State-Owned Enterprises: Presidential Review Committee Report briefing

Meeting report

The Chairperson welcomed members of the Presidential Review Committee (PRC) and said the Committee had been eagerly awaiting this meeting. Much hard work had gone into producing the report which, it was hoped, would assist not only the Committee with its oversight responsibilities, but also help the country to meet some of the challenges it faced.

Presidential Review Committee report on State-Owned Enterprises
Mr Glen Mashinini, Deputy Chairperson of the PRC, said the report had been commissioned by President Zuma in May 2010, following the Polokwane conference at which it had been resolved ”strengthen the role of state-owned enterprises (SOEs) and ensure that while remaining financially viable, SOEs, agencies and utilities – as well as companies in which the state had a significant shareholding, responded to a clearly defined public mandate and acted in terms of our over-arching industrial policy and economic transformation objectives.”

The PRC had focused on a macro review of all SOEs – commercial organisations, agencies, regulators and other relevant entities – and covered all three spheres of government. There had been no intention to try and “reinvent the wheel,” so previous studies carried out by various bodies, both locally and overseas, had been considered in the production of the report. It was also decided to benchmark the local situation against the practices of countries in other parts of the world.

The PRC had been given 21 terms of reference, but its work streams had covered four main areas. These were development and transformation, ownership and governance, the viability and funding of businesses, and their strategic and operational effectiveness. This had required intensive research activity, involving reviews of literature, conducting seminars, surveying SOEs generally, holding interviews with experts, undertaking case studies, learning about international experiences, and dialogue with a range of stakeholders.

The committee had worked against the background of seven characteristics of a developmental state, in line with the government’s policy directive. These were a shared developmental model, the development of skills and innovation, partnerships with the public sector, an improved infrastructure, increased economic growth, improved service delivery, better quality of life and the strengthening of democratic institutions. A change of management was required to effect the developmental state concept, and this would involve the vision, enabling framework, performance monitoring and evaluation, and competence and capacity, all to be in place, otherwise there would be failure.

Mr Mashinini said that the PRC had come up with 31 recommendations, but throughout its deliberations, it had considered its role to be about informing the discourse, rather than prescribing, so that the policy decisions would be made in Parliament. This did not mean that the PRC had shirked any of the issues, as the directive from the top had been that there should be no “sacred cows.”

A key recommendation had been that the government should enact a single over-arching law – the “State-Owned Entities Act” – which would govern all SOEs, as the current legislation was fragmented, involved duplication and was often conflicting. The main components of the recommendation were:
• A critical review of the overarching strategy and mandates of SOE’s must be undertaken every five years.
• An SOE “Council of Ministers” from the Departments of Public Enterprises, Trade and Industry, Economic Development, the Treasury, the National Planning Ministry and other relevant stakeholders, should be established to oversee implementation of the Act and to enable collaboration between SOEs and government departments at all levels.
• The establishment of a central remuneration authority to set guidelines and uniform standards of remuneration for boards and executives of SOEs.
• Determine the extent, nature of ownership, corporate type and category of all SOEs.
• There should be mandatory registration of all SOEs and subsidiaries in every sphere of government.
• Inclusion of the protocols and processes for the establishment and dis-establishment of SOEs.
• Creation of a centralized ownership model for commercial entities and development finance institutions (DFIs) and a decentralized ownership/shareholder model for statutory and non-commercial entitie3s.
• The establishment of a consolidated SOE data base for all SOEs and their subsidiaries, for all three spheres of government. It had initially been reported that South Africa had about 300 SOEs, but the PRC estimated there were around 715 when one included subsidiaries, trusts, and Section 21 entities
• There should be mandatory collaboration among SOEs.

The PRC had recommended that the chief executive officers (CEOs) of SOEs should be appointed by the Minister in concurrence with the Cabinet, on the recommendation of the board. The board of the SOE would be responsible for recruiting and assessing candidates, recommending two or three for approval, with the executive authority confirming the appointment in writing. With SOEs required to deliver “value for money,” the board should adopt a structured and intensive performance management system for SOE executives, and ensure that incentives were strictly aligned to performance. The PRC also recommended the establishment by the government of a strongly independent Central Remuneration Authority (CRA) to provide guidelines and parameters within which boards could apply their discretion on remuneration.
A common performance management system for all SOEs should be introduced, and the mandate of SOEs should be subject to critical review every five years.

Mr Mashinini said all government entities and SOEs should be required to develop transformation plans. These plans should have implementation deadlines and be included in the performance contracts of management. Boards should establish transformation sub-committees or add this function to an existing sub-committee. Broad-based Black Economic Empowerment (BBBEE) performance indicators should be included in the entities’ predetermined objectives, to be assessed by the Auditor General.

Several recommendations aimed at skills development were included in the report, with the PRC pointing out that the SOEs had the facilities to produce world-class artisans. Retaining these skills remained a challenge, however.

The PRC had recommended that the government should rationalize its holdings by focusing on those SOEs that provided public goods, or were considered “strategic.” This would have to be done by exiting from those sectors where market failure no longer existed and/or could be adequately provided for by the private sector, or if the mandate was no longer justifiable. Another option was to divest either fully or partially from those SOEs that were seen to be under-performing or competing unsuccessfully against private operators, and to absorb those entities whose functions could be carried out cost-effectively by government departments by incorporating them into line function department programmes.

