Public Investment Corporation & Financial Services Board 2009/10 Annual Reports

Meeting report

Public Investment Corporation (PIC) Annual Report 2009/10
Mr Nhlanhla Nene, Chairman, Public Investment Corporation, noted that a delegation from the Government Employees Pension Fund (GEPF) was also present, together with the delegation from the Public Investment Corporation (PIC), since the GEPF was the PIC’s major client. He tabled the Annual Report for 2009/10 and noted that there had been two major achievements in this year. Firstly, the organisational restructuring was successfully implemented, and secondly, the vision was clarified, the mission statement was fine-tuned, and the corporate values were consolidated. Assets under management increased by 23%, from R739 billion in the previous year to R910 billion as at 31 March 2010. They were expected to top R1 trillion by the end of the financial year if market conditions remained the same. Overall revenue was down by R80 million, the equity portfolio was up 63%, and the property portfolio was up 15%.

Dr Daniel Matjila, Acting Chief Executive Officer, PIC, noted that the vision of the PIC was to meet or exceed its clients’ investment objectives and commitments to stakeholders. PIC’s mission was to deliver investment returns, to create a working environment that would ensure that the best skills were attracted and retained, to be a beacon of good corporate governance, and to contribute positively to South Africa’s development. He outlined its values, which included striving for integrity and financial stability.

Ms Albertinah Kekana, Chief Operating Officer, PIC, presented the PIC’s governance structure. In 2009/10 PIC had concluded the sale of 54% of Harith Fund Managers to some of the other investors in the Pan African Institution Development Fund (PAIDF). The PIC also conducted a very robust review of its property investment activities, and she noted that assets under management grew, in the last five years, from just over R2 billion to over R20 billion. She pointed out that PIC would turn 100 years old in 2011, having grown from its former status as the Public Debt Commissioner in 1911. The Board continued to look at ways to strengthen the governance framework. A review had been conducted in relation to the properties business, which resulted in the Board deciding to strengthen its committees for investment, and creating the PIC Real Estate Asset Management (PIC REAM) sub-committee, which formed part of the approval process for property investments. The GEPF constituted over 90% of the funds under management. The collective assets under management (AUM), as at 31 March 2010, were R910.9 billion.

Dr Matjila added that this figure of R910 billion could be compared to the figure of R221 billion for AUM in March 2000. This growth represented a compound annual growth rate of 15.2%. The key driver of the growth rate was equities, which contributed to 19.85%, followed by growth in the capital market of 7.95%. Isibaya showed a decrease in growth of 3.39%, because of the unwinding of the MTN Black Economic Empowerment (BEE) transaction. Overall properties had been fairly static at 0.47%.

Ms Kekana then presented the operational highlights of the year. There had been building of institutional capacity, and a revised organisational structure was implemented, which allowed for the consolidation of financial risk, operational risk and regulatory compliance for seamless risk management. A comprehensive skills development plan was implemented and the graduate programme was enhanced, with the number of students increasing from 4 to 20 across various disciplines. Operational efficiencies resulted from the implementation of a Fixed Income Investment Management System (FIIMS). Another highlight was the focus on improving investment performance, by consolidating all the properties business into one division, so that there was now a single oversight structure. Lastly, a revised Isibaya Fund strategy had been drawn, to align with the developmental investment strategy (DIS) of the GEPF, and with responsible investing principles.

Ms Kameshni Naidoo, Chief Financial Officer, PIC, noted that in 2009/10, revenue had dropped by 20%, year on year. There was no increase in the fees charged to clients, and these fees were below the current industry levels. 54% of Harith had been disposed of, and with effect from June 2009 Harith became an associate of the PIC. In terms of operating expenses, the employee head count increased by 21%, which represented 35 individuals. Net profit after tax was 55% lower, as a result of the lower revenue. For the first time PIC declared a dividend to the shareholder, of R86 million. The net profit was expected to decline as the PIC built up its operations.

