report, it had received notification from the Minister of Agriculture and Land Affairs that the necessary property transfers would be done gratis, and that this was therefore no longer an issue.

Ms J Fubbs (ANC) asked for clarity on what was meant by "direct" and "indirect" property investment. She also asked what kind of property it was that the PIC got involved in.

Mr Molefe responded that the PIC largely "inherited" government buildings in the former Transkei and Boputhatswana areas that were built with former homeland pension funds. The PIC had also invested in directly held shopping centres in rural areas such as Themba, Garankuwa and Magopane. The PIC had also invested in "A Grade" properties in urban areas such as Johannesburg and Pretoria. Directly held properties were properties bought and managed directly by the PIC, whereas indirectly held properties were invested in via other companies. In this manner, the PIC had huge exposure to Sandton City via Pareto and another fund that it had invested in via Liberty Life.

Mr Johnson asked that province-by-province indicators be provided for the distribution of investments made by the PIC.

Mr Molefe agreed with Mr Johnson.

Mr Johnson and Ms Fubbs commented on the gender imbalance within the PIC as an organisation.

Mr Molefe referred Members to page 13 of the Annual Report, which indicated that 62% of the entire staff compliment was female, while the comparable figure in PIC management was 44%.

Ms Fubbs asked that a racial breakdown also be provided with regards to females in management at the PIC in future reports.

The meeting was adjourned.




 

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