Presidential Review SOE Committee on State-Owned Entities, reporting to Department of Energy

Energy

24 January 2012
Chairperson: Mr S Njikelana (ANC)
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Meeting Summary

The Presidential SOE Review Committee was announced by the President on 12 May 2010 during his budget vote. The Presidential Review Committee (PRC) was a 12 person committee with a steering committee which comprised of the PRC Chairperson and Vice Chair, Minister of Department of Performance Monitoring and Evaluation, and Legal Adviser to the President and the Director General in the Presidency. An overall period of 21 months was determined for the project and the final PRC report would be completed end of March 2012. Among the principles guiding the review was that state owned entities (commercial entities, agencies, regulators and other relevant forms) should be reviewed. The review was not a detailed micro audit of individual SOEs and sectors, but a macro examination of the government owned entities. The context of the review would be to examine the role of SOEs in a developmental state

As per best practice process of reviewing state owned entities the PRC would assess SOE sector performance and structure, revisit legal structure for SOEs, propose future strategy for SOE reform, select restructuring policy options and evaluate organizational and managerial performance. Preliminary observations revealed that the rationale for creation of SOEs by governments was to undertake commercial activities to promote economic growth on behalf of government, improve service delivery, undertake infrastructure development and management, invest where private sector investors refuse to serve less profitable areas and ensure constant and reliable supply of life critical commodities.

Some of the
Problem Statement Elements that would be examined were:
Are the failures of SOEs exaggerated?
Do commercial Entities in fact perform worse than private firms?
If the failures exist in SOEs, and reform is necessary, how should it be accomplished?
Can SOEs be reformed from within, or are they intrinsically inefficient?
Would changes in the operating environment improve SOE performance, or is a wholesale change of ownership necessary?
Are SOE inefficiencies a by-product of government-required social objectives and do the benefits from these social goals outweigh the cost of inefficiency?
What is the role of SOEs in a Developmental State?

The Chairperson of the PRC explained that four work streams would be reviewed: Development and Transformation; Ownership and Governance; Business Cases (Viability); Strategic and Operational Effectiveness. Under development and transformation, the PRC would explore common understanding and definition of an SOE and place of an SOE in the development state. Ownership and governance would look at current policy and regulatory framework and standardisation of accounting and reporting (transparency and disclosure). Under business cases, the PRC would consider strategic importance and value creation, viability and funding and current restructuring options such as public-private partnerships and privatisation. Lastly, the stream dealing with strategic and operational effectiveness would involve efficiency and effectiveness in service delivery, harmonisation of performance measurements and remuneration policies, wages and accounting.

A list was provided of the 21 topics on which the PRC would
make recommendations, as well as the type of  review activities that would be undertaken, a progress update was also given. Participation opportunities were noted.

Members of the Portfolio Committee on Energy asked the meaning of financial viability versus profitability as referred to during the presentation. In addition the Committee wanted to know the PRCs position on the issue of competitive neutrality. The Chairperson of the PRC replied that viability referred to when an entity was bringing minimum burden on the fiscus. The entity would be given enough startup capital and was able to finance itself at the same time driving predetermined social economic imperatives. If profitability was the goal this needed to be clearly articulated and would take the form of any meaningful dividend. Entities needed to be classified accordingly. On the issue of competitive neutrality this area needed to be looked into. Policy must be developed for all players in the sector. There is also the question of whether regulation should be independent or made part of the policy ministry.


Meeting report

Chairperson's Introductory Remarks
The Chairperson welcomed the Presidential Review SOE Committee and representatives from the energy sector. Noting the President had set up a Review Committee to review State Owned Enterprises, he said the Speaker’s Office had assigned all relevant Committees to invite the Presidential Review SOE Committee to present on its work.

Briefing by the Presidential Review SOE Committee
Ms Riah Phiyega, Chairperson of the Presidential Review of SOE Committee, made the presentation.
The Presidential SOE Review Committee establishment was announced by the President on 12 May 2010 during the Presidency’s budget vote. The Presidential Review Committee (PRC) was a 12 person committee with a steering committee which comprised of the PRC Chairperson and Vice Chair, Minister of Department of Performance Monitoring and Evaluation, and Legal Adviser to the President and the Director General in the Presidency. An overall period of 21 months was determined for the project and the final PRC report would be completed end of March 2012. Among the principles guiding the review was that state owned entities (commercial entities, agencies, regulators and other relevant forms) should be reviewed. The review was not a detailed micro audit of individual SOEs and sectors, but a macro examination of the government owned entities. The context of the review would be to examine the role of SOEs in a developmental state.

As per best practice process of reviewing state owned entities the PRC would assess SOE sector performance and structure, revisit legal structure for SOEs, propose future strategy for SOE reform, select restructuring policy options and evaluate organizational and managerial performance.
Preliminary observations revealed that the rationale for creation of SOEs by governments was to undertake commercial activities to promote economic growth on behalf of government, improve service delivery, undertake infrastructure development and management, invest where private sector investors refuse to serve less profitable areas and ensure constant and reliable supply of life critical commodities. Some of the problem statements to be explored were:
Are the failures of SOEs exaggerated?
Do commercial Entities in fact perform worse than private firms?
If the failures exist in SOEs, and reform is necessary, how should it be accomplished?
Can SOEs be reformed from within, or are they intrinsically inefficient?
Would changes in the operating environment improve SOE performance, or is a wholesale change of ownership necessary?
Are SOE inefficiencies a by-product of government-required social objectives and do the benefits from these social goals outweigh the cost of inefficiency?
What is the role of SOEs in a Developmental State?

