Department of Public Enterprises Strategic Plan & Budget 2010; State Owned Enterprises management & administrative issues

Meeting report

Chairperson’s opening remarks
The Chairperson said that at the previous meeting South African Airways (SAA) and SA Express were requested to report back to the Committee on certain issues, but that no time lines had been stipulated. The Committee suggested that they report back by 26 March.

She noted that the five and one year plans of the Committee included, as a priority, monitoring issues of performance of the State Owned Enterprises (SOEs) and performance management of the boards of SOEs. She stressed that for enhanced performance of SOEs, the large number of vacancies in strategic positions had to be filled urgently.

State Owned Enterprise monitoring and evaluation: Department of Public Enterprises (DPE) briefing
Ms Ursula Fikelepi, Deputy Director General: Legal and Governance, Department of Public Enterprises DPE, said that she would give a presentation on the processes and systems which the Department of Public Enterprises (DPE or the Department) used to oversee and monitor the performance of the SOEs, through their boards. She noted that the SOEs which reported to DPE were registered as companies with two governing organs, namely the shareholder / Minister of Public Enterprises, as well as the board of directors.

DPE’s performance management was regulated by the Public Finance Management Act (PFMA) and the Companies Act. Systems and tools for performance measurement had arisen from these statutory bodies. These would be presented.

The Shareholder Compact (the Compact), signed by the Minister as the shareholder representative, and the board of the SOE, at the Annual General Meeting (AGM) of the SOEs, was an annual performance agreement. Compacts were required to set out the mandated key performance areas, measures and indicators according to what had been agreed to by the Minister and the Board. The compacts were used as a tool to hold the board accountable to the Minister (the shareholder), as well as to the short and medium term goals. Monitoring of Key Performance Indicators (KPIs) and areas had evolved from those that were purely financial to also encompassing operational performance targets. This was part of the ongoing relationship improvement between the boards and the shareholder.

SOEs were limited and authorised by their Articles and Memorandum. These were also aligned to the Compact. Some SOEs had to ensure that agreements with suppliers and stakeholders were also aligned to the compact. The Compact was aligned to the SOE mandate, and contained the strategic objectives and goals of the SOE.

DPE’s Corporate Plan, as required by Section 52 of the PFMA and National Treasury (NT) regulations, was intended to translate the mandate and the strategic objectives (and in some instances the SOE developmental objectives agreed to between the Minister and the board) into business strategies which would cover a three-year period. The SOE strategic and business initiatives which interpreted the SOE’s mandate, as well the key performance indicators, were then required in terms of the statutes and regulation to include risk mitigation plans, core intervention plans, materiality/significant framework, financial plans and any additional information which the Minister would request.

Quarterly and Annual Reports facilitated performance monitoring and evaluation of the SOE, as well as any corrective action that DPE felt needed to be taken by the SOE. The reports enabled DPE to analyse the SOE’s implementation of its Compact, agreed mandate and KPIs.

As part of the reporting mechanisms, DPE had established the Dashboard for timely monitoring by SOE. This was an electronic tool which gave quarterly information on the SOE’s performance, and ability to reach targets on the corporate plan. DPE could analyse and monitor trends in relation to financial and operational performance. This included expensive infrastructure investment, environmental impact assessment, socio-economic issues, skills development and competitive suppliers’ development programmes, and disposal of non-core property. The Dashboard also enabled DPE to pick up potential risks that were emerging with respect to the SOE’s ability to implement its mandate.

The Strategic Intent Statements (SIS) were the Minister’s communication tools for SOE strategy. The SIS also contained the SOE strategy focus, scope of business and business consultation threshold. Through the SIS, the DPE also sought to ensure that there was broader stakeholder consultation and cooperation to ensure that the SOE’s development strategy was in alignment with government policy and regulation.

Investor briefs were issued by the Minister quarterly, to advise the SOE of performance trends picked up by the Dashboard analysis and to highlight any corrective action to be taken by the SOE, especially where there had been deviation from the key performance areas and indicators. In turn, the board was expected to respond to the Minister indicating measures intended to be put in place by the SOE to address the highlighted concerns as well as mitigate any emerging risks highlighted by the DPE.

The Board Performance Assessment Questionnaires were developed by DPE to standardise the assessment of past performance of the board, as well as to enable DPE to pick up areas which needed improvement and address succession planning within the board itself.

The Chairperson asked if the Board Performance Assessment Questionnaire assessed the board members individually or collectively.

Ms Fikelepi answered that the proposal was to address board members and the Chairperson both individually and collectively. Ms Coetzee would address this question in more detail.

Another performance managing tool was remuneration of the boards themselves. DPE developed market-related guidelines, approved by Cabinet in 2007, which provided for the non-executive (independent) directors and executive directors. Remuneration was approved by the Minister in terms of the guidelines, and paid by the SOE. The SOE determined any adjustments of remuneration during the AGM, according to the guidelines.

SOEs were categorised in terms of size, based on assets and turnover of the SOE, to determine the appropriate remuneration for non-executive directors. The largest SOEs were Eskom and Transnet, and the smallest was Alexkor. The guidelines were developed with lower, median and upper quartiles, which provided for a quarterly retainer to be paid to each board member at a median level. For each non-executive board member who sat on a board sub-committee, there was an additional retainer which was paid. There was an additional fee for holding the Chair.

