1 restructuring of public investment commissioners presentation to ad hoc committee on finance and...
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1
RESTRUCTURING OF PUBLIC INVESTMENT COMMISSIONERS
Presentation to
Ad Hoc Committee on Finance
and
Select Committee on Finance
18 JUNE 2004
Public Investment Commissioners 2
CONTENTS
Section 1 Purpose of PIC Bill
Section 2 Introduction to PIC
Section 3 Limitations of Current Legislation
Section 4 Resultant Operational Problems
Section 5 Proposed Restructuring
Section 6 Conclusion
Public Investment Commissioners 3
PURPOSE OF PIC BILL
SECTION 1
Public Investment Commissioners 4
STRATEGIC SIGNIFICANCE OF PROPOSED BILL
Allows PIC to operate as modern, professional, world-class investment manager
Board responsibility and accountability for performance of PIC
Allows PIC to compete for scarce investment management skills in the market
Enables PIC to address operational constraints as raised by AG
FSB oversight on PIC operations will improve control environment
Public Investment Commissioners 5
INTRODUCTION TO PIC
SECTION 2
Public Investment Commissioners 6
BACKGROUND
PIC was founded in 1911 as the Public Debt Commissioners
Its mandate is to manage investments on behalf of public sector entities
It is the largest investment management operation in the country
It is governed by the PIC Act of 1984
Public Investment Commissioners 7
PIC’S KEY CLIENTS
Client % of Assets
Government Employees Pension Fund 91.29
Compensation Commissioner* 3.20
Associated Institution Pension Fund 2.61
Unemployment Insurance Fund 1.65
Guardian Funds 0.65
Political Office Bearers Pension Fund 0.13
* Pension Fund and Compensation Fund
Public Investment Commissioners 8
ASSET ALLOCATION
R’ Billion Percentage
Capital Markets 182,6 59,2
Money Markets 16,3 5,3
Equities: Externally managed 77,1 25,0
Equities: Internally managed 11,7 3,7
Property Investments 1,3 0,4
Other Investments* 19,7 6,4
Total
(31 March 2003, audited)
308,7 100
* Isibaya Fund and Structured products
Public Investment Commissioners 9
STRATEGIC SIGNIFICANCE OF PIC
Management of public service pension assets
A critical player in the financial markets
Controls 8 – 10% of JSE market cap
Largest holder of government and corporate bonds
Can positively influence financial markets behaviour
Empowerment
Corporate Governance
Corporate Citizenship
Through Isibaya Fund, PIC is a key funder of BEE and infrastructure investments
Public Investment Commissioners 10
FIXED INCOME In-house management of all bonds and money
market investments
Money Market Investments Domestic banks, which have a credit rating
higher than A2 Corporate bond issuances by companies listed on
the JSE
Bond Investments Largest investor in government, parastatal and
municipal bonds
Public Investment Commissioners 11
EQUITY INVESTMENTS
Managed through a combination of in-house and external managers
PIC uses the following external Managers: RMB Asset Management Stanlib Futuregrowth Sanlam Investment Management Old Mutual Asset Management
Public Investment Commissioners 12
PROPERTY INVESTMENTS
Size of property investments is capped at 5% of GEPF funds under management
Asset management function is performed in-house Property management is outsourced
Investments are made directly by acquiring properties or through participation in listed and unlisted funds
Public Investment Commissioners 13
ISIBAYA FUND Established in 1999 by amendment of legislation
governing the PIC The Fund’s investment universe comprises the
following asset categories: Infrastructure development Black economic empowerment Private sector development capital
Size of the Fund is capped at 3,5% of funds under management Approximately R10.6 billion at current fair
value
Public Investment Commissioners 14
LIMITATIONS OF CURRENT LEGISLATION
SECTION 3
Public Investment Commissioners 15
PIC ACT (ACT 45 OF 1984) Section 2 – Appointment of Commissioners Commissioners responsible for investment of
funds on behalf of public bodies - Largest depositor is GEPF
Secretariat appointed by National Treasury Director-General: National Treasury seconds
officials to PIC to assist Commissioners in discharging their duties
Prescribe asset classes that PIC is empowered to invest in – Government, parastatal and corporate bonds; equities (listed and private), property and social and infrastructure investments
Public Investment Commissioners 16
PIC GOVERNANCE STRUCTURE
MINISTER
DIRECTOR-GENERAL
BOARD
MANCO
EXCO
AuditComm
InvestComm
STAFF
Appoints
Appoints staff toprovide secretariatservice
Public Investment Commissioners 17
Act does not provide for PIC to be legal and corporate entity - creates uncertainty around legal standing of the PIC
Governance and organisational structure Employees seconded by National Treasury and
report to Director-General Commissioners held responsible for making and
monitoring investments - have no authority over employees
