State Owned Enterprises Programme Report: Parliamentary Budget Office (PBO) briefing

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Finance Standing Committee

12 August 2015
Chairperson: Mr Y Carrim (ANC)
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Meeting Summary

The Parliamentary Budget Office (PBO) gave a presentation to the Standing Committee on Finance and the Portfolio Committee on Public Enterprises on the PBO Report on State Owned Enterprises (SOEs) commissioned by the Standing Committee on Finance and which was published in March 2015.

The presentation gave some background on the Presidential Review Committee Report on State Owned Enterprise (PRC); the concept of SOEs in a developmental state; non commercial mandates; how and why SOEs are funded and asset sales. The briefing identified key issues and practical and policy considerations for the Committee to consider.

Members said an ordinary developmental state would not have a backlog of challenges that it would have to address so everybody could have equal opportunity. This was the challenge of the concept of the developmental state within the South African context. In this context, non commercial mandates should be larger than commercial mandates because the non commercial mandates were developmental mandates. Members said there was a need for more clarity on the funding of operational expenditure and equipment expenditure that entities got involved in. Members felt that there was no role for the public to participate in a developmental state. Members wanted clarity on whether the consequences for non performance by SOEs were enough. Other comments made by Members included: One should guard against getting into an ideological discussion because the real concern was about the funding of SOEs which was draining the fiscus; more pressure should be put on SOEs to ensure that they did not set soft targets that were easy to achieve; one needed to look at the lack of capacity of executives to deal with labour relations issues;
one had to look at operational efficiencies as the problem appeared to be management, governance, leadership and productivity which were all sabotaging the attainment of a developmental state; the cost of capital for these entities and how their liquidity ratios changed over time needed to be understood.

Members were disappointed that there was no numerical analysis by the PBO because of a lack of access to reports. Was there any report indicating the impact of non commercial mandates on the financial status of SOEs that they were able to access? Members asked whether it had been found that the SOEs inflated their budgetary requirements. Had the time not come in certain sectors for SOEs to retreat and allow the private sector to play a role and increase efficiencies? Members said there was a need to develop implicit and explicit finances. Those days were past where mediocrity was acceptable and no benchmark was used for government finances.

Members said one could not determine whether SOEs were doing well or not because the full facts were not in front of them. The PBO was not given access to the shareholder compacts of these SOEs and did not know what the impediments were, so could not do a full analysis. Members asked whether private capital could be compatible with SOEs and whether this issue could be looked into. Members said there was room for the state to reduce barriers to competition in some sectors where the rationale for state intervention was weak. Members asked at what stage did one go to external markets for financing. Could the Committee request in future the PBO to take a look at the explicit funding for enterprises that were of particular concern to the Committee. Could explicit funding that went to SOEs also go to a private enterprise?

The Finance Standing Committee Chairperson said it was clear that given the structural inequalities of South African society and the intricacies of the market there has to be a role for SOEs. The question remained what role it would have and how it would relate to the private sector. What needed to be clarified was what was meant by a developmental state in the current context. The issue was not about monopolies but about competition. There was a role for the private sector. The issue was not whether the private sector participated, it was about the form it should take. It was about operational efficiency and how one managed SOEs. It was about avoiding undue political influence and preventing government using SOEs for political purposes while exercising firm government oversight. This was the big challenge. He said it was outrageous that the shareholder compact was not being made available to the PBO. How could an entity be monitored without the shareholder compact. He said the previous Minister Alec Erwin had made available the Transnet shareholder compact when requested by the Chairperson when he had been the Public Enterprises Committee chairperson. The parliamentary committees had a right to this information.

Meeting report

Parliamentary Budget Office (PBO) Report on State Owned Enterprises Programme
Mr Sean Muller, an analyst at the PBO, in his presentation distinguished between a State Owned Entity and a State Owned Enterprise (SOE), talked of the typical roles of SOEs, gave a background to the Medium Term Budget Policy Statement and gave some background on the 2012 Presidential Review Committee Report on State Owned Enterprise (PRC). He then gave the terms of reference and information sources of the PBO report on SOEs commissioned by the Standing Committee on Finance which was published in March 2015. The presentation then spoke to the concept of a developmental state and the role of SOEs in it and the non commercial mandates of SOEs as well as the implicit funding of mandates and the separation thereof. At this point the briefing paused to take questions before continuing.