Remuneration of the executive directors was also based on SOE size and enterprise performance and therefore was related to board performance. Performance was measured against revenue, profits, market value and return on investments, and provided for a scarcity allowance for remuneration of the upper quartile. Within the guidelines, flexibility was in-built to allow for variations. In this case, the SOE Chairperson would have to motivate for a variation to the Minister, based on the impact of the SOE to the economy, nature of competition, market capitalisation, complexity of the industry and strategic freedom to act.

Rewards also applied where the CEO and executive directors exceeded expectations in performance. Remuneration was reviewed annually and adjusted in terms of individual and organisational performance. DPE had provided short and long term incentives. Short term incentives were annual cash bonuses tied to the performance of the company, for the team, or individual executive director as a reward for contribution to achieving the business plan. The reward was determined by the board, based on the level of responsibility of the individual, scarcity of skills, complexity of the business and performance of the individual. It was intended to encourage individuals to achieve specific results and successfully implement the strategic plan of the SOE, and could be structured as an incentive target, bonus or profit share.

Long term incentives, usually a three-year minimum period, were critical to achievement of SOE strategic goals, particularly increasing shareholder value. These incentives were cash based.  Where the objectives were not met, the unearned incentives were not paid out.

DPE had recommended in the guidelines that the incentive scheme should have precisely defined KPIs relating to the performance areas, which in turn related back to the Compact. It also recommended that the incentive scheme should not be applied concurrently with employee share holder option, and a maximum of two to four times the total annual guaranteed package could be accrued during the contract term. Furthermore, it asked that the board should establish a Remuneration Committee comprising of non-executive members, to deal with executive remuneration and incentive policies, remuneration packages of senior management, the company’s recruitment, retention and termination policies, and procedures for senior management and the remuneration framework for directors. Finally, DPE recommended in the guidelines that non-executive directors should not be included in the incentive schemes and that the remuneration for non-executive and executive management should be clearly distinguished.

Ms Sandra Coetzee, Acting Director General, DPE, added that DPE’s immediate focus, as the shareholder, was on board performance, and that shareholder compacts were in place for all SOEs. The shareholder compacts provided for both financial and operational indicators and an expectation of the outcomes to be achieved. The indicators were reflected through submission of the annual report and annual financial statement of the SOEs. The auditors of SOEs were required to take a view as to whether the targets had been achieved or not.

The Board Performance Assessment Questionnaire was primarily done as a collective. However the different SOEs undertook a peer-review of board performance and individual board performance, and made the information available to DPE. DPE also kept in mind succession planning, demographic representation on the board, skills scarcity of the board, and tenure of membership of a board member. DPE also ensured appropriate rotation of board membership. Individual assessment of the board members by the shareholder was currently focused on reports of attendance and participation of the board itself and of the board committee. Independent assessments of individual boards and board members were being introduced.

Discussion
Mr G Koornhof (ANC) said that the presentation had not been clear on whether the shareholder or board was responsible for the appointment of the Chief Executive Officer (CEO) and Chief Financial Officer (CFO). According to the new Companies Act, the board should appoint the CEO and CFO.

Ms Coetzee said that the CEO and CFO were appointed by the board, not by the shareholder, but served as ex officio directors on the board. The shareholder’s role was limited to acceptance of that ex officio directorship.

The Chairperson commented that the Committee was waiting on a report from DPE on the term of the boards, how many boards were in place, how many people were sitting on various boards across the country, and other information. This report had been outstanding since the previous year.

The Chairperson asked if Chief Executive Officers would sit in on remuneration committee meetings. She was concerned that if they did, they would be influencing what they were being remunerated.

Ms Coetzee answered that the SOEs were required by DPE to comply with the King Code, which stated explicitly that executive directors should not be part of Remuneration Committees.

Mr P Van Dalen (DA) asked who checked up on compliance to the Code.

Ms Coetzee said that DPE did check, and it was also disclosed in the annual report and annual financial statements.

Mr Koornhof asked if the Remunerations Guidelines gave value for money and if DPE received the desired levels of remuneration, given that the incentives added up to a substantial remuneration level.

Hon Barbara Hogan, Minister of Public Enterprises, informed the Committee that the current remuneration framework had been in place for some time and a panel to evaluate the consistencies and entire remuneration package across SOEs was currently being set up. She was happy to enter into discussions about that.

The Chairperson recognised that this meeting would not accommodate all the issues, due to time constraints but said that this meeting was the first of a number of meetings which would address those issues. Members would engage with the Minister further on the new framework when time would allow.

Mr Van Dalen asked how the DPE held SOEs accountable when they regularly failed to meet their compact. The President had recently said on e-tv news that this was a big problem.

The Chairperson asked if any SOE board member’s or executive manager’s remuneration had decreased when their performance had declined.

Mr L Greyling (ID) asked on what basis annual salary increases were made, given that there was a case when a member whose performance indicators were not met received an increase shortly before he was asked to leave.

The Chairperson rephrased the question and asked generally how it was possible to pay a huge performance bonus, and immediately thereafter find that person not to be performing.

Mr M Nhanha (COPE) asked why a performance bonus was paid to senior executives when at the time of employment the objectives for the job were clear. In no cases were the KPIs regarded as goals which were set by the employee. He questioned why senior executives were paid extra for work for which they were receiving remuneration in the first place. He believed the issue of performance bonus for senior executives had to be reviewed. His feeling was that a senior executive should only be paid a performance bonus when he or she had performed substantially over and above the call of duty.