Disempowering for Commissioners and not conducive to environment in which employees are held accountable for their performance
LIMITATIONS OF PIC ACT
Public Investment Commissioners 18
Ability to attract and retain employees – Concern raised by Auditor-General and SCOPA
Regulation of PIC activities – PIC not regulated on same basis as private sector investment managers (Financial Markets Control Act, 1989 and Stock Exchanges Control Act, 1985)
LIMITATIONS OF PIC ACT
Public Investment Commissioners 19
CONSTRAINTS ON PIC OPERATIONS
PIC Management has identified further constraints on PIC operations: Not a Legal Entity
Limits ability to act as counter-party in financial transactions
Corporate governance issues Ability to attract and retain scarce investment
management talent Limited capacity to conduct own research and
analysis of investments Need to deploy better IT systems
Public Investment Commissioners 20
RESULTANT OPERATIONAL PROBLEMS
SECTION 4
Public Investment Commissioners 21
AUDIT QUALIFICATION
Auditor-General has qualified PIC’s 2003 financial statements because: Risk Management Framework had not been
implementedA risk manager had not been appointed
Non compliance with GAAP Valuation of properties in terms of AC135
not performed
Public Investment Commissioners 22
EMPHASIS OF MATTER
AG also raised the following as emphasis of matter: Restructuring of the entity Internal auditing Accounting for structured investment products Ownership of investment properties Amortization of premiums and discounts PFMA compliance
Public Investment Commissioners 23
ADDRESSING THE AG’S CONCERNS
A risk manager was appointed in August 2003 The PIC’S risk management framework is in the
process of being implemented Additional risk management personnel are
being recruited Risk management systems have been identified
Implementation in 2004/2005 Internal audit function is being set up Compliance officer has been appointed
Public Investment Commissioners 24
ADDRESSING THE AG’S CONCERNS
PIC will be GAAP compliant for year ended
31 March 2004 Properties revalued in terms of AC135 All other investments revalued in terms of
AC133 PFMA compliance
Areas of non-compliance expected to be addressed by 31 March 2005
Issues relating to ownership of properties are largely resolved
Public Investment Commissioners 25
PROPOSED RESTRUCTURING
SECTION 5
Public Investment Commissioners 26
Corporatise the activities of the PIC – Convert to corporate entity namely financial services provider as contemplated by Financial Advisory and Intermediary Services Act, 2002
Corporation will be owned by Government represented by Minister of Finance
Board of Directors to be appointed by Minister of Finance in consultation with Cabinet
PRINCIPAL RESTRUCTURING CONSIDERATIONS
Public Investment Commissioners 27
Board shall determine corporation’s policy and direction subject to overall authority of Minister of Finance as shareholder representative
Corporation subject to Public Finance Management Act, 1999
Corporation outside public service but within public sector
PRINCIPAL RESTRUCTURING CONSIDERATIONS
Public Investment Commissioners 28
Provide for establishment of juristic person
Commissioners will be succeeded by Board to be
appointed by Minister of Finance
Corporation will be regulated by Memorandum and
Articles of Association
Transfer of all assets, liabilities, rights and
obligations of Commissioners to corporation
PUBLIC INVESTMENT CORPORATION BILL
Public Investment Commissioners 29
Investment by corporation of certain money received or held by, for or on behalf of Government, certain bodies, councils, funds and accounts
Regulates certain activities of corporation regarding management of funds
Corporation to be subject to Financial Advisory and Intermediary Services Act, 2002 (FAIS Act)
Public Investment Commissioners Act, 1984, repealed
PUBLIC INVESTMENT CORPORATION BILL
Public Investment Commissioners 30
PROPOSED LEGAL STRUCTURE
STATEsole shareholder
MINISTERrepresentative
PIC
INVESTMENT MANAGEMENT
BUSINESS
PIC Clients
BOARD
appoints & approves
controls
Public Investment Commissioners 31
PROPOSED PIC GOVERNANCE STRUCTURE
Shareholder(State)
Board(appointed by
Minister)
Corporation
Shareholders Compact
•PFMA•Companies Act•Minister approves memorandum & articles•Report to Parliament•SCOPA•Founding legislation•Protocol on Corporate Governance•FSB regulation
Public Investment Commissioners 32
CONCLUSION
SECTION 6
Public Investment Commissioners 33
STRATEGIC SIGNIFICANCE OF PROPOSED BILL
Allows PIC to operate as modern, professional, world-class investment manager
Board responsibility and accountability for performance of PIC
Allows PIC to compete for scarce investment management and administration skills in the market
Enables PIC to address operational constraints as raised by AG
FSB oversight on PIC operations will improve control environment
Public Investment Commissioners 34
THANK YOU