Report on State-Owned Enterprises: briefing by Presidential Review Committee

Meeting report

Presentation of the Presidential Review Committee (PRC) report on state-owned enterprises
Mr Glen Mashinini, Deputy Chair, PRC, indicated that  Polokwane had resolved to strengthening the role of state owned enterprises and ensure that, whilst remaining financially viable, SOEs, agencies and utilities – as well as companies in which the state had significant shareholding – responded to a clearly defined public mandate and acted in terms of an over-arching industrial policy and economic transformation objectives. The role of state-owned entities and the development finance institutions would also be crucial to achieve the New Growth Path goals. The institutions would need to operate differently and more effectively. The PRC was appointed by President Jacob Zuma on 10 May, 2010. The Committee consisted of 10 members (previously 12 members), the gazetted term of the PRC ended on 25 August 2012, the final report of the PRC had been submitted to the President. The Presidential Review Committee consisted of the following members: Mangwashi Phiyega, Glen Mashinini, Dawn Marole, Deon Crafford, Swazi Tshabalala, Gugu Ngcobo, Mbulelo Mzamane, Pramod Mohanlal, Nombulelo Mkhumane, and Simo Lushaba.

Mr Mashinini described the terms of reference as including a common understanding and definition of state-owned entities; the place of State Owned Enteprises (SOEs) in a developmental state; strategic importance and value creation of SOEs; the viability and funding of SOEs; the existing portfolio of investments by the state in strategic businesses;  the efficiency and effectiveness of SOEs with respect to service delivery; current policy and regulatory framework and the impact thereof on the management of SOEs; the balance of social, political and economic imperatives in delivering objectives for SOEs; performance measurements among SOEs; standardisation of accounting and reporting processes for SOEs.

Other terms of reference included: owner/ shareholder oversight and governance of SOEs; recruitment, selection and appointment of boards and executive management of SOEs; remuneration policies of SOEs, taking into account wage differential aspects; and current restructuring initiatives (privatisation, retrenchments, public/private partnerships) and implications thereof; SOEs as a platform for sustainable human capital development and a catalyst for scarce skills; establishment of a comprehensive database of SOEs across all spheres of government; policy for the establishment and de-establishment of SOEs; a framework for identifying and establishing priority state-owned entities; relevant global benchmarking and best practices, alignment, collaboration and cooperation among SOEs for the purpose of optimising state resources; relationship and collaboration between Ministries to facilitate achievement of SOEs objectives; and finally, compliance of SOEs with the government’s development and transformation agenda.

The PRC undertook a macro review of entities, but it was not a detailed micro audit of individual SOEs because the focus was on all SOEs, such as commercial, agencies, regulators and other relevant entities. SOEs in all government spheres were included in the scope of the review, and the engagement with the existing knowledge contained in numerous reviews was undertaken by various stakeholders.  An examination was made of existing benchmarks, both domestic and international. The PRC placed an emphasis on leveraging that which existed while also seeking to identify gaps and fresh opportunities. The PRC wanted to promote the developmental state which was characterised by improvement of quality of life and service delivery, increased economic growth, strengthened democracy, improved infrastructure, a shared developmental vision, developing skills and innovation, and partnership with the private sector.

The PRC had put forward the following recommendations to respond to its terms of reference:

The government should develop an overarching, long-term strategy for SOEs. The strategy should be aligned to the developmental state that South Africa aspired to become, the strategy should be articulated in a White Paper on SOEs, and the recommended strategy should be periodically reviewed and evaluated, at least every five years, to ensure long-term alignment with the objectives and circumstances of South Africa’s developmental state.

The government should enact a single overarching law (‘State-Owned Entities Act’) governing all state-owned entities. The proposed legislation would aim to address the duplication, conflicting provisions, different founding legislation, and sometimes serious omissions in the current legislation. The State-Owned Entities Act should supersede all current legislation governing SOEs, reduce the current burden of compliance with multiple laws and regulations, and include all subsidiaries of SOEs.