Dr Matjila discussed the investment highlights for the year. The equity portfolio increased by 62% and the core-satellite investment strategy was finalized, which resulted in 75% of the funds managed internally and 25% managed externally by 16 asset managers. R8 billion would be allocated to Black Economic Empowerment (BEE) asset managers. The property portfolio increased by 15%. The Community Property Fund (CPF) was ranked number one on an income return (10.6%) out of 21 funds in the Investment Property Databank survey for 2009. The Bridge City Mall in KwaMashu was finalised, with R740 million being invested. The unwinding of the MTN BEE transaction had yielded a R14 billion profit for the GEPF and resulted in 3200 MTN BEE employees becoming shareholders in MTN.

Dr Matjila also presented the summary of fund performance. The performance of the total AUM had provided a positive real return, with the exception of the performance of the GEPF, which was below the benchmark. The Unemployment Insurance Fund (UIF), the Compensation Commissioner (CC), the Compensation Commissioner: Pension Fund (CC: PF) and the Associated Institutions Pension Fund (AIPF) outperformed their benchmarks by 0.98%, 0.68%, 0.92% and 0.59 % respectively. The Fund performance of the GEPF attribution showed a decline in the performance of the listed equities from the previous year, owing to market movements as well as the strategic buying up of equities over the period, resulting in the composite portfolio underperforming against the benchmark. Internally managed tracker funds had underperformed against the benchmark, but the new externally managed equity composite had outperformed marginally against that benchmark. He noted that in respect of property, there was an overweight position in the largest and most liquid listed stocks, and a concentration in higher grade properties which did not match the Independent Property Databank (IPD) property mix, nor the conservative capitalisation rate used in comparison with the IPD. He stated that the Isibaya fund had returned an internal rate of return (IRR) of 25 % since its inception, outperforming its benchmark by 11%. The R6 billion investment in AfriSam was materially impaired at R1.2 billion, due to the deterioration of market conditions affecting companies in the cement industry, whilst the high gearing also contributed to the impairment. He then noted that the fixed income portfolio had outperformed against its benchmark, across all the sub classes.

Dr Matjila then went on to discuss the socio-economic impact of the PIC investments. He began by noting that the fixed income portfolio had invested R169.4 billion through various forms of government debt. R2.6 billion was invested directly and indirectly to municipalities supporting infrastructure development and service delivery, whilst R97.3 billion was invested in State-Owned Entity (SOE) bonds and money markets, to support the building of the infrastructure necessary for development. In addition to the Airports Company of South Africa (ACSA) bonds, R2.4 billion was invested in ACSA equity and R2 billion was given to the Industrial Development Corporation (IDC) from UIF funds for initiatives aimed at addressing the impact of the global recession. Investment of R3 billion supported African infrastructure development via the African Development Bank (AfDB) bonds.

In terms of equities, he noted that both GEPF and PIC played an active part in the SA Network of the United Nations Principles of Responsible Investing (UNPRI). The environmental and social governance (ESG) matrix was finalised, which included social and environmental issues. R8 billion was allocated to BEE asset managers.

The Isibaya fund was one of the year’s highlights and was focused on implementing the GEPF developmental investment policy framework. The GEPF policy was aligned with the priorities set out in the Medium Term Strategic Framework (MTSF) and the Industrial Policy Action Plan (IPAP). The allocation of 5% of GEPF AUM amounted to R40 billion and was divided up, with R20 billion for economic infrastructure; R12 billion for social infrastructure; R4 billion for environmental sustainability; and R4 billion for job creation and new enterprise.

Dr Matjila said that the Isibaya Fund approved investments totaling R2.045 billion and it was similarly divided, with R130 million for educational loans; R 317 million for affordable housing (by way of refurbished inner city buildings); R 400 million for road infrastructure; and R48 million for IT hardware and software leasing to Small and Medium Enterprises (SMEs). R150 million was allocated to the South African Workforce Housing Fund for affordable housing; and R1 billion was for affordable housing through the Old Mutual Housing Impact Fund. All the funds were approved in line with the GEPF developmental strategy.

He outlined that the Community Property Fund (CPF) covered 27 properties that were owned, while 32 properties were developed (of which 5 had been sold). The total value of the properties was R2.8 billion, whilst the value of other holdings was R0.5 billion. There were allocations to the provinces which amounted to R2.83 billion.

