Department on Legislative and Policy Challenges hindering the achievement of the Developmental Objectives/Public Mandate of State-Owned Companies

Meeting report

Opening Remarks
The Chairperson informed Members that the Department of Public Enterprises (DPE) had been called in to brief the Committee on the issues that were hampering the progression of its work in terms of legislation and the work of the State-Owned Companies (SOCs).

Ms G Borman (ANC) noted that the presentation had not been sent to the Committee beforehand; this was the first time Members were seeing it.

The Chairperson agreed that it was unfortunate that the Committee was only receiving the presentation in the meeting.

Ms Matsietsi Mokholo, the Deputy Director-General for Legal and Governance matters in the DPE, explained that there was some information the DPE only managed to include in the presentation late last night. She apologised and said it would not happen again. She also apologised on behalf of the Director-General (DG), who had to attend the Infrastructure Indaba and could not make the meeting.

Briefing by the Department of Public Enterprises
Ms Mokholo explained that the board of each State Owned Company (SOC) was accountable to the shareholder Minister – a relationship that functioned through corporate law. The DPE and SOC corporate governance included processes and systems by which SOC were directed, controlled and held to account to stakeholders such as the shareholder, Parliament and customers. The shareholder expected the board to report on the adequacy of SOC controls, sufficiency of resources, its business plans and SOC performance. The Department expected boards to account for and evaluate their performance against outcomes in the shareholder compact, and apply government policies consistently across the SOCs. Boards were also expected to ensure that SOCs had strong, independent and adequately skilled executive management to oversee and supervise the SOC business operations.

The Shareholder Compact and Corporate Plan
The boards were primarily responsible for initiation of the shareholder's compact, to be concluded by October of each year ahead of the annual plans. The corporate plan should cover a period of three years and include strategic objectives and outcomes identified and agreed to by the board and the Minister in the shareholders compact.

Performance against Pre-determined Objectives
All public sector entities were required to submit their annual performance reports for auditing together with the annual financial statements within two months after the end of the financial year. Where the Auditor-General of South Africa (AGSA) had opted not to perform the audit of the public entity, the audit report had to reflect an opinion or conclusion on the reported information relating to the SOC performance against pre-determined objectives.

SOC Internal Controls
Review of the 2011 audit indicated poor outcomes for some SOCs in terms of financial management, poor audits and governance challenges. The Shareholder was concerned with the wide range of challenges emanating from the SOC annual reports such as challenges around non-compliance with legal and regulatory prescripts, qualified audits due to lack of internal controls and inadequate and late submission of information as well as instances of fruitless and wasteful expenditure, SCM audit findings such as irregular procurement practices and inadequate controls, and emphasis of matter on issues requiring attention such as guarantees that are due to expire over the next year.

It was found that there were deficient management structures in place and no information on resignations of senior executives. There were incoherencies, both at board and management levels, and there were often tensions between Chief Executive Officers (CEOs) and the boards. Very often there was little or no early warning signs that the relationship between the two was dysfunctional. There were inadequate measures, mechanisms and systems in place to deal with potential cases of directors' conflict of interest and appropriate disclosures. Other problems included delays in the finalisation of the shareholders compacts, planned targets not being met, and the quality of information submitted to the DPE was not up to standard.

The DPE was not adequately informed of impending or emerging risk, and most times SOCs risk management strategies were not outlined in their reports. This was coupled with the fact that there were inadequate financial disclosures.

In terms of misalignment between the SOC quarterly reporting, the draft financials and, the AGM pack and the final annual reports, condonation of late submissions hampered the technical teams' ability to adequately prepare the DPE's leadership for the AGM. This resulted in the postponement of the AGM and had a negative impact on meeting the deadline to table the reports to Parliament.

The DPE's interventions included strengthening the appointment of the boards and board committees, being involved in the appointment of the audit and risk committees as well as the internal auditors. The SOC mega-projects were being monitored robustly and Independent Board Evaluations would be held to improve board performance and provide clarity and accountability. The DPE had also embarked on a process to improve the channels of communication in terms of the decision-making process. Strategic monthly meetings were held with the Ministers, chairpersons, DG and CEOs, and there were structured engagements with the Auditor-General (AG). There were two standing meetings a year between the AG, Minister, and chairpersons of the audit and risk committees. SOCs also had ad hoc meetings with DPE officials.

