State Owned Companies (SOCs): Department of Public Enterprises briefing on shareholder compacts

Meeting report

Department of Public Enterprises (DPE) briefing on shareholder compacts signed with SOCs
Mr Tshediso Matona, DPE Director General, pointed out that in terms of the Treasury regulations all State Owned Companies (SOCs) had to conclude a shareholder compact with the executive authority on an annual basis. SOCs had a dual mandate in that they had commercial as well as non-commercial imperatives. The shareholder compact set out annual key performance indicators and measures in support of the strategic intent. Targets had to be defined for financial, operational and socio economic performance. The core business of the Department of Public Enterprises (DPE), the shareholder, was oversight of State owned enterprises. Parliament was part of that oversight through voting on the budget for each mandate. The Public Finance Management Act (PFMA) required that the DPE had to report on a quarterly basis to Parliament.

Ms Matsietsi Mokholo, Deputy Director General: Legal, Governance and Risk, stated that the SOCs operated in an evolving environment. Oversight had to be agile. The SOCs had to be competitive, but also had to invest in infrastructure. Within the South African developmental agenda, the SOCs had to compete for skills. The SOCs had their own legislation, which constrained the ability of government to direct them. The shared function had to be enhanced towards public transparency, accountability and a culture of delivery. There had to be investment driven growth. There were benchmarks for partnership with the private sector. Challenges included ensuring alignment between compact targets and performance of executives; the setting of too many targets; protracted shareholder compact negotiation processes; balancing achievement of objectives and financial sustainability in a constrained economic environment, and no clear punitive measures for non-performance. Key interventions to respond to challenges were remuneration standards to align executive pay with company performance; SOC quarterly reporting guidelines, and the development of the Government Shareholder Management (GSM) Bill.

Discussion
Mr E Marais (DA) asked about time frames for implementation.

Ms D Rantho (ANC) asked if the DPE had relations with the Department of Higher Education and Training to help with skills development in the SOCs. The SOCs had a terrible background with regard to skills.

Ms Mokholo replied that there had indeed been engagement with the DHET towards skills development. Memoranda of Understanding (MOUs) were entered into. There were partnerships with universities and teaching academies. Skills development targets were included in the compact.

Mr Matona added that there was a national skills fund for skills initiatives. SOCs used to take the lead in the training of artisans, and not only for themselves, but also for the general market. But there had been financial cost cutting due to investment in capital expansion, which resulted in a skills loss. Training was resumed, but there were financial constraints. Transnet was in partnership with the DHET. The underlying principle was that the SOCs had to provide training for skills to be used also outside of the SOCs.

The Chairperson asked about partnership with universities in the current year. Targets had not been met in the Eskom youth development skills programme.

Mr Matona replied that the Eskom new intakes target would be monitored. Eskom also had to say what was in the pipeline.

The Chairperson asked why unrealistic targets had been set.

Mr Matona replied that youth was a new category, and the SOCs were struggling with it. The SOCs were as yet uncertain about what could be achieved.

Ms Mokholo added that the skills development fund was not sufficient for the entire SOC programme. The challenge was that when companies were not building, there was a loss of skills in a company. Skills were lost to the international market. There were skills challenges to implement programmes.

Ms Rantho asked if the compacts clearly indicated penalties if people did not reach a certain percentage of their targets. There were unreachable targets. She asked if people could just do what they wanted.

Mr K Morapela (EFF) referred to punitive measures for non performance. The GSM Bill had to capacitate the Department to monitor the SOCs. The Labour Relations Act provided clear guidelines on courses of action for non-performance. Non-performance could prevent projects from being finished on time.

Mr R Tseli (ANC) asked about consequences for non-performance. People at the lower level were punished, when they had not really been responsible. It would do to look higher when non-performance was punished.

Mr Matona replied that the GSM Bill would help in that regard. Performance at work was governed by the Labour Relations Act. The Department did not have a legal instrument to guide relations between the shareholder and the SOCs. If need be, the shareholder could dismiss the board and appoint another board, in the event of non-performance. But situations could be complex. The shareholder had to exercise judgement as to whether there were other factors that influenced performance. Transnet targets were influenced by the economic downturn, for instance. It was not because trains did not run on time. The economic downturn affected the volumes that could be carried. Due to the economic downturn people travelled less, which affected South African Airways targets. The Department prevailed on SOCs to punish non-performance. His own performance contract did not state that he would be fired as DG if he did not perform. Yet it was clear that there would be that consequence. The picture with regard to non-performance changed from year to year. One consequence for non-performance was the denial of bonuses.