Dr Matjila noted that there was a variety of socio-economic impacts. Direct employment was created for more than 11 000 people, whilst a further 57 000 people were indirectly affected, calculated on a simple multiplier, and not inclusive of all downstream activities. Local entrepreneurs, such as cleaning, security, refuse suppliers and franchise outlets, benefited. The financing provided infrastructure to under-serviced areas, for instance formalising the bus/taxi commuter facilities, and created catalysts for other infrastructure development by way of nodal activity by creating a commuter critical mass,, enabling better service provision by government. Community trust funds were able to be created, providing funding for crèches; old age homes; and HIV prevention education.  The Bridge City Mall was a prime example of the social impact. PIC had, in the planning phase, facilitated the acquisition of the site and acquired all the retail development prior to construction to facilitate commercial funding. In the construction phase, there was R650 million spent directly on construction, while R160 million was channeled to local contractors, and 4 000 people were employed during construction. In the site development, 20% was retained for black empowerment groups, and 10% for Broad Based Black Economic Empowerment (BBEEE) group, while approximately 800 permanent jobs were created. The development of the site had also been the catalyst for a new railway station being provided by the Passenger Rail Agency of South Africa (PRASA), to the value of R450 million, for a 450-bed provincial hospital, the setting up of the Regional Magistrate’s Court, and further retail and commercial opportunities in the precinct.

Ms Kekana dealt with the performance of the Harith Fund and the PAIDF. She noted that in 2007, the sum of  $650 million was given for development in Africa. PAIDF was the winner of the Infrastructure Fund of the year for the second year in a row, and over 70% of PAIDF funds would be committed by the end of March 2011. Investments took place in Nigeria, Kenya, South Africa, Zambia, Ghana, sub-Saharan Africa and Tunisia.

Mr Nene concluded that this presentation had shown only the highlights of the Annual Report, but fuller information appeared in the Report itself.

Discussion
Mr N Koornhof (COPE) asked who owned the other 54% of the Harith Fund.

Ms Kekana replied that some of the major investors wanted to invest in Harith when the PAIDF fund was being constructed. Part of the shareholding was given up to ABSA and Old Mutual.

Mr Koornhof asked in what month of 2008 the AfriSam investment was made.

Mr Zakhele Sithole, Chairperson, Remco, said that the investment in AfriSam was made in January 2008, and at that time the actual investment itself was still performing, but the main problem was around how the funding structure was effected. The PIC would be looking at ways to address the funding structure in the future.

Mr Koornhof asked if there was a remuneration committee, and, if so, who chaired that committee, and whether the Chief Executive Officer’s salary was fair. He wanted to know what the PIC’s views were on the high share options for Chief Executive Officers.

Mr Sithole replied that there was an HR Committee. He noted that the policy on executive remuneration recognised that the PIC needed to attract the right calibre of individuals, so that its mandate could be carried out. In terms of the market benchmark, he noted that the PIC was in the 60^th percentile, and was within the benchmark.

Mr Jan Strydom, Chairperson of the Investment Committee, PIC, added that when he joined MTN the share price was about R11 per share, whilst currently it was R130 per share. When Santie Botha came from ABSA she was offered certain share options. He pointed out that she had been largely successful for the successes of MTN, and the profits that ensued from there; with MTN having grown from operating in only one country to operating in 21 countries. MTN was also the biggest investment on the Johannesburg Stock Exchange (JSE).

Ms Z Dlamini-Dubuzana (ANC) asked for details of the mandate given to PIC by the GEPF.

Dr Matjila replied that the mandate was quite detailed, and the way it was constructed was based on the liabilities structure in the portfolio. Whatever assets were chosen would be matched to future liabilities. That informed how the different asset classes were selected. The strategic asset allocation would then be passed on to the Minister for approval.

Dr D George (DA) asked why part of the Harith Fund was sold off and who bought it. He wanted to know why the dividend of R86 million was paid to the shareholder.