Discussion
Ms T Tobias (ANC) said an ordinary developmental state would not have a backlog of challenges that it would have to address to ensure everybody would have equal opportunities. This was the challenge of the concept of the developmental state within the South African context. In this context, non commercial mandates should be larger than commercial mandates because the non commercial mandates were developmental mandates. She said there was a need for more clarity on the funding of operational expenditure and equipment expenditure that entities got involved in.

Dr Z Luyenge (ANC) said there was a desirability to become a developmental state through using SOEs but he felt that there was no role for the public to participate in a developmental state.

Mr R Tseli (ANC) wanted clarity on whether the consequences for non performance by SOEs were enough.

Ms N Mazzone (DA) said one should guard against getting into an ideological discussion because the concern was about the funding of SOEs which were draining the fiscus. SOE’s set their own targets and set targets for their executives and bonuses and incentives were paid out to these executives when targets were achieved. There was a need to look at putting more pressure on SOEs to ensure that they did not set soft targets that were easy to achieve. Another aspect was the need to look at the lack of capacity of executives to deal with labour relations issues as in the case of Eskom where the scheduled completion dates for Medupi and Kusile had once again been pushed back due to labour strikes. How could the Committees come together to say this far and no further. She referred to the case of how SA Express implemented austerity measures which worked to turn the company around.

Ms M Khoza (ANC) said one needed to look at operational efficiencies as the problem appeared to be around issues of management, governance, leadership and productivity which were all issues sabotaging the attainment of a developmental state that was being aspired to. One of the challenges seemed to be that one was moving from untested assumptions. The cost of capital for these entities needed to be understood. How their liquidity ratios changed over time within the context the SOEs found themselves in at the time needed to be understood. When companies declared dividends what happened to the government’s portion. Were they reinvested?

Mr D Van Rooyen (ANC) said he was disappointed that there was no numerical analysis by the PBO because of a lack of access to reports. Was there any report indicating the impact of non commercial mandates on the financial status of SOEs that they were able to access?

Regarding commercial and non commercial mandates, Mr N Kwankwa (UDM) said it had been noted that non commercial mandates were sometimes very difficult to monitor. He asked whether it had been found that the SOE inflated its budgetary requirements because it was difficult to quantify. Had the time not come in certain sectors for SOEs to retreat and allow the private sector to play a role and increase efficiencies?

Responding to Ms Tobias question on the developmental state and the collaboration of SOEs, Mr Muller said the financing of that should be considered differently. At present that was a question that was raised and often it worked on a commercial arms length basis and this was a policy question that should be dealt with.

On the issue of backlogs and service delivery in the developmental state, he said some of the non commercial mandates arose from constitutional obligations but there had to be a process that took into account the resources available. The key point being that an SOE was expected to be financially viable. It could not be expected to fulfil a mandate when it was not adequately funded and the state was ultimately responsible for that.

On the question of different models, the PBO only put models forward but did not endorse any as per international best practice. The appropriate model would depend on the SOE. It was for the shareholder to assess, based on a broader interest.

On the issue of the net benefit or effect of the commercial mandate, SOEs had to ensure that they were on-going viable concerns.

There should be consistency across enterprises on, for example, corporate governance.

On the breakdown of SOE expenditures, he said the PBO could do work on a particular enterprise.

On Mr Luyenge's question on the role of the SOE and how to locate it within government priorities, he said this was touched on by the Presidential Review Committee (PRC) and the rationalisation process. The PRC and National Development Plan (NDP) suggests that the role of SOEs needed to be reviewed to the point where the role an SOE played in the current SA context was clearly defined.

On community involvement, he said that if SOEs failed in the performance of its primary mandate, it would do more damage to development than extra failings in its community involvement roles that it might have.