The Chairperson of the PRC explained that four work streams would be reviewed: Development and Transformation; Ownership and Governance; Business Cases (Viability); Strategic and Operational Effectiveness. Under development and transformation, the PRC would explore common understanding and definition of an SOE and place of an SOE in the development state. Ownership and governance would look at current policy and regulatory framework and standardisation of accounting and reporting (transparency and disclosure). Under business cases, the PRC would consider strategic importance and value creation, viability and funding and current restructuring options such as public-private partnerships and privatisation. Lastly, the stream dealing with strategic and operational effectiveness would involve efficiency and effectiveness in service delivery, harmonisation of performance measurements and remuneration policies, wages and accounting.

A list was provided of the 21 topics on which the PRC would
make recommendations, as well as the type of  review activities that would be undertaken, a progress update was also given. Participation opportunities were noted.

Discussion
Ms B Tinto (ANC) observed that there was no mention of the role of entities in job creation during the presentation.

The Chairperson of the Presidential Review of SOE Committee replied that the relevance of SOEs should take into account critical social implications for the country, one of those being the creation of jobs. This should include the creation of critical skills, quality and access of services and transformation facilitation.

Mr K Moloto (ANC) stated that the issue of competitive neutrality should not escape the attention of the Committee. Does the PRC want to have a situation where as an example Transnet is regulated by the Department of Transport and the department is the one that determines the policy? 

Ms Phiyega replied that the issue had been raised by stakeholders. This was an issue of being the referee and player at same time in terms of running these entities. This was an area that needed to be looked into. Policy must be developed for all players in the sector. There is also the question of whether regulation should be independent or made part of the policy ministry.

Mr Moloto stated that there was a need to look at the issue of corporate governance. The role of the shareholder and board were not clearly defined. An example was where the board wanted to appoint the CEO but the shareholder objected and provided a CEO. This violated the basic tenets of corporate governance. The CEO in practice then disregards the board as they felt they were appointed by the Minister. The interaction of the executive and entity was not clearly defined. If there is an agreement that the appointment of the CEO would be done in concurrence with the executive, the issue would not arise.

Ms Phiyega replied that corporate governance issues were key and were linked to an enabling environment. What was core was bold shareholding by the state as the owners of business. The bold shareholding would inform how entities are formed, owned, managed, governed and how the enabling environment should be structured to ensure that they function accordingly.

Mr Moloto stated that the shareholder should communicate clear objectives and expectations to the entity. Some of the entities had migrated from their mandate by default because sometimes the executive had not communicated its interests to that entity. For instance with Eskom, the state had always said that 70% should be done by Eskom while 30% should be done by Independent Power Producers (IPPs) but this was not the case.

Ms Phiyega replied that clear communication was important. Some entities had not signed a share holder contract in four years but one wondered how they had been operating.

Mr Moloto asked the meaning of financial viability versus profitability as referred to during the presentation.

Ms Phiyega replied that viability referred to when an entity was bringing minimum burden on the fiscus. The entity would be given enough start-up capital and was able to finance itself at the same time driving predetermined social economic imperatives. If profitability was the goal, this needed to be clearly articulated and would take the form of any meaningful dividend. Entities needed to be classified accordingly.

Mr S Motau (DA) asked if the process ended with giving the report to the President or would the report be given back to stakeholders.

Ms Phiyega replied that currently the responsibility of the PRC was to look into the terms of reference. Should there be a calling beyond that, that was for the President to advise.

Mr J Schmidt (DA) stated that there was a huge problem with funding obligations that state entities had. This had an impact on security of supply and impacted negatively on the consumer. For instance the 25% increase of electricity over five years.
           
Ms Phiyega replied that these were some of the areas that would talk to the funding model; the approaches and the proposals the PRC would get from various stakeholders. There were a volume of permutations that could be looked into.

Mr E Lucas (IFP) pointed out that there was a need to look at why about 50% of the entities were not profitable.

Ms Phiyega replied that the observation of entities not being profitable was not raised by PRC but by the Institute of Race Relations. There was a debate on what could be regarded as a “non profitable” entity. For instance Eskom might not be profitable but it was rolling out a massive infrastructure to ready the country for effective economic participation.

Mr Lucas observed that entities ran at a loss but yet came back to the government to get more money. At the same time the people running the entities were getting huge bonuses.

Ms Phiyega replied that it was critical for the shareholder to look at remuneration and have a harmonized approach. A framework and structure was required for remuneration. There was a need for the shareholder to ensure that they were able to retain skills and that there were no differentiated salaries.

The Chairperson asked why some entities were disestablished

Ms Phiyega replied that there was a process via the Public Finance Management Act that talked about how entities were established and disestablished. Preliminary observations indicate that in other countries there was an established process of periodically reviewing the mandate of entities. The process of disestablishment needed to be transparent and structured.

The Chairperson asked how and when the macro audit of entities would be done.

Ms Phiyega replied that it was clear that so much needed to be done. Marco analysis should at least get the fundamentals right. A micro audit might be necessary, particularly within the various sectors.

Mr Lucas asked if it was a mechanism for an entity that had the intention to expand, to source funding outside government.

Ms Phiyega replied that public sector entities were highly reliant on grants from the state. The shareholder had a role to play if entities were to get funding from the private sector. This was related to funding models and public-private partnerships.

The meeting was adjourned.


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