Mr Matona continued that there was a time when shareholder oversight was unplanned. It was assumed that the companies knew the market best. That model did not work very well, because there was no alignment with government policy. It was an ugly history. The current approach was to get hands on and closer and enforce compacts. Initially there was pushback. It was only when there were financial difficulties that the SOCs realised that they needed the government assistance. Currently the Department was prepared to walk in and intervene if necessary. The trend was towards alignment. But it could be difficult, because there were challenges related to the performance of the economy.

Mr Tseli suggested that SOCs that performed well could report back on best practice.

Mr Morapela asked if the shareholder compact factored support of small business into the mandate of the SOCs.

Mr Tseli asked at what stage the Committee could make inputs into the GSM Bill. The content of the Bill had to be shared with the Committee.

Mr Tseli referred to the performance dashboard. He asked why performance fell short of expectations, if there was regular monitoring on a quarterly basis.

Mr Matona replied that the SOCs could not always report timeously on new developments in the current quarter. It had to wait for the next quarter. The Department urged SOCs to continually keep abreast of progress and challenges. There had to be improved monitoring.

Mr Tseli asked why there had been a delay in the signing of compacts. It had an impact on performance.

Ms Mokholo replied that there were internal and external reasons. Treasury had to be engaged to create targets. Intergovernmental discussions took time. Matters were not escalated timeously to the DG. There were pushbacks about issues such as payment of incentives and bonuses. The Department had pushed too hard with negotiation of targets.

Ms P Van Damme (DA) commended clear performance targets. The executive had to be kept accountable. She suggested that shareholder compacts be brought in for scrutiny.

Ms Mokholo responded that there were eight SOCs listed in the Annexure, that were still changing their strategy. They operated in different sectors, and some indicators did not apply to some of them. There were confidentiality restrictions that prevented the ability to show full compacts. There were contracts with other parties in the market. Companies had not to be exposed to litigation. A company like the SAA moved in a very competitive space. Key performance indicators could be shown, however.

The Chairperson asked how soon the Department could go through the GSM Bill process. The Bill was the key to the oversight process. It could determine the remuneration of executives and the Board itself. People were complaining that executives were earning money without performing. The Department could not determine remuneration, because of labour related issues. She asked about a time frame for the GSM Bill process.

Mr Matona replied that the Bill process had been developed several years before, but then it had stalled. There was other related legislation that received attention. The Treasury wanted to amend the PFMA. There was also the Companies Act that required attention. The Department had decided to rationalise SOCs, and witheld the Bill. The process could move forward again once the Presidential Review Commission had rationalised the SOCs. There were companies that were not really strategic. The legal instrument could only be developed after the rationalisation. The State had to decide which companies would remain. The Bill would be tabled in Parliament before the end of the current financial year. The Minister would table the Bill, but first had to be familiarised with it. The Department would brief the Minister, and then she would table the Bill. It was important that prior policy clarity had to be bedded down. The intention of the State with ownership of companies had to be clear. The Presidential Review Commission had to provide finality about that.

Ms Mokholo added that the Bill did not limit the role of the Department to being governors. There were possible funding mechanisms for SOCs. There could be programmes for SOCs to wean themselves off from government. The Department would engage through the parliamentary liaison officer to brief the Committee on the Bill. The Bill provided a model for best practice. It was undepinned by global benchmarks, by looking at examples from France, China, Singapore, Poland and Namibia. But there first had to be a clear policy environment, otherwise legislation could not be implemented. The DPE was not the only shareholder department. The GSM could be a blueprint for the entire government. It was based on a decentralised model.

The Chairperson remarked that shareholders had an interest when projects were not completed. There were cost implications. The SOCs were regulated by the Companies Act. The question was who would recoup money lost due to delay with the Bill.

The Chairperson referred to project management planning. She asked what the department was doing about extra costs.

