1 RESTRUCTURING OF PUBLIC INVESTMENT COMMISSIONERS Presentation to Ad Hoc Committee on Finance and Select Committee on Finance 18 JUNE 2004

Public Investment Commissioners2 CONTENTS Section 1Purpose of PIC Bill Section 2Introduction to PIC Section 3Limitations of Current Legislation Section 4Resultant Operational Problems Section 5Proposed Restructuring Section 6Conclusion

Public Investment Commissioners3 PURPOSE OF PIC BILL SECTION 1

Public Investment Commissioners4 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 Commissioners5 INTRODUCTION TO PIC SECTION 2

Public Investment Commissioners6 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 Commissioners7 PIC’S KEY CLIENTS Client% of Assets Government Employees Pension Fund 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 Commissioners8 ASSET ALLOCATION R’ BillionPercentage 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 Commissioners9 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 Commissioners10 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 Commissioners11 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 Commissioners12 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 Commissioners13 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 Commissioners14 LIMITATIONS OF CURRENT LEGISLATION SECTION 3

Public Investment Commissioners15 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 Commissioners16 PIC GOVERNANCE STRUCTURE MINISTER DIRECTOR-GENERAL BOARD MANCO EXCO Audit Comm Invest Comm STAFF Appoints Appoints staff to provide secretariat service

Public Investment Commissioners17  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 Commissioners18  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 Commissioners19 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 Commissioners20 RESULTANT OPERATIONAL PROBLEMS SECTION 4

Public Investment Commissioners21 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 Commissioners22 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 Commissioners23 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 Commissioners24 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 Commissioners25 PROPOSED RESTRUCTURING SECTION 5

Public Investment Commissioners26  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 Commissioners27  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 Commissioners28  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 Commissioners29  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 Commissioners30 PROPOSED LEGAL STRUCTURE STATE sole shareholder MINISTER representative PIC INVESTMENT MANAGEMENT BUSINESS PIC Clients BOARD appoints & approves controls

Public Investment Commissioners31 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 Commissioners32 CONCLUSION SECTION 6

Public Investment Commissioners33 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 Commissioners34 THANK YOU