RESTRUCTURING OF PUBLIC INVESTMENT
COMMISSIONERS
Presentation to
Ad Hoc Committee on Finance
and
Select Committee on Finance
18 JUNE 2004
1
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
2
SECTION 1
PURPOSE OF PIC BILL
Public Investment Commissioners
3
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
4
SECTION 2
INTRODUCTION TO PIC
Public Investment Commissioners
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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
6
PIC’S KEY CLIENTS
Client
% of Assets
Government Employees Pension
Fund
Compensation Commissioner*
Associated Institution Pension Fund
Unemployment Insurance Fund
Guardian Funds
Political Office Bearers Pension Fund
91.29
3.20
2.61
1.65
0.65
0.13
* Pension Fund and Compensation Fund
Public Investment Commissioners
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ASSET ALLOCATION
Capital Markets
Money Markets
Equities: Externally managed
Equities: Internally managed
Property Investments
Other Investments*
Total
(31 March 2003, audited)
R’ Billion
182,6
16,3
77,1
11,7
1,3
19,7
308,7
Percentage
59,2
5,3
25,0
3,7
0,4
6,4
100
* Isibaya Fund and Structured products
Public Investment Commissioners
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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
9
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
10
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
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PROPERTY INVESTMENTS

Size of property investments is capped at 5% of
GEPF funds under management

Asset management function is performed inhouse


Property management is outsourced
Investments are made directly by acquiring
properties or through participation in listed and
unlisted funds
Public Investment Commissioners
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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
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SECTION 3
LIMITATIONS OF CURRENT
LEGISLATION
Public Investment Commissioners
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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
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PIC GOVERNANCE STRUCTURE
Appoints
MINISTER
BOARD
Audit
Comm
Invest
Comm
EXCO
DIRECTOR-GENERAL
Appoints staff to
provide secretariat
service
MANCO
STAFF
Public Investment Commissioners
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LIMITATIONS OF PIC ACT


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
Public Investment Commissioners
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LIMITATIONS OF PIC ACT

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)
Public Investment Commissioners
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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
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SECTION 4
RESULTANT OPERATIONAL
PROBLEMS
Public Investment Commissioners
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AUDIT QUALIFICATION

Auditor-General has qualified PIC’s 2003
financial statements because:

Risk Management Framework had not been
implemented
 A risk

manager had not been appointed
Non compliance with GAAP
 Valuation
of properties in terms of AC135
not performed
Public Investment Commissioners
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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
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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
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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
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SECTION 5
PROPOSED RESTRUCTURING
Public Investment Commissioners
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PRINCIPAL RESTRUCTURING
CONSIDERATIONS

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
Public Investment Commissioners
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PRINCIPAL RESTRUCTURING
CONSIDERATIONS

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
Public Investment Commissioners
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PUBLIC INVESTMENT
CORPORATION BILL

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 Commissioners
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PUBLIC INVESTMENT
CORPORATION BILL




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 Commissioners
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PROPOSED LEGAL STRUCTURE
STATE
MINISTER
sole shareholder
representative
appoints & approves
controls
PIC
BOARD
INVESTMENT
MANAGEMENT
BUSINESS
PIC Clients
Public Investment Commissioners
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PROPOSED PIC GOVERNANCE
STRUCTURE
Shareholder
(State)
Shareholders Compact
Board
(appointed by
Minister)
Corporation
•PFMA
•Companies Act
•Minister approves memorandum & articles
•Report to Parliament
•SCOPA
•Founding legislation
•Protocol on Corporate Governance
•FSB regulation
Public Investment Commissioners
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SECTION 6
CONCLUSION
Public Investment Commissioners
32
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
33
THANK YOU
Public Investment Commissioners
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