Ms Mokholo noted that executive remuneration was linked to the pyramid structure that was introduced. Standards would be brought to the Committee.

Ms N Michael (DA) referred to interaction with the Department. The Department had to know when she had requested information from Eskom about the Medupi contract. She had written to Eskom about it, and received a letter back in which she was addressed as “dear Tasha”. She did not mind being called by her first name by colleagues in Parliament, outside of meetings, but she was not about to accept that from Eskom. It showed disregard for protocol and disrespect for her position as shadow Minister. She had mentioned the problem of access to the contracts and was told that she would have to go to Eskom to get the contracts. Acting Eskom CEO, Colin Matjia, wrote to her to say that he did not understand the problem.

Mr Morapela called a point of order. The Committee had to deal with what was currently before it.

The Chairperson noted the point of order.

Dr Z Luyenge (ANC) said that he supported the point of order. Administrative and political issues had to be separated. The issue that Ms Michael had brought up had to be dealt with at the administrative level. The CEO of Eskom was disadvantaged.

Ms Michael insisted that she was attending to the issue of oversight when she asked for the contract. She said with reference to oversight that targets had not been met. She asked if the Department would force entities to report to Parliament. There had been previous problems with that.

Mr Matona replied that cost overruns due to delays at Medupi had not reached R200 billion. The company had been asked to inform them about the actual amount. Costs were from claims arising from the contract. The historical context to challenges at Medupi was that the country had not built power stations for a long time. Skills had not been utilised, and had left. Skills were lost to the Middle East. There was poor front end planning at Eskom. Project managing capacity had been lost. There were technical challenges. But lessons had been learnt and challenges overcome. Eskom had left the management of workers to contractors. Bad contracts were entered into, which caused labour unrest. There had never been building on such a massive scale before. It had to be known how to prevent lateness in delivery. It was assumed that the project would unfold according to plan, but risk mitigation was not robust. The question was how to overcome assymetry between the DPE and the companies, which had manifested at Medupi. The DPE was not in a position to assess accurate independent reports. It was discovered at a late stage that a lot of information had not been forthcoming.

Mr Matona continued that when dealing with projects of scale, independent ability to evaluate had to be brought in. With the dashboard there was equal access, and delay factors could be overcome. Eskom was on track to deliver the first Medupi unit at the end of the year. Union leaders appreciated how vital it was for the future to get the project on line. A lot of jobs depended on the project. Further delays could not be afforded. The DPE was watching the project like hawks. He told Ms Michaels that if Eskom officials failed to show respect, the DPE would intervene.

Ms Rantho asked about concerns about the SOCs raised by the Auditor-General. The SOCs had made a turnaround but had then lost focus. She asked what the Department did when a company went back to a disclaimer or an adverse audit opinion.

Ms Mokholo responded that the Department met with the audit risk committee and the Minister. The SOCs had private auditors, but AG assistance was brought in to bring a government focus to auditing. The AG had audited two SOCs. The Department was challenged about the intervention. It was asked if it was intervention or interference. The public was critical. The DPE accounted as department, and the Minister facilitated. There was an agreement with labour about strategic interventions by the department. The DPE advocated risk management.

Mr Tseli remarked that companies had their reasons when targets were not met due to external circumstances. He asked if it was possible that the GSM Bill could contradict the Presidential Review Commission.

Mr Matona replied that the PRC Report supported the Bill. The question was how much wider the shareholder wanted to own. There were 700 SOCs, and not all were strategic. Many were at the provincial and local level. There could be an agentification of the State, which would complicate governance. The Commission report would pronounce on what was strategic, and what could go. Agreement on recommendations had not yet been reached. Risks had to be assessed on how much longer a situation could persist that undermined funding for distressed companies. National Treasury was constrained by a lack of guidance in the law. A way had to be found to frame things. The principle was that if certain things were not in place, there could be disposal of the SOC. But there was no guidance in the law. It was advisable that the Portfolio Committee engage with the Presidential Commission Review report. The DPE would engage with the Committee on this.

Committee matters
The committee minutes of 9 July were adopted without comment.

The Committee Secretary, announced that Committee training would take place on 27 August.

The Chairperson adjourned the meeting.