Mr Sandile Dlamini, Chief Director: Legal and Governance matters in the DPE, spoke to legislative/policy challenges.

Integrated Coastal Management (ICM) Bill
The Bill was issued by the Department of Environmental Affairs (DEA) on 2 September 2011 as an amendment to the ICM Act of 2008. It was important for the Committee to be aware of the Bill's implications. The Bill failed to achieve the balance between the management of national environment and Transnet's commercial imperatives. It failed to align the ICM Act and legislations such as the Sea-Shore Act, Legal Successions Act, Ngqura Act and the National Parks Act. The composition of Coastal Public Property included land submerged by coastal water. Therefore, ports would be included in coastal public property. This would affect Transnet's balance sheet as it was inconsistent with the old regime of ownership of immovable assets. Ownership of the coastal public property vested in the state. The DPE recommended that the Bill should exclude any immovable structure within ports from the coastal public property.

In terms of reclamation of land, it formed part of state-owned land. Reclaimed land should be capable of registration in terms of the Deed Registries Act. Transnet currently engaged in sand-by-pass schemes that included moving sand in order to prevent erosion. The DPE's recommendation was that activities authorised by or in terms of the National Ports Act of 2005 should be excluded from the IC Act. The DPE would address the Committee further after the ICM Bill was introduced in Parliament. A comprehensive submission was already made to DEA.

Broadband Infraco
Infraco's statutory mandate was to extend the availability and affordability of access to electronic communication. They were issued with an Electronic Communications Network Services (ECNS) licence by ICASA in October 2009 to enable them to provide long distance connectivity to national and international markets on a bulk wholesale basis. According to the Broadband Infraco Act, Infraco should be licensed with an ECNS licence as well as an Electronic Communications Services (ECS) licence in order to carry out its mandate. On 7 April 2010, ICASA resolved not to issue an ECS licence to Infraco. The lack of a licence would make it virtually impossible for Infraco to achieve its developmental or strategic objectives. The way forward would be to ask ICASA for a conditional ECS licence.

Preferential Procurement Policy Framework Regulations
The challenges for the regulations emanated from the introduction of a Broad-Based Black Economic Empowerment (BBBEE) status level of a contributor. The DPE noted that a BBBEE status alone was not effective in implementing transformation. SOCs procured specialised goods and services from foreign markets, therefore, they should be allowed some flexibility in how they procured as there would be instances where it would not be possible to comply with the regulations.

Adventura Limited
Cabinet decided that Adventura would be wound up. Since the decision, the company had not carried out any business. Some assets were disposed of and the DPE would be initiating the voluntary liquidation process soon. The legislative process would include liquidating and deregistering the company first, and repealing the Adventura Resorts Act. This would be concluded in the last quarter for 2012/13 or the first quarter of the 2013/14 financial year.

Discussion
Mr E Marais (DA) asked if a date had been set for when the last assets belonging to Adventura would be dissolved.

Mr Dlamini replied that the DPE was looking at a timeframe of three months from today for winding the company up.

Mr A Mokoena (ANC) noted that Adventura was supposed to be wound up. He asked what happened to the employees of the company and what compensation procedure had been followed to avoid repercussions from trade unions. He wondered if there was any dissonance between the Public Finance Management Act (PFMA) and the Companies Act as far as SOCs were concerned. He also wanted to know if there were any legal cases pending within the DPE.

Mr Dlamini answered that the Companies Act recognised the PFMA and also goes on to provide that the PFMA would provide solutins in instances of conflict.

He assured the Committee that the DPE had been very clinical regarding the winding up of Adventura. Currently, an internal audit was underway on the SOC and once this was finalised by the end of February or beginning of March 2012, a general meeting would be held to pass a resolution to liquidate the company. Once the resolution was taken, the Office of the Master would be contacted to provide security for small liabilities that may exist. A liquidator would be appointed to proceed with the winding up. Thereafter, the assets would be disposed of.

In terms of human capital, there was only the CEO left as well as an admin officer. The company’s functions were outsourced to another company. There were no other people working there so the DPE was not worried that there would be any “comebacks” relating to contracts being terminated.