The appointment of the Chief Executive Officer (CEO) should be done by the Minister in concurrence with Cabinet, at the recommendation of the board. The appointment process should include that the board was responsible for the process of recruitment and assessment of the nominated candidates, the board would recommend to the Executive Authority two or three ‘appointable’ candidates for approval and the Executive Authority would confirm the appointment in writing. To manage sustainable development and retention of skills, the PRC recommended longer-term employment contracts, the board should adopt a structured and intensive performance management system for SOE executive management, and incentives should be strictly aligned to performance.

The government should develop a mandatory framework for effective collaboration among SOEs. The collaboration framework should be in line with the constitutional requirements for collaboration, consist of a common plan, derived from the overarching developmental state strategy, strengthen partnerships between SOEs to drive government priorities, and establish and strengthen partnership between government and the private sector to drive the developmental state agenda and priority projects.

The government should establish a Central Remuneration Authority (CRA). The CRA should be allocated a strong degree of independence as well as the necessary authority to develop an overarching framework for remuneration in SOEs, provide guidelines and parameters within which the board might apply its discretion on remuneration, provide direction on remuneration of SOEs’ boards and executives, advise government on the appropriateness of the remuneration policies, practices and both short and long-term incentive approaches developed by the SOEs ,and periodically review the relevance and appropriateness of executive perks or benefits paid outside the executive’s total package.

The PRC had recommended the availability of regulation, meaning that the government should develop a uniform framework for economic regulation. Government should undertake a process of identifying policy inconsistencies and policy conflicts, clarify the role of economic regulators, and develop a blueprint to guide regulatory designs.

There should be strategic intent and corporate performance plans. The agreement and sign-off of statements of strategic intent and corporate performance plans should be made mandatory for every executive oversight authority developed within a specified timeline.  There should be a focus on a dedicated, deliberate training and development programme for oversight functionaries. Most importantly, strong sanctions and accountability measures should be in place to deal with non-compliance and ensure accountability and productivity.

All government entities and SOEs should be required to develop transformation plans. The transformation plans for SOEs should have implementation time frames, be included in the performance contracts of executives and management, require boards to establish transformation sub-committees or add the transformation function in a dedicated fashion to an existing sub-committee, include Broad-Based Black Economic Empowerment performance indicators as part of the pre-determined objectives to be assessed by the Auditor General, and finally, include the review of the current BBBEE initiatives including charters and  preferential procurement to determine their successes or failures.

The government should rationalise its holdings by focusing on those SOEs that provided public goods and those deemed to be strategic. This should be done by exiting from those sectors where market failure no longer existed, sectors that could be adequately provided for by the private sector and sectors where the mandate was no longer justifiable. Government could also divest either fully or partially from those SOEs observed to be under-performing and those that were competing unsuccessfully against private operators. Those entities could also be absorbed if their functions could be cost-effectively carried out by government departments by incorporating them into line function department programmes.

The government should develop a consolidated funding model for commercial SOEs and Foreign Direct Investments (DFIs). This should be done collectively by the central authorities for commercial entities and DFIs as well as National Treasury, with the concurrence of the SOE Council of Ministers. National Treasury, in terms of its mandate, should exclusively marshal and manage all liabilities of SOEs, both commercial and non-commercial, because they were in the end the state’s contingent liabilities.

The government should develop and adopt a policy shift towards a greater mix of debt finance and equity finance. That should be done, where relevant, after consideration by the SOE Council of Ministers and approval by Cabinet. Government should consider the possibility of listing select SOEs on the Johannesburg Stock Exchange (JSE), while astutely preserving government control and maximising investor participation in SOEs. A flexible policy could be instituted that discouraged SOEs from raising private funds to provide capital to those SOEs where private sector involvement was not desirable (e.g. natural monopolies).

A model for the funding of public infrastructure based on a distinction between economic and social infrastructure should be developed. Economic infrastructure, where relevant, should be funded on a ‘user pays’ basis. Such a funding approach should be complemented by, for example, a portion of the proposed resources tax. Funding of social infrastructure, including roads, should have less reliance on the ‘user pays’ principle, and more on taxes. The emphasis on taxes and the ‘user pays’ funding model as the only sources of generating capital for infrastructure should  be reviewed, moderated and blended with other diverse policy options. Such funding should be considered and approved by the SOE Council of Ministers guided by National Treasury. To adopt a relatively expansionary gearing policy, the government should signal unambiguously to financial markets its implicit backing of this form of SOE debt because SOEs were strategic. The future pricing of services and retention of earnings should take into account on-going maintenance requirements and the eventual need to replace obsolete infrastructure to avoid future scrambles for capital to address deterioration.