A consolidated funding model for commercial SOEs and development finance institutions was proposed. It was further recommended that the government should develop and adopt a policy shift towards a greater mix of debt finance and equity finance, as this would reduce pressure on the fiscus. Many of South Africa’s BRICS partners had followed this route successfully. Private sector participation in partnering with SOEs should be encouraged.

Mr Mashinini said a funding model for public infrastructure, which distinguished between economic and social infrastructure, needed to be developed. Economic infrastructure, where relevant, should be funded on a “user pays” basis and complemented, for example, by a portion of the proposed resources tax. The funding of social infrastructure, on the other hand, should have less reliance on the “user pays” principle, and more on taxes. The government should also look into whether SOEs were all contributing “a fair share” towards the cost of providing infrastructure, particularly in the mining sector.

South Africa had the potential to turn selected SOEs into world-class national flagships in both the commercial and economic fields. This should be done, based on service delivery performance and financial returns, by capitalizing them adequately, consolidating them structurally and managerially, and focusing their operations on core strategic objectives in the context of the developmental state.

To drive the implementation of the PRC’s recommendations, a transitional SOE Reforms Committee had to be established in the form of an execution management and monitoring task team. Its appointment should take effect as soon as the PRC recommendations were adopted and continue until the SOE reforms were fully implemented, or handed over to the responsible executive authority. It should be constituted by an expert nominated by the President and the central government authorities, and be provided with the necessary resources and powers to carry out its mandate. It would report on progress to the President.

An integrated reporting, monitoring and evaluation capacity for SOEs across all spheres of government needed to be developed. A compulsory electronic reporting and performance management system would have to be introduced, with access to verifiable source documents for monitors and evaluators.

Discussion
Mr C Gololo (ANC) asked if all 715 SOEs which had been identified, were receiving funding from the fiscus. How were they performing, and how many were sustainable? The PRC had recommended that Parliament had to play its role in the appointment of SOE boards, and during a visit to Chile he had found that some board members of state-owned companies were Members of Parliament (MPs), usually from the portfolio under which the entity fell. Did this mean that one could see South African MPs on SOE boards in the future?

Dr G Koornhof (ANC) said the PRC recommendations placed a tremendous responsibility on the state for their implementation. The establishment of an inter-ministerial committee seemed a good idea, but in the end the question was, who would be the “champion” to drive the process? Another recommendation had proposed that the government should improve the financial decision-making capacity in all departments dealing with state-owned companies. How would this be done in practice, particularly with regard to adherence to the Public Finance Management Act (PFMA)?

Mr A Mokoena (ANC) joined other Members in congratulating the PRC on its presentation, and said it was pleasing to see the spirit of transformation coming through. However, there was so much to be done that the PRC should be seen “as a work in progress.” For a start, the legal framework required would be a “behemoth.” Referring to developmentalism, he said he did not believe one should be implacably wedded to the retention of everything one hand – and this did not mean moving to privatization. There were simply some entities that had outlived their usefulness, and should be got rid of.

Ms G Borman (ANC) expressed the view that the crux of the recommendations would be in their implementation. The PRC had set out a framework, and there was now the beginning of quite a number of structures all moving in the same direction. However, she also wondered who was going to drive the process, and suggested that the Portfolio Committee would have to play an important role in this regard.

Ms N Michael (DA) said her party welcomed the development of a framework to clarify the roles of Ministers, boards and CEOs, as well as the proposal that struggling SOEs should be merged into line-function departments or public-private partnerships, or completely disposed of. This was a clear and honest outlook on the way things were going. However, what was not clear was which SOEs were being considered for rationalization, and which would be moved into what was being called the “ministerial empire.” The DA’s view was that to achieve economic growth and create jobs, SOEs should be privatized, and should operate with complete autonomy from government. A “ministerial empire” would achieve the opposite. She suggested the formation of a sub-committee to go into the details of the complex report in depth, as it would have a massive impact on the national development plan in the future. She strongly opposed the idea of MPs sitting on SOE boards, as their role was one of oversight.

Mr Mashinini expressed appreciation for the supportive comments of Members. The PRC had naturally been guided by the policy documents of their “client,” the ANC government, but it had been allowed to adopt an independent point of view and had avoided emotion in its deliberations. The outcome had been a report of national unity which resonated with the medium and long-term interests of the country.

One of the recommendations had dealt with the question of what one should do with SOEs that were not viable. In the case of those that were not commercially viable, one of the criteria would be, what was in the public interest, such as the security of supply. This would be a political decision, and the PRC would not prescribe a decision. The parliamentary oversight entities would always be state-funded. With commercial SOEs, one had a different situation. One could not treat all SOEs as homogeneous entities, and apply the same criteria. When it came to privatization, South Africa did not have a good history – it privatized the profit-making capability of the state, such as Telkom, and nationalized loss-making organizations.

The PRC definitely would not recommend that MPs should be allowed to serve on boards of SOEs. Their role should purely be one of oversight.

The role of “champion” of the process would fall to the lead minister in the inter-ministerial committee. It would be wrong to describe the committee as a “ministerial empire,” but rather as fulfilling the need to build centres of excellence around such a sensitive area of the state’s commercial entities, and to provide leadership instead of having the SOEs fragmented as they were at present.

Dr Bheki Mfeka, Project Manager, Research and Development, PRC, said the “centre of excellence” would deal with the issue of improving financial capacity within the government departments who had oversight responsibility over SOEs. A central authority could produce standard approaches to issues such as governance and training.

The Chairperson said that the PRC was prepared to conduct a workshop for Members so that there could be further interaction.

The meeting was closed.