Ms Borman thanked the DPE for the presentation; Members now had a good idea of the challenges and the measures put in place to address those problems. She asked what the DPE’s strategy was to get SOCs to submit reports such as their corporate plans. She stated that the source of most of the problems was having the right, qualified people in the correct positions. She asked if the DPE had any input in this when it came to SOCs. She addressed the matter of the Independent Board of Evaluators and asked who would make up the independent part of the board.

Ms Mokholo addressed the question on what the DPE’s strategy was to ensure compliance.  She explained that the DPE had put together a strategy that still had to be approved by the Minister that talked to what the alternatives wee. The reporting for most of the plans, such as the corporate plan was based on the prescripts PFMA, which was not punitive. There was legislation; however, it did not necessary equip the SOCs to deal with certain matters. The DPE was making recommendations to the Minister that the process for all the projects contained in the corporate plans that were subject to PFMA approval, would not automatically be attended to according to PFMA prescripts if there was non-compliance in terms of the corporate plans. The DPE could not approve all the projects if the corporate plan was submitted late. This would affect the performance of the company, but it also tested the performance of the senior management. 

Ms Mokholo replied that the DPE introduced the CEO appointment guideline to SOCs that was influenced by looking into the private sector in terms of the Companies Act, which sets out clear processes for the role of the board and shareholder in the appointment of the CEO. But, the Companies Act did not recognise that in the public sector, the appointment of the CEO or the board also had to go to Cabinet. The question that faced the DPE, was how this could be taken into account. So, the appointment guideline was aimed at striking a balance between the Companies and the PFMA. The DPE also sometimes focused its attention on the appointment of the CFO and COO, and other senior management.

Mr M Sonto (ANC) noted that the risk management strategies were not outlined in the SOCs reports. What measures and interventions did the DPE employ to ensure that these strategies are outlined in the SOCs reports? Were the audit and risk committees in place before or not? He wanted to know what the situation was around the V&A Waterfront since it was bought over. The matter of Broadband Infraco had been dragging for some time now. He asked what the hold up was with ECS licenses. He wanted to what the timeframe was in which the PBMR had to be wound up completely and if there were any assets that had to be dispersed of.

Ms Mokholo replied that the risk management strategy was part of the DPE’s priorities. The DPE had introduced templates on risk management, which were based on how the Department manages contracts. If a contract was to expire it would get a six month red flag upfront so the DPE knew it needed to renegotiate the contracts and decide what the terms were. So, the Department would be using the dashboard as a risk management tool around contract management. It would also be used as a tool to monitor mega projects.

Ms Mokholo said that the audit and risk committees were in place before in terms of the PFMA and the old Companies Act. The new Companies Act has helped to elevate the appointment of the audit and risk committee to the shareholder. Now, the process has to be done by the Minister for SOCs at their annual general meeting. The new Act also specified the qualifications needed by the members of the audit and risk committees. The DPE was taking advantage of the provisions of the Act to strengthen their own oversight over SOCs. 
Ms Mokholo answered that the Waterfront sale was not covered in the DPE’s Inter-Coastal Management strategy. She, personally, was not sure what the issues were around the sale of the Waterfront. 

Ms Dlamini explained that the DPE had been relentless in pursuing a solution to the Infraco matter. The DPE would be having discussions with ICASA. At this stage, the DPE was trying its best to have the matter resolved. They appreciated the Committee’s help.

Mr C Gololo (ANC) noted that the DPE seemed to have detected many of the challenges at a very late stage. For example, the relationships between the CEOs and the boards. He wondered what this said about the DPE’s capacity and its legal unit. In terms of the Independent Board Evaluators – would this be an internal exercise or would there be outsourcing involved? There was a litany of pending litigations against either the Minister of the DPE. He asked what bearing these cases had in the DPE. What relief would the winding up of Adventura bring to the government?

Ms Mokholo addressed the concern about the litigation pending against the Minister and the DPE. She said that in order to answer the query, she had to look back into the history of the DPE. When the DPE was convened as an office of privatisation, the skill needed for the job that had to be conducted proved to be a challenge for the Department, as it had to rely heavily on consultants. There was no one that could follow up on the privatisation processes. As a result, the contracts and the way officials conducted themselves exposed the Department. This was why there were a number of litigations pending. There were a few cases that went on for a number of years because they were not handled properly. However, the DPE had introduced an intervention called the “Alternative Dispute Resolution” initiatives, which looked at cases that could be settled without going to litigation. There were only two cases left that were pending in the Department and both were at the arbitration stage. The DPE believed that the one would be dealt with without needing to go to court. An assessment was being done on the other case. The DPE had managed to drastically reduce the amount of litigation. Since 2008, there had not been any new cases of litigation. What the DPE was dealing with currently was legacy issues such as the manner in which contracts were drawn up and how they engaged with external parties.

