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FINANCE PORTFOLIO COMMITTEE
21 August 2007
PUBLIC INVESTMENT CORPORATION ANNUAL REPORT
Chairperson: Mr N Nene (ANC)
Documents handed out:
Public Investment Corporation presentation
Public Investment Corporation Annual Report
Pan-African Infrastructure Development Fund presentation
Audio recording of meeting
The Public Investment Corporation briefed the Committee on its past performance, transformation, corporate governance and shareholder activism. Highlights for the PIC in the year ended 31 March 2007 included growth of funds under management with client portfolios meeting or exceeding benchmarks, supporting economic transformation with the Isabaya Fund approving R1,7 billion in investments, externally managed equities were broght in-house and the launch of its subsidiary, Advent Asset Management (Pty) Ltd. Advent aimed at driving property investments in historically under-serviced townships and rural areas. Since corporatisation PIC has focused on developing its internal capacity with skills in its investment divisions and operations. Corporate governance focused on improving the PIC governance framework and addressing operational constraints. The United Nations Global Compact and Principles for responsible investment was explained.
Committee members congratulated the PIC on their performance. Committee questions focused on investment return figures, the Isabaya Fund, interaction with the Government Employees Pension Fund, the UN Global Pact, PIC’s seeming intolerance for criticism, socio- economic development aims of the PIC, conflict between good investment choices and other aims like broad based black economic empowerment (B-BBEE), whether the PIC dictated policy to clients, the use of derivatives, B-BBEE, PIC remuneration, lessons learnt given Auditor General clean slate report, taking a management control in companies, equity staff capacity, interests of other provinces in the PIC.
The Public Investment Corporation (PIC) who briefed the Committee consisted of the following members, Mr Jabu Moleketi (Chairman), Mr Veli Ntombela (Investment Committee Member), Mr Ignatius Sehoole (Chairman, Audit and Risk Committee and Human Resources Remuneration Committee), Mr Brian Molefe (CEO), Dr Daniel Matjila (CIO), Ms Albertinah Kekana (COO), Ms Rolandi van der Westhuizen (CFO) and Mr Tshepo Mahloele (CEO) of the Pan African Infrastructure Development Fund (PAIDF).
Mr Moleketi gave an overview of the PIC’s past performance, transformation, corporate governance and shareholder activism. PIC operations achieved a net-surplus of R 18.9 million after tax compared to a loss of R 7.0 million in 2006. The PIC established two new businesses, Advent asset management and the Pan African Infrastructure Development Fund (PAIDF). PIC clients consisted of the Government Employees Pension Fund, Unemployed Insurance Fund, Associated Institution Pension Fund, Compensation Commissioner, Guardians Fund, National Skills Fund, RDP Fund, Temporary Employees Pension Fund and the Auditor General. The conclusion of mandates was a key step to bring the PIC into compliance with the Financial Services Board’s regulatory provisions.
Historically the PIC had a fee structure that was too low to sustain its operations without a reliance on its reserves. Changes to its business model aimed at attracting additional staff and improving it Information Technology platform resulted in PIC operations incurring a loss of R 7 million in 2005/6. In 2006 PIC committed itself to implementing measures to ensure its financial sustainability whilst retaining relatively low fee structures compared to the market. As a result of revised client fee structures and cost containment measures, the PIC returned to profitability with a net surplus of R 18.9 million in the current financial year.
Advent Asset Management was launched in 2006 with the aim of driving property investments in historically under-serviced townships and rural areas. Since corporatisation, PIC has focused on developing its internal capacity with skills in its investment divisions and operations. PIC was one of the most transformed asset management companies in SA with 69% of employees being black and 56% were women. The executives within PIC were 64% black and 44% were women.
Mr Ntombela focused on growth in assets under management. Funds under PIC management grew from R599, 5 billion to R719,8 billion. Performance of client portfolios met or exceeded benchmarks.
In their second year as a corporation, the value of assets under management grew by 20,1 % while producing a total return on 18,7 %. Within PIC’s four asset classes, the highest returns of 32,5% were generated by equities, which grew in value by 31,8%, or R84,3 billion.
Mr Matjila focused on performance and indicated that the total return for the year was 18,7, against 27,6 % in the previous 12 months.
With regards to PIC’s equities strategy, it holds % of the JSE All Share Market Capitalisation. In December 2006 equities valued at R126 billion were removed from external to internal management, resulting in a 72/28 split between internally and externally managed equities. A strategy was adopted whereby the bulk of the funds would be managed on an enhanced index basis internally by PIC. Funds benefited through significant saving in management fees without sacrificing performance. Relative to the market, PIC held 30% of the Bond Exchange of South Africa (BESA) All bond market value. All fixed income investment was managed internally.