Ms Fikelepi said that DPE reviewed the implementation of the guidelines and also approved any applications for increases by board members. DPE's expectations generally had been met.  There were instances when DPE did not approve increases in remuneration.

Mr Greyling said that he understood that the reason for the meeting was that there had been outrage expressed both by the public and members of Parliament with regard to bonuses which were paid to CEOs of State owned enterprises, especially when these enterprises were not meeting targets and in fact were a drain on the system. Unlike private companies, SOEs’ performance was not simply about making profits, but rather about achieving certain developmental objectives of the State. Some SOEs were continually under-performing, yet bonuses continued to be paid to their CEOs. He asked for clarity on what the performance indicators were that were being used to assess whether a bonus should in fact be paid to a CEO. He suggested that perhaps there should be transparency around the performance indicators at the beginning of the year, so that the Committee could assess whether the performance bonuses were in fact justified.

Dr M Oriani-Ambrosini (IFP) said that the presentation was similar to that given in the previous year. It had some structure, and was formal, but it lacked substance. For the Committee to engage properly with the presentation, for example on the issue of performance, the Committee would need the actual detail of what exactly the KPI and cash rewards were, whether targets were reached and how they were reached.  He could not translate much of the documentation on the DPE strategic objectives into reality. He asked if there was a factual list which identified why each SOE was held, so as to understand clearly what its objectives were, as performance was tied to the purpose for which they existed, which was obviously more than just making money out of the holding companies. Some, such as the Pebble Bed Modular Reactor, which was incubating a potential successful future technology, were clear, but others were not.

The Chairperson said that this Committee would be clutching at straws if it was expected to work without knowing what the key performance indicators were. Transparency, the intermediate measures, time line, outcome and appraisal of performance would assist the Committee.

Ms Coetzee said that it was unfortunate that DPE did not have the opportunity to present the Dashboard in full, to offer more detail on the financial and operational indicators which were monitored across the SOEs. This would be presented at the second session at the Autumn School. The Dashboard indicators were not limited to financial and operational indicators, but also related to other indicators such as skills development, the process for non-core property disposal, capture of key points of governance and board performance such as number of meetings, and attendance at meetings. As far as the financial indicators were concerned, most were directed towards the financial health of the company, and its ability to use its balance sheet, to leverage further funding, and to get a return on assets – in other words a host of operational indicators were tracked to ensure operational stability and improved performance in the company. She suggested setting time aside for a presentation on the Dashboard in full.

Mr Koornhof asked for clarity on the point that only a maximum of two to four times the total annual guaranteed package could be accrued over the contract term.

Ms Fikelepi said that when calculating the incentive, it could not accrue to more than 2 to 4 times the total annual guaranteed package.

Mr Van Dalen asked how the former Chief Executive Officer of Eskom could think that he could receive R85 million, and where provision had been made for that kind of money. He asked for clarity on pay-out conditions.

The Minister stressed that the matter was sub-judice. There were many contentious issues in the case but it was important to respect everyone’s rights, including the individual, Eskom and DPE, to be heard in court.

Dr Oriani-Ambrosini said that the case had been declared unconstitutional a year previously, and could not infringe on the Committee’s right to receive answers on the matter.

The Chairperson said that this case could not be discussed in the meeting.

Dr Oriani-Ambrosini strongly disagreed with the Chairperson.

The Minister said that without anticipating deliberations in the court, the remunerations and practices within the SOEs were those which had been put before the Committee. They did not lead to dramatic escalations and wonderful payouts and were within market-related parameters.

The Chairperson asked if shareholding options were given to employees of the SOEs.

Ms Coetzee said that the detail on SOE shares could be responded to by the SOEs. There had been at some point in time, a reference to shares, where companies used the concept of shares in calculating long term incentive schemes and then converted them back into “phantom” shares. No shares were issued to members of the executive as a consignment of the bonus. It was simply a point of reference to calculate the quantum of the bonus. The only share option that employees of SOEs held in the past, was where DPE had implemented employee option schemes. SAA was the only such case where employees, including the directors, had any shares in the company. This option was no longer in existence.

Mr Van Dalen asked if salaries were benchmarked internationally according to cost of living.

The Chairperson asked if, when the remuneration and guidelines were developed, the economic situation in the country was considered, as those benchmarked internationally would not resonate well locally. She believed that South Africa had the highest Gini coefficient in the world, due to the fact that the economic situation was not factored into remuneration. She also asked if the Dashboard and Risk Management Plan would be updated in anticipation of the impending Infrastructure Bill and suggested that the Risk Management and Mitigation plans be reviewed.

Ms Coetzee said that the guidelines of November 2007 had been updated. The update indicated that the increase in remuneration during the current economic climate had been marginal, and the increase provided for in the guidelines was actually marginal in relation to the market analysis. Thus the market economy did have an impact on the limited increase in remuneration. The methodology applied to the updated guidelines also related to the structure of corporate governance. There was far more instructive detail as to the remuneration of board members and more guiding instruction as to remuneration of senior executives, the latter being the domain of the board. DPE therefore guided the board on a consistent and harmonious structure for remuneration of the executive directors.

Mr Van Dalen said that the Committee had been unable to receive information on secret contracts from the SOEs and asked if DPE, in its oversight role, was privy to the secret contracts, such as with Eskom pricing and coal procurement contracts, or if they were held secret from DPE as well. He was concerned that money was being stolen.