She said that the DPE acknowledged that some of the issues it was dealing with were related to human elements. The DPE relied on the SOCs boards to provide it with information and for external auditors to act as “gatekeepers” to an extent. The DPE could put all of these measures in place, but it might fall short anyway because was not in the SOCs itself. There were always going to be times when information was inadequate or too late to be dealt with. The DPE relied on open communication and constant engagement with the SOCs.

Ms Mokholo answered that the Independent Board Evaluators would be external service providers that would conduct the board evaluation. The DPE found that there were instances of non-compliance. For example, some of the SOCs had not conducted board evaluations in the last three years. Two SOCs that had challenges between their senior management and the board had not conducted board evaluations in years. Where SOCs complied with the evaluations, the DPE discovered interesting things about them – it gave the DPE a sense of what the dynamics were in the board, where there were issues of contention and conflicts of interest, and how the challenges were resolved. It was a useful tool that would be used for the 2012 AGM.

Dr G Koornhof (ANC) said that if the Committee took a step back and looked at the sizes of the eight SOCs that the DPE oversaw, Members would see that the economic activities they were involved with were huge, as well as the contribution they made to the GDP. At the same time, if one looked at the size of the DPE with its diminishing budget and relatively small amount of personnel, it had to wonder if the DPE had the capacity and the resources to be effective in terms of oversight over SOCs. The DPE had to tell the Committee if it was going to be “comfortable” over the next year Medium Term Expenditure Framework (MTEF) period, and if it was really in control and able to handle the oversight role effectively. The challenges mentioned by the DPE in the presentation were massive. The DPE referred to a “misalignment” by the SOCs on quarterly reporting, draft annual financials, the AGM and the final annual reports. The government was already 18 years into the new democracy. How could it still have a misalignment from SOCs after such a long period of learning curves and lessons learned? The Committee was aware of the Integrated Coastal Management (ICM) Bill that was coming to Parliament. The DPE had made the Committee aware of the problems before, especially as it affected Transnet and the ports. The DPE was correct; it had massive implications for Transnet. If he understood the Bill correctly, all coastal property belonged to the public and it overrided the state. The fact of the matter was that if ports were included under coastal properties, it had massive implications for Transnet. Transnet’s recommendation that it had to be excluded from prohibition of activities and the reclamation of land also had implications for Transnet, which was a SOC that had to embark on a massive infrastructure rollout initiative. He asked where this Bill was at the moment and if it had passed the stage of public hearings. If the Bill was to come to Parliament, it would go through the Portfolio Committee on Water and Environmental Affairs, and not the Committee on Public Enterprises. Had the DPE exhausted its negotiations in terms of the Bill? The Committee had to know what role it was going to play in the matter and whether it should meet with the Committee on Water and Environmental Affairs.

The Chairperson asked the DPE to speak on what the DG’s and board’s role was in these interventions.

Ms Mokholo explained that it seemed that when people spoke about the DPE, it was if they were only a shareholder department. Everything else that the DPE did related to its systems, frameworks and guidelines. Sometimes, the SOCs adhered by these guidelines and sometimes they did not. Sometimes the companies made a choice not to adhere to the guidelines if there were other legislative impediments, such as with the Companies Act. The DPE had now embarked on a process to ensure that all guidelines and frameworks were legislation related. First and foremost, the DPE ensured that it was compliant with legislation. So, the interventions by the DPE, through the Minister, would be based on the legal prescripts. The interventions had been very successful where measures had been introduced. However, the DPE still had some way to go because SOCs operated in a much regulated environment. The Companies Act did not take into account the developmental mandate and the DPE wanted to use the SOC’s to fulfil developmental objectives. The DPE’s role as a shareholder in effecting interventions was to strike a healthy balance that was compliant with legislation, but also achieved the developmental objectives. At this point in time, the DPE’s interventions had been effective. The evolution of the shareholder function was still ongoing.