Highlights for the PIC year which ended 31 March 2007 included the launch of the Advent Asset Management (Pty) Ltd. Growth in property at 31 March 2007 was 41% growth in directly held property, 31% growth in unlisted property and 251% growth in listed property. The directly held portfolio of PIC for retail centres included 52 000 square metres in Central City, anchor tenants in Shoprite, Score Supermarket, Clicks and Absa. A range of directly and indirectly held portfolios and specialised property holdings were highlighted.
Isibaya performance for the years ended 31 March 2007 included an annual benchmark of 13.39% and an annual return of 35.96%.
Mr Sehoole focussed on transformation within the PIC. Key objectives included improving the PIC governance framework and addressing operational constraints.
With regards to corporate governance, Ms Kekana said that the PCI Corporate Governance and Proxy Voting Policy were approved by the PIC Board in December 2005. Resolutions voted against included the placing of all the un-issued ordinary shares under the control of the directors and general authority to issue shares for cash.
The United Nations Global Compact and Principles for responsible investment was explained. The Global Compact asks participants to embrace, support and enact within their sphere of influence, a set of core values from which the ten principles were derived. The Global Compact also required that participants engaged with other partners in projects that gave concrete expression to the Global Compact principles, in addition to advancing the broader development goals of the United Nations. In terms of the Compact, businesses should support and respect the protection of internationally proclaimed human rights and also that businesses should uphold the freedom of association and the effective recognition of the right to collective bargaining. Businesses were also asked to support a precautionary approach to environmental challenges and to work against corruption. The PIC approach was to adopt the UN Global Compact principles by making the principles part of business strategy and operations and to promote an inclusive and sustainable globalisation process. PIC has an investment mandate with the Government Employees Pension Fund (GEPF) which legally bound it to the UN Global Compact. PIC would be developing a tool for benchmarking Environmental, Social and Corporate Governance (ESG) integration through the development of a Socially Responsible Investment focused fund of R1 billion by 31 March 2008.
Mr Mahloele focused on the Pan African Infrastructure Development Fund (PAIDF). The rationale for the fund was the need for infrastructure in Africa and to increase the competitiveness of the continent. Investment would focus on energy, telecommunications, water and sanitation and transport. A PAIDF Facilitation Trust was established in April 2006. The PAIDF generated deal pipelines consisting of 21 deals amounting to approximately $10,2 billion.
Mr K Moloto (ANC) wanted further clarification from the PIC on the investment return of R26 million on page 87 of their financial statements.
Ms Kekana replied that there was a R186 million provision which referred to two investments which did not perform very well. These two investments constituted about 0.26% of a R790 billion portfolio which was below industry norms in terms of investments not performing well. The PIC was working to save some value on these investments which were not working well and hoped to make progress soon. In a non performing situation, the PIC would pull out all the stops to ensure that a company would be put back on a performing track.
Mr Molefe said that the R26 million provision referred to an investment which was made some time ago which involved an option which was not exercised. He indicated that the amount written off was, given the total portfolio of R 790 billion, not enough to sound alarm.
Mr Maloto also wanted to know why the PIC had only invested about R250 million for the Isibaya Fund if R1.7 billion was approved.
Ms Kekana replied that there was a time lag between investment approval at board level and the time that people, for whom investment has been approved, could withdraw funding. The PIC controlled money and only gave it in terms of verified requirements of projects.
Mr Maloto asked if the PIC had interaction with the GEPF on the benchmark for the asset classes. Was there agreement on the benchmarks and how the performance of the PIC would be judged?
Ms Kekana replied that benchmark construction was viewed as very important by the PIC. Each benchmark was customised with clients. The client could appoint independent consultants to assist them with benchmarks.
Mr D Gibson (DA) congratulated the PIC on their report and their insistence on diversity, good governance and benchmarks from the companies that the PIC invest in. He said that the financial press had suggested that the PIC chose a few targets and pilloried them in public, instead of first engaging them at a board level where they would be able to bring about changes. The PIC also seemed to leave other companies alone. Mr Gibson asked the PIC’s response on this.
Mr Gibson said that there seemed to be a good deal of criticism towards the PIC on the lack of clarity regarding their commitment to the UN Global Pact. He asked why there was such a long delay in clarifying facts, figures and commitments which could have been put before the public at an earlier stage.
Mr Moleketi said that he had engaged with the media regarding the UN Global Pact but the media chose not to report on this issue. The PIC decided to inform the Committee on the steps taken and levels of commitment regarding the UN Global Pact.
Mr Molefe said that the GEPF had signed the Global Compact. The GEPF gave the PIC a mandate to manage their funds and therefore the PIC was also bound by the Compact. The PIC could not disrespect something which was already in their mandate.
Mr Gibson also mentioned that the PIC was paid from public purse but seemed to be intolerant of criticism. He said that instead of dealing with the merits of the criticism, the PIC personalised and racialised criticism and called white critics racist and blacks were called sell-outs.