The Chairperson rephrased the question. She asked if, given that Parliament did not have access to those contracts, someone was looking into them on behalf of South Africans.

Ms Fikelepi said that there may be contracts with outside (third) parties which could be confidential.

Ms Coetzee responded that DPE had a reserved shareholder right under the PFMA, Section 54(2), which essentially required SOEs to submit significant and material transactions to the executive authority for approval. Through that process, DPE received disclosure of those contracts, risk components of the contracts and mitigation measures applied to those contracts, and could assess contracts prior to their execution.

Dr Oriani- Ambrosini said that the previous answer referred to approval of contracts and future contracts. The question raised referred to the contracts executed by Eskom, and the Committee wanted to know whether they were subject to scrutiny by DPE. He asked if DPE had copies of these contracts, as they had not been given to members of the Committee.

The Minister said that the issue of confidential contracts had been in the public domain for some time and that some of the information was fairly slanted. Information had been put out that 138 companies’ tariffs were completely confidential in Eskom and were confidentially contracted. In fact, the tariffs for the 138 companies were regulated by the National Energy Regulator of South Africa (NERSA, and were published under the Megaflex and the Night Save Urban Tariff Regimen on March 15. The documents on tariff cross-subsidisation were available and could be circulated. This was very clear and was not confidential.

However, there were a small number of contracts where preferential pricing agreements were given, during the apartheid era, in order to attract investment into the country. These contracts were being actively pursued by the Chairperson of Eskom and herself. In the days of free electricity, DPE could afford such expenditure, but nowadays the matter was problematic. She asked the Committee to bear in mind that certain contracts had been entered into and DPE needed to pursue what type of flexibility was contained in those contracts. The Chair of Eskom could add on to that. She made it clear that there should not be some idea that Eskom was engaged in a myriad of secret agreements which were not regulated.

She further explained that in terms of Demand Side Management, Eskom had undertaken to provide an amount of energy and DPE was asking the mining companies to reduce their demands at peak periods. This was where contractual specification, not tariffs, governed that relationship. There were mining companies in competition with each other, and there were also Eskom customers who were competitors. DPE was eager to enter into debate on what the nature of confidentiality of commercial agreements was and what kind of degree of disclosure was required. This was important, particularly in an era when tariffs and cross-subsidisation had created an enormous amount of confusion. She suggested a special meeting where DPE and Eskom could go into detail around the tariffs. During this, professionals could address the Committee on municipal tariff arrangements and their surcharges. This would show that Eskom was often incorrectly blamed. She had a document from Eskom to circulate on the tariffs and contractual arrangements.

The Chairperson agreed that a special structured meeting with DPE and Eskom was necessary to address these issues, as well as the issues around cross-subsidisation of industry and household consumption.

Dr Oriani-Ambrosini suggested that it would be important for the Committee to strengthen the position of the Minister and Eskom where contracts needed to be renegotiated, and also to give the Committee the chance to consider legislation if the contractual negotiation was not in the interest of South Africa. Compensation was conditional to the manner in which the right was acquired in terms of the Constitution. Where there was preferential treatment, it would reflect. This was an option available to Parliament and the Minister if the negotiation did not achieve an equitable outcome on what was now an untenable situation.

The Chairperson said that it was not possible to strengthen their position in negotiations but it was possible to review regulation and legislation to make sure that a good regulatory and legislative space was created. This was in the 5 year plan.

Mr Van Dalen said that would take too long; the problem was an immediate one.

The Chairperson said that the Committee would discuss an urgent plan to bring DPE and Eskom to address the Committee.

Mr Koornhof highlighted the fact that it was not fair to engage SOEs on a document that the Committee had only received that morning.

The Chairperson suggested that with time restraints, the presentation on the strategic plan would be prioritised above the vacancy rates.
 
The Minister said that some of SOE’s most senior executives had, at 24 hours notice, attended the meeting and suggested that the SOEs presentations be given preferential time.

The Chairperson asked that Mr Koornhof take over as Acting Chairperson.

Transnet briefing
Mr Chris Wells, Acting Chief Executive Officer, Transnet said that the presentation would deal only with the vacancy rates.

Mr Pradeep Maharaj, Group Executive: Human Resources, Transnet said that there were two vacancies in the group executive team and four vacancies in the extended executive team (members of the excos of the various operating divisions). At the executive level the Group Chief Executive Officer (CEO) vacancy was in the process of being filled, and the Chief Operating Officer (COO) position had been put on hold until the new CEO position had been filled. Processes were under way to fill the four General Manager positions, which related to Strategic Supply Management, Risk Management, Freight Rail Engineering & Strategy, and Human Capital in Rail Engineering. On average, the filling of positions took between four to six months.

Dr Oriani-Ambrosini said that it appeared that vacancies had existed for eight months to a year. He asked if that was due to shortage of skills or other reasons.

Mr Maharaj said that in particular the strategic and risk management positions had taken longer than anticipated to fill, as these were very specialized, and suitable candidates were not found even after three or four rounds of interviews. The positions were temporarily filled to ensure that functions were carried out. The process in the Re-Engineering Strategy and Freight Rail post could not be taken up until after the disciplinary process was complete. The Human Capital position was recent and was in the process of internal interviewing.

Mr Wells said that certain positions were vacant due to disciplinary action. Transnet wanted to get the right people in the positions. In the mean time, the roles were covered on a temporary basis.

Ms Mentor asked what the impact of the vacancies was on the operations of the companies.