The government should ensure that the Executive Authorities’ SOE strategic management and relationship was professional. There should be maintenance of strategic relations and exchange within and between the executive authorities and the management of the entities; improvement on the governance of the SOEs; enhancement of  the capacity of the state to act as an effective owner; an effective state advisor on the affairs of the SOEs; transparency in dealing with Parliament, and other ministries and stakeholders; quality delivery of services in line with the developmental state agenda; and ensuring accountability and safeguarding of the government’s assets. Such processes should take into account balance of merit and transformation.

The PRC had put in place an implementation plan which involved a common understanding of a developmental state vision within the SOEs and their structures. The strategy for SOEs should be formulated and communicated.  A White Paper for SOEs would be drafted and adopted by the Cabinet. The process of formulating an SOE Bill should be initiated, and SOE categorisation framework should be adopted.

The plan would ensure that all reforms were fully implemented, in particular: SOE policies and legislation were implemented, including streamlined transformation legislation, uniform economic regulation framework introduced; and selected world-class commercial SOEs were in place. In the implementation phase, the SOE sector would have a strategy for SOEs aligned to the developmental state vision. An enabling environment was important, including legislation, structures, policies. SOEs would be meeting their performance targets in a balanced manner. The state owner/shareholder and oversight capacity would be appropriately enhanced.

According to the National SOEs Database, South Africa had approximately 300 SOEs. The PRC estimated that there were 715 SOEs when including subsidiaries, trusts, and other entities. The National SOE Database would serve as a National Management Information System for SOEs, with up to date performance indicators. Performance analysis dashboards would provide reports on the performance of SOEs in service delivery, skills development, job creation, contribution to economic growth, and providing essential data for research, and planning relating to SOEs, and other such crucial analysis of SOEs from one consolidated platform.

Discussion
Mr M Swart (DA) noted that the presentation was very interesting, but having lots of SOEs was not a good idea in South Africa. He then asked what the Presidential Review Committee’s next project was.

Mr G Snell (ANC) congratulated Mr Mashinini for the good presentation. He then asked what the extent of the involvement of Cabinet board in the recommendations was. He wanted clarity on legislative framework.

Mr N Signh (IFP) noted that the presentation clearly indicated that there was unfinished business and more work still need to be done. He asked when those recommendations were going to be adopted, and who would work on the adoption and implementation. He asked how the developmental state outlined in the presentation was going to work, and how inclusive economic transformation was. He requested the list of all SOEs.

Mr P Gelderblom (ANC) noted that the recommendations were interesting. He wanted clarity on the recommendation that said “the government should develop a common performance management system”.

Ms A Mfulo (ANC) wanted clarity on standardisation of accounting and processes, the efficiency and effectiveness of SOEs with respect to service delivery under terms of reference, mission and vision of the PRC.

Mr Mashinini replied that some questions asked by Members needed serious debate and discussion with PRC committee members. However, there should be proper guidance on how to go forward. The PRC recommendations tried to speak to National Development Plan (NDP) which was the overall plan for the country. The SOEs were also covered in the NDP. The PRC Committee did not go through the whole report yet, but the Committee would look at the whole report, and give clarity on issues raised by members. However, the presentation briefly outlined the implementation plan. There was a list of SOEs as well as how they performed. The list would be sent to members. Some SOEs had not performed very well, and their mandate had been clarified to ensure that they perform better. In addition, the PRC Committee had conducted a survey to check how SOEs performed, and advice was given to SOEs as how to improve their performances. The developmental state that the PRC was trying to promote would deal with issues of crime, poverty, job creation, rural development, and service delivery across the country. There should be equity transfer to the grass roots so that people get empowered. The mines are national resources and they needed good policy in place.

The Chairperson noted that the mines could generate money needed for improvement of the South African people. He emphasised that the recommendations should be implemented.

The meeting was adjourned.