Mr Moleketi said that he wanted to dispel the view that the PIC’s CEO personalised matters. He said that he was not aware of levels of intolerance on the PIC’s CEO side. The CEO of the PIC had numerous meetings with companies. It was not decent to communicate to entities through the media but to engage directly with different companies. The CEO developed a profile due to his commitment to shareholder activism. Concrete and specific criticism was valued by the PIC.
Dr G Woods (NADECO) said that the PIC’s mandate was to achieve good returns which should be sustainable. He asked how the PIC made decisions about investments on a practical level given that they have to look at good investments but also at board representivity and broad based black economic empowerment (B-BBEE). He asked how the PIC dealt with conflict about where the priorities should lie.
Mr Molefe replied that there were classical conflicts between the objectives of shareholders, the board and management. The PIC aimed to analyse and understand the source of conflict when they act on behalf of shareholders on a case by case basis. Transformation was good for long-term sustainability and profitability. There were still pockets which believed that transformation would not lead to profitability
Dr Woods indicated with regards to equity that the PIC’s performance compared to the previous year dropped by 41% against the JSE all share index. He wanted further information from the PIC on this issue.
Mr Matjila replied that the PIC benchmark was customised and was not the same as the benchmark for the JSE All Share. It was designed to have a lower weighting in the resource component. When resources under-performed one would also see the All Share under-performing. The benchmark was also not as volatile as the All Share or as concentrated in resources. The 1.8% underperformance could also be attributed to the underperformance of external managers.
External managers were sitting on huge portfolios but were unable to put their conviction into the portfolios and also due to constraints such as liquidity. The 1.8% underperformance was solely because of underperformance by external managers of the equity portfolio.
Ms Kekana said there was a marked improvement since funds were withdrawn from external managers and moved internally.
Ms J Fubbs (ANC) said that she was impressed with investments in township communities which were previously financially marginalised and that the PIC was making sound and profitable investments. She referred to the issue of concentration risk on page 42 and 43 of the PIC Annual Report. The PIC pointed out that their approach was to diversify sums and avoid excessive concentration in one area but at the same time they managed risk in accordance with their client investment mandate. Ms Fubbs asked if the client or PIC policy dictated the level of concentration and how this balanced out.
Mr Matjila referred to the asset liability study that the client conducts. The study gave the client the strategic asset allocation that they would have. The relationship between the asset and the liability would determine the precaution in each asset class and therefore the concentration in a particular asset. The client took responsibility for determining what level of concentration risk they were comfortable with in the portfolio.
Ms Fubbs asked the PIC how they adopted their hedging policy in relation to the use of derivatives.
Mr Matjila explained that the client provides the PIC with a policy on how to deal with derivatives. The PIC did not speculate or use derivatives carelessly but stuck to client policy in doing asset management. The PIC was very conscious of the risks involved with using derivatives.
Mr B Mguni (ANC) said that there was an outcry from Cosatu and the media that B-BBBEE was benefiting those who had connections with the ANC ruling class. He asked how the PIC financed BEE initiatives without falling into the trap of just benefiting a few.
Mr Moleketi replied that the PIC acted on behalf of their clients and could not go into a project that would not bring a good return for their clients. The PIC had to safeguard the savings of pensioners.
Mr Mguni asked how the PIC balanced remuneration while still attracting or retaining skills during their corporation process. He asked if PIC remuneration was below or above inflation.
Mr Sehoole said that the PIC paid below market. PIC staff did not only join because of the money but because it offered other specialised opportunities. PIC remuneration tried not to be too far behind the market but it was not leading the market regarding remuneration.
Mr Mguni asked if the PIC had incentive schemes where senior management have shares in the company.
Mr Sehoole confirmed that there was no share scheme at the PIC and that management did not have shares.
Mr S Marais (DA) referred to the Isabaya Fund on page 40 of the PIC presentation that indicated that the returns were substantially higher than those of the loans. He wanted more information on the type of loans, to whom, rates and securities.
Ms Kekana replied that in most Isabaya transactions there were two components to funding which included the extension of a loan funding and the cost of funding towards people who received funding. Funding and the cost of the fund were determined according to its risk as assessed by the PIC investment analysis. The PIC required that they participate in the upside of the increase in value of the investment up and above of the percentage on loan returns. Loans showed a 8.52% return and also equity rights attached to funding had a return of 63%. There was a blending and loans have not under-performed.
Mr Marais asked if the PIC’s definition of B-BBEE correlated with the Department of Trade and Industry’s (DTI) definitions and Codes of Good Practice on B-BBEE.
Ms Kekana confirmed that the PIC’s definitions of empowerment correlated with those of the DTI.