Mr Wells said that the impact of vacancies had not affected performance at all, as positions were well covered through succession planning. He believed that the Committee was aware of why the executive positions had not been filled and that this was not within the ambit of the Transnet board and executive at the present point in time.

Ms Mentor asked to what extent Transnet relied on consultancies to fulfill the duties that would otherwise have been assigned to those who should have filled the vacancies. She commented that that it was a high risk not to have general managers for risk management for such an extended time and asked if risk mitigation strategies were in place.

Mr Wells repeated that filling of the CEO and CFO vacancies was in process and in the meantime were adequately covered. There was no exposure whatsoever. Each Transnet division and key department had its own CEO with its own Executive Committee. At the present time, he was filling the role of COO. The finally-appointed GCEO must decide whether he wished to have a COO, and who this should be. The general manager position in Strategic Supply Management was adequately covered at present by a senior executive, to whom the functions reported. The search for adequately skilled people at the right remuneration level was a challenge. The Chief Risk Officer, who was a member of the executive team, and who filled the position for many years in the past, was covering the position and there was no risk exposure whatsoever. In Re-Engineering and Strategy, there was an Acting CEO of Freight Rail, and the position was adequately covered. He reiterated that the Human Capital Rail and Engineering vacancy was a fairly recent development as there had been disciplinary issues around that as well, but there would be no trouble with filling that position and there was also no exposure in that regard.

Mr Van Dalen said that he needed assurance that the person who was capable of doing the work, irrespective of skin colour, would be suitable for the job.

Mr Wells said that the race issue did not impact the filling of the positions.

Mr Van Dalen asked if Transnet applied succession planning and if there was anyone in the company who was suitable for the vacant positions.

Mr Wells said that Transnet had a very well-developed succession policy. There were unique characteristics at present in Transnet which had made some of the promotions difficult. With regard to Risk Management, the particular skills required were not within the company at the moment. A number of people were being trained and would need two or three more years before they could adequately cover that job.

Mr Koornhof said that the Committee would closely monitor Transnet’s progress. Transnet represented huge investments and it was important that the vacancies were filled as soon as possible.

Mr Maharaj then delivered a presentation on performance management, which he noted was driven by the shareholder compact. At the shareholder level, focus was on volumes and revenue growth, financial value creation, operational efficiency, infrastructure investment, development objectives and safety/health/environment/quality (SHEQ) compliance.

Transnet had an enterprise performance model which was built on long term planning of ten years or longer, brought down to five-year plans. This then gave rise to the Quantum Blueprint which drove the corporate plan. It all linked to the budget and was submitted to DPE on a quarterly basis, for Dashboard performance tracking. (See attached presentation for details of this process). 

Details were also given on the recognition initiatives and what these could comprise. Transnet was busy finalising strategic performance objectives for the new financial year, aligning incentive schemes to those objectives and looking at implementation of the corporate plan with continuous monitoring and feedback.

Between March and April there was agreement reached on what should be achieved in the coming year, the key performance areas, and standards wee set. Coaching and performance review took place monthly. Formal assessments took place in September and March, and led to the development of a learning plan for each individual. Rewards for performance were done in April to May.

Discussion
Mr Van Dalen asked for clarity on what the performance measurements were.

Dr Oriani-Ambrosini said that the Committee needed a clear statement of the purpose of holding each SOE.

Mr Wells said that he would give the background to Transnet’s Key Performance Indicators (KPIs). Transnet had signed a shareholder’s compact that set out the objectives of Transnet and KPIs. This covered volumes and revenue growth, financial value creation, operational efficiency (where the main thrust was), infrastructure investment, development objectives and SHEQ compliance. These were then incorporated into an annual corporate plan. One of the KPIs for rail was to increase the number of long haul containers on rail. Each of the KPIs was embedded in the appropriate executives’ annual performance contract.

Minister Hogan said that the question Dr Oriani-Ambrosini was asking was really a policy question on State ownership and State intent around SOEs. The review of SOEs would certainly address some of the questions.

The Minister addressed an earlier question on the Committee’s need for content and actual issues rather than structure. Policy alignment between the government and SOEs had progressed. DPE had set up inter-ministerial committees for policy alignment, in both Transport and Energy, so that the strategic intent of the SOEs was very clear. Transnet had one of the most important roles in the economy - to move the country’s commodities. DPE had been in discussion with the Acting CEO, and the Chair and Board of the Department of Transport about shifting freight from road to rail.

Minister Hogan said that she had been impressed with the document presented in an earlier meeting by Mr Wells, which showed how the KPIs were cascading through the system, what was to be achieved, and the performance measures for each manager. DPE believed that Transnet was applying its mind to the operational objectives of government. However there was policy debate on whether the optimal configuration of rail/ports was vertical integration, whether there should be separation of operational activities from infrastructural ownership, the extent of private operators coming in to branch lines and other issues. DPE was not a policy department, but these were issues to be dealt with on an individual basis with SOEs.  Government was engaging with the Department of Transport, which was a policy department. Joint meetings between the Portfolio Committees on Transport and Public Enterprises were being set up, as policy alignment was very important. The Minister concluded that Transnet’s corporate plan was very impressive and very focused and directed towards the essentials which Transnet was trying to achieve.

Mr Wells said that the outstanding responses to questions from the previous meeting would be presented to the Committee before the end of the quarter.