Ms Kekana replied that Harith was not spun out of the PIC, but was a new subsidiary. In regard to the dividend, she explained that in line with the Public Finance Management Act (PFMA) regulations, a dividend policy was signed with its shareholders. The dividend policy was focused on ensuring the financial stability of the PIC.

Dr George noted that the Isibaya Fund seemed to have overshot its benchmark. He asked how the fund managed to go so far out of line. He asked how the PIC was actually protecting members of the pension funds from exploitation, citing, for example, the Arcelor-Mittal deal.

Dr Matjila replied that the Isibaya fund profits came from the unwinding of MTN. At the time the PIC had managed to achieve exactly the right structure of the portfolio. The mandate was to deliver a return to the client with a real rate of 3%.

In answer to the question of shareholder activism, Dr Matjila replied that the GEPF last year launched its responsible investment policy. The PIC also embarked on developing a measurement tool so that it could measure companies against certain ESG variables. In the long term the economic imbalances in ownership of assets needed to be sorted out.

Dr Z Luyenge (ANC) wanted clarity on the staff establishment and the vacancy rate of the PIC. He wanted to know whether consultants were employed, and, if so, at what rate.

Ms Kekana replied that as at the end of the year, there were 195 people employed by the PIC. PIC had a total capacity of 240 but currently it was adequately staffed. As the staff count grew, the number of consultants decreased. However, there were some consultants who performed special functions, and they remained. Those consultants mainly performed IT-related functions.

Dr Luyenge asked if the PIC had a valuation depreciation policy and asked where the PIC disposed of its assets. He also asked whether the Board or the Chief Financial Officer was the inventory holder.

Ms Kekana responded that the PIC did have a depreciation policy and this policy guided the PIC in the disposal of its assets.

Mr D van Rooyen (ANC) asked what the prospects were of the net profit increasing.

Ms Kekana replied that one of the principles on which the PIC operated was to strive to offer the best possible asset management service at the lowest possible cost. Its fees were the lowest in the industry. The PIC focused on sustainability, not profitability. The fees had remained level, which was the reason for the profits decrease. 

Mr van Rooyen asked about the bias of investments, noting that rural development issues were important. He also wanted to know to what extent the PAIDF fund was adequate for regional infrastructural development.

The Chairperson thanked the delegation for its presentation and said that the Committee would discuss the Annual Report further.

Financial Services Board (FSB) 2009/10 Annual Report briefing
Mr Nene said that the core business of the Financial Services Board (FSB) was to regulate and supervise the non-banking financial services sector, in terms of the Financial Services Board (FSB) Act and other relevant legislation.

Mr Dube Tshidi, Executive Officer, FSB, said that the FSB was fully staffed with few vacancies, and that 52% of its staff was female. The FSB was hoping to increase that number in the future. A substantial amount of money was spent on training and re-skilling, resulting in two chartered accountants and one actuary being produced as a result of the training. He noted that 19 investigations were completed in the year under review.. Action would be taken against the individuals implicated.

Ms Nonku Tshombe, Head: Legal Department, FSB, took the Committee through the legislative and regulatory framework. She noted that there had been amendments to the Insurance Laws Amendment Act 27 of 2008, and noted that amendments were being proposed by way of the Financial Services Laws General Amendment Bill, the Financial Markets Bill (formerly known as the Security Services Act), and the Credit Rating Agencies Services Bill.

Mr Dube added that these Bills were still being worked on and would be presented to Parliament when they were ready.

Mr Gerry Anderson, Deputy Executive Officer: Market Conduct and Consumer Education, FSB, said that the regulation of hedge funds was being investigated, in the light of the global financial crisis. Hedge fund managers were to be brought in under the Collective Investment Schemes Act if they so wished. This issue had been under discussion since 2004.

Mr Jonathan Dixon, Deputy Executive Officer: Insurance, FSB, took the Committee through current developments in the insurance industry. He said that there were developments in solvency assessment and management (SAM), insurance groups legislation (IGL) and micro insurance (MI). The SAM project was initiated in response to the International Monetary Fund (IMF) reviews last year, and a risk-based approach would be used. SAM would be introduced by 2014. He noted that regulators around the world had generally lagged behind in development of IGL. Micro insurance was driven by National Treasury (NT), to support the lower income groups.