Mr Marais wanted clarification on figures in the PIC Annual Report which indicated that returns for 2006 were down from the previous year. On page 62 of the annual report it was also indicated that that non executive remuneration and car allowances was down but that bonuses increased by more than double. He wanted more information regarding this given that lower returns were reported.
Mr Sehoole said that levels of activities for the PIC’s board was a lot higher in 2006. The PIC also instituted a bonus incentive scheme for the first time in that financial year. Changes in car allowance related to the restructuring of packages within the PIC.
Mr S Asiya (ANC) said that the Committee should congratulate the PIC for getting a clean slate from the Office of the Auditor General. He requested that the Committee would want to hear the lessons learnt from previous audit reports on the PIC.
Mr Molefe said that good governance and the consistency of board members was key to getting a clean slate from the Auditor General. The board members retained institutional memory and their persistence to see things done and holding management accountable was also important. The board was also prepared to take difficult decisions. Mr Molefe said that the PIC might write a case study on how they moved to where they were currently.
Mr Nene said that the PIC Annual Report has not been officially tabled in Parliament and that the Committee still had an opportunity to engage in it. The speakers indicated that they would be prepared to engage with the Committee
Mr Gibson asked if the client dictated the mandate or did the PIC suggest what the mandate should be and then negotiated and agreed.
Ms Kekana said that to a large extent the clients did dictate mandates. The process of finalising a mandate was however intricate and involved exercise which required for instance a collaboration between the PIC and the GEPF. The GEPF would take responsibility for giving the PIC as clear a mandate as was possible.
Mr Gibson asked if the client gave a mandate with regards to investment strategy and when could the PIC take effective and management control of a company.
Ms Kekana said that CBS was a listed company and the stock exchange had specific requirements for the conduct of people who wanted to acquire and control companies. In this case the PIC followed the JSE guidelines. As a general rule the PIC did not take management control of companies. The PCI supported good management teams but the PIC was only shareholders.
Mr Molofe said that in the case of private equity which got into trouble, there was a special PIC unit which would step in. The PIC would become very active in engaging management in order to save investments.
Mr Gibson said that the PIC’s percentage holding ranged from 24.2% down to 8.58%. He asked if there was a strategy to move towards exercising control of companies as well as management control against the background of the PIC becoming a huge player in the property market. Mr Gibson wanted to know if the PIC would be moving towards other aspects and companies.
Ms Kekana said that Mr Gibson question related to the delisting of CBS. PIC undertook the transaction because the GEPF portfolio has historically been under-invested in the property market. CBS delisting allowed the PIC to obtain a vehicle which had good assets and human skills.
Mr Maloto asked if the PIC had assessed the effectiveness of Isibaya Fund over the last three years. He also wanted to know if the PIC was getting the desired outcomes. He asked for more detail about the risk management strategy adopted in relation to investments in unlisted companies. Given JSE regulations, the strategy might be different from that of a listed company.
Mr Matjila replied that they have strong control processes to manage risks from the start of investments and also monitoring. Reporting on investments took place on an ongoing basis as well as taking board representation in key committees in order to have control and understanding of businesses
Mr Maloto asked for more detail about the building of in-house capacity to manage equities given that this function has been withdrawn from external managers.
Mr Matjila replied that PIC was not running at optimal level yet but that they had four strong analysts already. The nature of the portfolio was that it was going to track the benchmark.
Ms Kekana said extensive local and international research within the last 24 months on portfolios of the GEPF size indicated that the core of the portfolio must be brought in-house. The PIC put sophisticated information management systems in place which assisted them in determining how a portfolio should change in terms of buying and selling. Due to this, the PIC required a smaller staff component.
Mr Mguni said that before corporatisation there used to be a representative from each province on the PIC. He wanted to know how the PIC currently dealt with provincial interests given that properties were mostly in Gauteng, Western Cape and Kwazulu Natal.
Mr Molefe said that there were investments in all provinces except in the Northern Cape. The PIC was looking at investing and hoped that they would find activities to invest in.
Prof B Turok (ANC) congratulated the PIC on its openness and transparency compared to the early days when one could not get information from the PIC. He also said that the GEPF wanted to see sound financial management but that it also had socio-economic objectives. The GEPF was the main shareholder of the PIC and they had strong views on what their money should do for SA. The PIC had a tricky role to play in terms of safeguarding the interests of pensioners and employees but also promoting socio economic development. Prof Turok commented that the socio economic part of the PIC’s responsibility had not emerged strongly enough during the PIC presentation.
Mr Nene asked for more information on Advent which was 60% owned by the PIC.
Ms Kekana responded that the other 40% was owned by Fisher Growth Asset Management. They had separate portfolio but the two portfolios were put together. The PIC had up to 20 properties in all the provinces and hoped to increase that number.
The meeting was adjourned.
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