Eskom Presentation
Mr Mpho Makwana, Acting Chairperson, Eskom, said that performance was measured against a backdrop of seven pillars. Independent board providers annually conducted peer-reviews on board performance and also reviewed the effectiveness of the board and the role of the Chair.
Strategy reviews were conducted through board breakaways immediately after the financial year end, in preparation for the new shareholder compact, and after the six month review. In addition, a governance review by an independent legal firm reviewed governance practices both annually and also at the time of statutory changes.

Eskom had a shareholder compact, as explained earlier by DPE, and submitted biannual report under the PFMA and annual corporate reviews to the Minister. The annual financial statements were significant instruments of governance that drove performance.

Eskom also provided a host of programmes around director development to ensure that directors were able to fulfill their duties with effectiveness. The Board was considered as a high performance board since the Corporatisation of Eskom in 2002.

The board was presently fully staffed, and was diverse in terms of skill, race, gender and experience. It was composed of six black board members, four white board members and three international directors, namely Mr Hee-Beom Lee (Korea), Mr Lars Josefsson (Sweden), and Mr John Mirenge (Rwanda).

In 2004 the Board had decided that, in accordance with King II, the Board would directly oversee the performance compact of the CEO and the finance director. An HR board committee Charter was put together, delegating the power to oversee performance of the executive committee to the HR remuneration committee and the CEO. The Board reviewed the performance of the CEO every six months, through interactive discussion, and annually held an extensive board review including an extensive performance management review, which included the Chair of the board.

The executive committee (Exco) also had extensive performance compacts linked to sustainability, looking at short and long term aims, as well as sustainable development in terms of the triple bottom line. The nature of the business meant that Eskom’s operations were driven over long term plans of between 10 to 50 years. Eskom had to ensure that it did not have a management culture which was too long-term and that ignored short term requirements, and yet had to ensure that the performance review system focused on the current deliverables required.

Eskom did annual performance benchmarking in relation to other utilities. It was the tenth largest utility in the world in terms of generation capacity, and it must fulfil technical requirements in relation to plant availability and reserve margins. Its membership of the World Nuclear Operators Association involved peer-reviews at Koeberg by other member-states around performance, integrity and safety. Koeberg continued to be in line with the standards.

The executives themselves were reviewed every six months, based on an automated dashboard system of performance management system, where the numbers and data were always visible and also a comprehensive final performance review.

Exco consisted of ten people; eight being executive members, and two senior general manager officials. It was diverse in gender and race. The complement was set out (see attached presentation). There were three vacancies in Exco. The role of CEO had been vacant since 28 October and Eskom was currently conducting the second round of internal interviews, and should reach finality by May. The position of manager of corporate services had been vacant for over 18 months, because the former CEO had wanted to restructure that function. A short list was not compiled and the first round of interview would commence on 27 March. The position of company secretary became vacant in December, as the incumbent had moved to the Department of Justice.  The new company secretary should assume the position on 1 June.

The performance measurement was explained. If only the required work was performed, the employee would receive a basic salary only. If 90% of targets were achieved, then a performance reward could be considered, and with 100% achievement of targets, performance bonuses were given. The ceiling of 120% targets for remuneration rewards could not be exceeded. There were short, mid and long-term criteria. The CEO had 25% discretion on the overall review of each executive. The HR had a further 30% over-rider. He illustrated that, as a result of Koeberg load shedding, the HR Committee at the time applied a 30% penalty on all performance reviews of executives across the board. The Board did the same with the performance review of the CEO.

There was a vacancy for Managing Director: Eskom Enterprises since 1 July 2008. It had taken time to fill, as the board had been very clear that Eskom should as far as possible stay within its mandate. There had been a host of telecommunications interest and non-traditional core business contracts that the board had constantly been trimming out. Since 2007, seven executives had left due to retirement or normal resignation

The manner in which non–executives were remunerated had been addressed by the DPE presentation. In relation to executives, Eskom had a strategic remuneration policy in place, looking at the median to the upper quartile, largely because Eskom was akin to a global entity in size and how it operated in relation to other utilities.

Discussion
Mr Greyling said that he was intrigued by the international positions which were occupied on the boards. He asked how the international appointments were made, and what the rationale was for having three international positions on the board. He also wondered how it was ensured that South Africa’s strategic intentions were not conveyed outside South Africa’s borders.

Mr Makwana said electricity was linked with how the economy competed with others and attracted investment into the country, as well competing on exports. Eskom sought to benefit from talent which would take the utility a notch higher. Sweden was strong on renewables and nuclear energy and continued to contribute to the country’s energy mix strategy and Korea also had an emerging economy and also engaged with similar energy sources with which South Africa was concerned. The matter of confidentiality was adequately covered by statutory processes and confidentiality requirements in the appointment process, and the individuals respected their responsibility. There had been no breaches of confidentiality since 2002. The candidates were chosen in a collaborative consultative process between the board and shareholder. This had worked well over the last eight years.

Mr Van Dalen asked if Mr Makwana was paid twice for filling positions of both Chairperson and CEO and if business was affected by the dual role.

Mr Makwana said that Chairpersons of Boards and CEOs did not remunerate themselves. They were appointed by the shareholder, and served the shareholder. A Board remuneration committee considered appropriate remuneration for performance of both responsibilities, after consultation with the shareholder and in line with guidelines of the DPE.

Mr Van Dalen asked what the incentive was to appoint another CEO, if Mr Makwana was being paid for both posts.

The Minister said that it was incorrect to assume that this was so.