Mr Anderson took the Committee through the relevant provisions of the Financial Advisory and Intermediary Services (FAIS) Act. He noted that conflicts of interest (COI) must be avoided by institutions offering financial services, in terms of Section 3(1). A COI management policy must also be developed, in line with Section 3A(2), while Section 3(2) required that there must be disclosure. Controls should also be implemented to ensure that there was compliance with prohibitions on financial interest. Compliance officers must ensure that they performed the necessary monitoring on the COI policy, as set out in Section 3A(4).

Ms Olivia Davids, Head: Consumer Education Department, FSB, outlined what was being done in terms of consumer education. She said that in 2000, the FSB Act (No 97 of 1990) had been amended, and this was then followed by the development of a Consumer Education (CE) strategy, which was approved by the FSB Board in 2001. The targeted financial education programme focused on advising the public about budgeting, saving, and debt management, how to detect and avoid fraudulent schemes, insurance, retirement, investment and financial advisory services. It also educated the public on the rights and responsibilities involved in financial transactions, and offered formal and community education. FSB was involved in various programmes and projects, including consumer and shopper education, community engagement. media campaigns, community financial education workshops, employee assistance programmes and financial education that was offered to the youth, including in some schools. She noted that there was a need to better coordinate financial education. To this end, the FSB was facilitating a process to develop a draft National Consumer Financial Education Strategy. It was envisaged that a Central Coordinating Committee, comprising ,all the stakeholders, would be established to lead the coordination of financial education in South Africa.

Mr Jurgen Boyd, Deputy Executive Officer: Retirement Funds, FSB, emphasised that trustees played a vital role in financial services. Funding of R1 million was granted, in order to provide a learning toolkit for trustees, and a team had visited the United Kingdom of Great Britain to look at what had been offered in that country by way of training for trustees, and its model was brought back and adapted for South African use. An E-learning toolkit would be made available on the web, and this would be launched by June 2011. The toolkit would also be made available in book form and also later would be translated into the various languages spoken in South Africa.

Mr Marius du Toit, Chief Actuary, FSB, explained the pension fund surplus apportionment table to the Committee. This could be seen on Slide 19 of the accompanying presentation.

Discussion
Mr Koornhof asked why there was a drop of 90% on inspection recovery costs and a drop of 23% on general costs.

Mr Dawood Seedat, Chief Financial Officer, FSB, replied that litigation costs were responsible for the increase in the inspection recovery costs. He noted that R11 million had been allocated for “accounting provisions” in respect of the R18 million increase for general expenses.

Dr George asked what the deadline was for the regulated hedge fund industry process.

Mr Anderson replied that he could not give a specific date for the deadline on the hedge fund process, but it was at an advanced stage, and could probably come to fruition in 2011.

Dr George asked how the FSB measured the success of its programmes and projects.

Mr Tshidi replied that as far as consumer education was concerned, there was a focus mainly on the lower levels of schooling, but this would be extended to the higher levels of schooling. The FSB had an outsourced facility that handled all the complaints and calls from the public.

Dr George asked how the FSB managed the surplus apportionment settlements, noting that there was concern that the curators were getting large amounts of the settlement.

Mr Tshidi said that he was happy to report that the surplus apportionment recovery figures amounted to more than R600 million, but there was an issue of curators’ fees that needed to be addressed. The media tended to blow out of the proportion the amounts that the curators received. However, there were agreements that needed to be complied with.

Dr George asked how the FSB was balancing the interests of the public against rising crime.

Mr Tshidi noted that it was necessary never to under-estimate the number of people who would take other people’s money illegally and to deal with them severely.

Mr Dixon added that this was a longer term project. He spoke about the concept of “treating customers fairly”, saying that this was a major project that the FSB was driving. This would address this problem to a certain extent.    

Dr Luyenge asked if there was any regulation that governed individuals that were HIV positive, noting that they did not always manage to obtain insurance cover.

Mr Dixon said that there was an industry agreement a couple of years ago that prohibited risk rating on the HIV status of an individual.

The meeting was adjourned.