In terms of the size of the budget, the DPE was a very “lean” department. The global trend was to focus on the shareholder function, which was a highly capacitated function that required skill. The DPE had shared with the Committee previously that it was quite constrained. It had challenges being in public service in terms of attracting and then retaining staff of the correct calibre. In the past, the DPE tried to put measures into place – it was even part of the DPE’s legislative process - to have an autonomous authority but also to be able work outside of the state if you want to attract other remuneration. The DPE’s budget had been reduced but it was looking at other alternatives to strengthen the capacity within the DPE. If one looked at the infrastructure build and the State of the Nation Address (SONA) in terms of the role SOCs would be playing in infrastructure development, the DPE had taken note of this and is looking for alternative ways of capacitating themselves.

Mr Dlamini answered that it was correct that coastal property belongs to the people of South Africa and that it was held in trust by the state. The ICM Bill was still with the Department of Environmental Affairs for comments, but it would be out soon for public comment. Thereafter, it would be introduced to Parliament. The DPE and Transnet had made comprehensive comments on the Bill and were hopeful they would be taken into account. If not, the process would be taken to parliamentary level.

The Chairperson stated that the matter had to be addressed before the Bill was introduced to Parliament – it could need the assistance of the Committee. He suggested that a joint meeting could be held with the Portfolio Committee on Water and Environmental Affairs about the ICM Bill.

Dr Koornhof proposed that the DPE “give their case of Transnet” to the Committee in the mean time while they waited for the joint meeting so time was not wasted and so Members could know the background of the issue.

Mr Dlamini agreed.

The Chairperson commented that everyone had to make an effort to ensure the ambitious infrastructure plan could be achieved. The Committee and the DPE had to keep its eyes on the SOCs.

Ms C September (ANC) concurred that an informal briefing should be held on the ICM legislation. There was nothing wrong with this. They had emphasise that the Public Enterprise Committee was not going to be an afterthought. She wondered when the legislation was going to be submitted to Parliament. The Committee needed a sense of the timeframe so it could have consideration in the Committee Programme. It was clear in terms of capacity that the DPE was trapped in the situation that Apartheid had left it. She suggested that the Committee hold public hearings on the role of the DPE in a developmental state. Government had asked for infrastructure to be rolled out on a massive scale but one of the department’s that played a big part in the rollout had huge constraints. There was nothing wrong with the Committee looking at other legislation to help the DPE. She suggested the Committee look at other legislation with other state-owned entities. She was sure that there were many lessons that could be learned. In terms of the situation with Infraco, the Committee had to be proactive and come up with a solution to the problem. She also suggested that the Committee should “have a conversation” with the Communications Portfolio Committee on the matter.

Mr Gololo asked what DPE’s role was in ensuring that the SOCs were capacitated to handle these huge amounts of money for infrastructure development.

Ms Mokholo stated that the DPE gave the boards of SOCs clear instructions on what was expected from them. From the DPE's analysis, blame could not be put on one part of the organisation. Many times the SOCs are let down by management within their organisations, things that the boards could have done better, and elements that the auditors should have picked up. The DPE relied on information from these entities, but the DPE could also have done better analysis. The purpose of the 2010/11 audit process was to show who the roleplayers were and what was expected from them. The DPE has tried to improve upon the quantitative and qualitative measures put in the SOCs, and believes it has started implementing the correct processes such as engaging with the boards and spending time with the SOCs to show them that DPE was watching them.

Mr Dlamini added that there was a very big part of the risk management plan that went into the corporate plan and the DPE has been robust in assessing this plan to ensure it contained all the components of the SOCs operations.

The Chairperson stated that the DPE should tell the Committee what they needed help with, especially in terms of the Budgetary Review and Recommendation Report (BRRR).

Adoption of Minutes
The Chairperson asked Members to turn their attention to the minutes.

Ms September stated that the Committee had made a resolution that Members had to receive the minutes before the time so they could read through them. She proposed that since the Committee only received the minutes moments ago, that they should consider them another time.

The Chairperson agreed saying that the minutes would be considered at the next meeting. He asked the Committee Secertary to respect the resolutions of the Committee.

The meeting was adjourned.