Ms Coetzee indicated that the guidelines had been applied and had recognized the additional burden in taking on the role of the CEO. Mr Makwana was not paid double, nor was he receiving two salaries. Mr Makwana’s remuneration was reflected between the upper and 90% percentile, which was in accordance with the guidelines. She could provide the Committee with the figure.

Mr Koornhof asked her to do so.

Dr Oriani-Ambrosini felt that the Committee was entitled to the information on how much the CEO was paid. He felt that the question could have been spontaneously answered.  Mr Van Dalen’s question was quite legitimate, particularly as in a previous meeting the Committee had found that the CEO of Alexkor was getting a double salary.

The Minister said that details of the CEO’s remuneration were contained in the annual report and that DPE was not withholding information. She had objected to the insinuation and presumption that Mr Makwana was earning a double salary.

Ms Coetzee clarified that she would undertake to provide the detail. She did not have exact figures with her at present.

Mr Van Dalen clarified that he was not making presumptions but simply required clarity as he was concerned about the behaviour of some people within SOEs.

Mr Koornhof said that the matter was closed.

Ms Borman requested Eskom to make available a vacancy list.

Mr Koornhof asked Mr Makwana for confirmation on the date of the final interviews of the CEO.

Mr Makwana said Eskom wanted to be in a position to make recommendations to the shareholder before the AGM. It would not be a straightforward process. Even when a candidate was appointed, he or she might not be able to commence immediately; some at these senior positions tended to serve six to twelve months’ notice at their current employment.

Mr Nhanha asked for clarity on the position of the MD: Corporate Affairs.

Mr Makwana said that at the time when the former CEO, Mr Marogo, was appointed, the role of MD corporate affairs existed, and he had approached the Board and HR with proposals to change the structure, which were ratified by the Board.  The position was not at that stage filled.

However, the role still existed and the Board had now decided it should be filled to ensure that Eskom managed its communication, reputation and corporate citizenship effectively.

Mr Nhanha asked if there was any overlap between the positions of MD:Corporate Division and MD: Corporate Affairs.

Mr Makwana said that he regretted any confusion that may have been caused. The two were totally separate divisions. The corporate services division included IT, internal audit, research and development and Eskom’s focus on renewable energy, while corporate affairs related to ‘public affairs’ and dealt with aspects of corporate social investments, government relations, media relations, and communications.

Denel presentation
Ms Patience Mushungwa, Group Executive: Human Resources and Transformation, Denel, said that Denel’s succession planning was robust and critical vacancies were able to be filled in a short space of time. At present, there were no vacancies at senior executive level.

Denel was trying to push its performance beyond the extraordinary. Its strategic intent was aligned with its remuneration strategy and performance management processes, to turn Denel around from a loss-making situation to a profit-making, self-sustaining position.

Denel operated eight core entities, which were not homogenous, so Denel had to ensure that the Key Performance Indicators spoke to the heterogeneous nature of Denel businesses. Denel prioritised finance (60%) because that was where it was currently facing challenges, people and transformation imperatives (20%) and other issues contained in the corporate plan and the Shareholder’s compact.

The performance management process and procedures applied stringently from 2007. Each employee had a performance contract, audited formally in September and March. Poor performance was weeded out and all entities had to explain what they had done with those who did not perform, and questions could be raised around poor performance. The remuneration model included a fixed pay model, and a percentage was set aside as a valuable pay portion, to be paid only if certain targets were reached (for instance, 10% for a low level employee). The percentage increased as responsibilities increased. Denel did not exceed DPE remuneration guidelines.

Denel used a correlation table which showed that within the different models, Denel was able to work out the level of the executive responsibility and match it with the guidelines of the Ministry. As a strategy, Denel aimed to pay at the 50^th percentile of the market, but currently 80% of all managers, including executives, were below the 25^th percentile of the market. There had been consolidation and a reduction in the total number of executives since 2007, (from ten to six) with the same amount of work, demographic representation had improved.

Discussion
Mr Van Dalen asked why, if the number of executives had been reduced and productivity was improving, Denel would need to appoint more executives.

Ms Mushungwa replied that there were no vacancies. Denel had consolidated so that the six executives were doing more work for the same pay.

Mr Koornhof said that the Committee was concerned about the Denel Saab Aerostructures (DSA) business unit which accounted for around 83% of Denel’s total expected loss. He asked for a separate hearing to deal with Denel’s turnaround strategy for DSA.

South African Airways (SAA) presentation
Mr Chris Smyth, Acting Chief Executive Officer, SAA, said that SAA had a new fit-for-purpose board of 16 members which was demographically represented with a rich cross section of skills.
There were four acting positions, which were in the process of being filled, and one which was on hold. He would be handing over his Acting CEO position to the new CEO at the end of the month. The rest of the positions were very recent or were placed on hold for the new CEO to make appointments (see attached presentation).

Mr Mbongeni Manqele, Acting General Manager: Human Resources, SAA, said that the exco performance review process was threefold. It consisted of a preparatory stage, where exco members reflected on the year under review, and then identified imperative key performance areas for the organisation in the next year, a conversation phase which formalised the review process so that exco members understood what the deliverables were in any particular year, and a communication phase, where assessments whether the objectives were achieved or not were communicated.

Discussion
Mr Van Dalen asked why the handout reflected Mr Smyth as having received far less remuneration than the other executives.

Mr Smyth said that since he only been Acting CEO for about two months, the figure was correct.

Mr Koornhof noticed that turnover dropped from 46% (2008/09) to 29% (2010). This was still high, and he asked if there were steps to address that.

Mr Manqele said that the extent to which executives were leaving was a concern. SAA was currently putting together short and long term incentives to bind executives to the organisation for longer periods. It appeared that those who had come up the ranks stayed longer than those who had come in from outside.

Mr Koornhof commented that throwing money after executives was not the only measure that should be in place to keep quality people in place.

South African Express Airways (SAX) presentation
Ms Siza Mzimele, Chief Executive Officer, SA Express said that since most of the presentation highlights on shareholder compacts had been covered by the previous presentations, SA Express (SAX)  would focus on the most pertinent highlights on performance and vacancies.

Mr Wesley Hermanus, General Manager: Human Resources, SAX, said a performance model and a performance management methodology were in place for performance management. From a mechanism perspective, short term incentives were based on the balanced scorecard which cascaded out across the whole organisation. Performance targets were set looking at business imperatives and attempted to ensure there was a total alignment across the business. Long term incentives which were linked to retention of critical and scarce skills spanned a rolling three year plan. SA Express had a very low staff turnover rate. Remuneration was within DPE guidelines.

Scorecards were calibrated by the Moderation Committee and were reviewed biannually at executive level. Bonuses were only paid when targets were met.

The 15 executives were demographically represented as 20% white, 80 % black, 40% female and 60% male. The Chairperson had confirmed the previous day that SA Express was working with the succession plan to replace the CEO (who had been appointed CEO at SAA). However, SA Express would be casting the net outside the company as well.

Discussion
Mr Van Dalen said that again it was of concern that despite the appearances of this SOE having strong succession planning, it could not find anyone in the company to fill vacancies.

Ms Mzimele said that SA Express was utilising the succession plan but would also benchmark outside of SA Express to ensure that the best appointment could be made.

Minister Hogan wished to stress that the CEO’s appointments were not political appointments, and requested that political parties applied their minds to the destructive consequences when discussing political preferences in Parliament.

Dr Oriani-Ambrosini said that the Minister had raised an important point. He would like the Committee to review its scope of oversight. At best, Parliament had a shareholder role, and he felt uneasy telling anyone how to run a business.

Mr Koornhof said that SA Express was a flagship SOE, and he wished the new CEO for SAA well.

Minister Hogan congratulated Ms Mzimele on her appointment at SAA, and said that she looked forward to fruitful and productive engagement with her and her team at SAA.

Pebble Bed Modular Reactor (PBMR) presentation
Ms Mercy Ranko, Human Resources Executive: PBMR, said that the performance management procedure included planning, implementing and reviewing performance as well as managing unsatisfactory performance.  During planning, strategic objectives were defined and balanced scorecards were compiled based on each business unit of PBMR.

The performance results were divided into 30% collective results and 70% individual performance results. This meant that the performance of PBMR as an organisation would be taken into account as well as individual performance. KPIs were used to measure objectives and the five point score determined the bonus applicable to the organisation.

There had been two recent resignations in March, of the Chief Executive Officer and the General Manager: Business Development. She noted that before the resignations, the gender and race breakdown was 50:50 black/white with 80% male and 20% female employees.

Discussion
Dr Oriani-Ambrosini said that he had been a great supporter of PBMR since 1996, and believed in the technology and the value it had for South Africa. However, he had major difficulties with where the entity was presently. All the deadlines had been broken and all the expectations had been disappointed. In the past four years, R9 billion had been spent. He believed that the entity could not be put to rights, and that perhaps it should be put on the market with a supply contract.

Mr Greyling said that the key performance indicators presented had not shown any kind of plan which would see the entity make returns on the R9 billion invested in it. He asked for clarity on that.

Mr Alex Tsela, Acting Chief Executive Officer, PBMR, said that the KPIs indicated in the presentation were illustrations on how the balance scorecard cascaded into being put into effect. There were other KPIs not shown, which related to the business plan.

Mr Koornhof said that PBMR would be giving a presentation to the Committee in the following week.

Mr Van Dalen asked for clarification as to whether PBMR was planning on filling the vacancies or if it was intending to leave them open, as a result of what he had been reading in the media reports.

Mr Tsela said that more information would be given to the Committee at the forthcoming meeting when there was more time. Vacancies would be filled and the process was presently ongoing.

Ms Ranko said that PBMR was restructuring the organisation and that there was not much information to release until the new organisation had been approved.

SAFCOL presentation
Mr Azwindini Adam Mutshinya, SAFCOL, said that in the SAFCOL holding company structure, there was one vacancy, that of Special Advisor to the CEO. This position had come about when the board realised the new direction of shareholder focus. The board would decide when this position would be filled.

In the operational structure of the subsidiary company Komatiland Forests, there was one vacancy, namely that of Executive for Processing. SAFCOL was awaiting advice from the shareholder on vertical integration and until that time, the position would remain vacant.

Female colleagues made up 36% of the 11 executives. Two out of the four females were black and the total male and female black component was 45%.

SAFCOL was regarded as a Category B entity in terms of the DPE Remuneration Guidelines. Performance Management was guided by the shareholder compact.

Mr Koornhof commended SAFCOL on their training of foresters as part of SAFCOL succession planning.

No other questions were posed

NOTE: the presentations by Alexkor and Broadband Infraco will be added later. Please refer to attached documents