Regarding Mr Tseli’s question on whether the consequences for non performance were enough, he said that would be a recommendation and it was hard to say in the absence of seeing the shareholder compacts. In a policy environment where non commercial mandates were not known, it would not be possible to know why targets were not met or whether they were appropriate or not. Thus it would be difficult to assess if the punishment or reward was acceptable.

On Ms Mazzone’s question on targets, he said the reports did not touch on questions of governance.

On the setting of targets, he said that this was a problem in all evaluations. When an enterprise set its own targets, it would not set ambitious targets and this was not unique to SA.

On Mr Tseli’s question and the comments on SA Express, he said there was not going to be a single model.

On Ms Khoza comments on untested assumptions and unfunded mandates, he said the PBO’s our intention was to go back to basics and look at Treasury’s report on SOEs and the state of their finances. The PBO had done a similar type of exercise on financial ratios but felt it was a bit too simplistic. To interpret the meaning of those ratios one would also need to know the history of an organisation.

On Mr Van Rooyen's question on whether a report had been produced, he said to their knowledge they did not know of one. Few could answer that question which hindered oversight as one could not analyse what caused non performance.

On data access, he said the PBO was a new institution. There might be sensitive information so perhaps it was a case of establishing protocols on issues of process.

On Mr Kwankwa’s question he said SOEs would not underestimate, typically one would expect costs to be inflated.

Ms Khoza said there was a need to develop implicit and explicit finances. Those days were past where mediocrity was acceptable and no benchmark was used for government finances.

Ms Tobias said that if as shareholder, one did not give a clear mandate to the CEO then it was up to the shareholder to take action when targets were not achieved. She said one could not determine whether SOEs were doing well or not because the full facts were not in front of them. The Committee and the PBO did not have the shareholder compacts and did not know what the impediments were, so could not do a full analysis.

Briefing (continued)
Mr Muller then continued the briefing and spoke on the funding of SOEs . He covered why SOEs were funded, how they were funded, government guarantees, state laws, cash injections and economic regulators. He referred to the PRC report on the non financially viable SOEs, speaking on what caused financial problems, inefficient non commercial mandates and inadequate turnover or loans of SOEs. He spoke on the concept of competitive neutrality and about direct and indirect funding, then economic regulation, debt guarantees and contingent liabilities. He moved on to cover private capital, speaking to equity and private public partnerships (PPP), and to the disposal of state owned assets. The presentation ended off with a look at practical considerations and policy considerations for the Committee to consider (see document).

Discussion
Ms Tobias asked whether private capital could be compatible with SOEs and whether this issue could be looked into.

On PPP, Mr Kwankwa said there was room for the state to reduce barriers to competition in some sectors where the rationale for state intervention was weak.

Ms Khoza raised the question at what stage did one go to external markets for financing. She asked this in light of the reference to state guarantees that were given to Eskom. Was the R50billion given to Eskom separate to the guarantees given.

On a particular enterprise’s explicit funding that the PBO had looked at, Mr A Lees (DA) asked if in future it could be done for enterprises that were of particular concern to the committee. Could clarification be given because it appeared that explicit funding that went to SOEs could also go to a private enterprise.

On Mr Lees’ question, Mr Muller said the PBO took on work from the parliamentary committees and looked for requests from the committees. It was possible and the PBO was working on the Eskom Bill for the Standing Committee on Appropriations.

On private enterprise and non commercial mandates, he said yes, some countries commercialised non commercial mandates by putting it out to tender and SOEs has to tender as well. In this case a private sector enterprise could win and it gave the state an indicator of what a fair market price was.

On Mr Kwankwa’s question on reducing barriers to competition, he said the PRC endorsed this approach but it was sector dependant.

On Ms Khoza comments and going to external markets, Mr Rashaad Amra, an analyst at the PBO, said only 36% of SA debt was held by foreigners and only 4.5% of total borrowing currently was held by foreigners so public finances were well managed.

Mr Carrim said, on the matter of ideological issues, it was clear that given the structural inequalities of society and the intricacies of the market there has to be a role for SOEs. The question remained what role it would have and how it would relate to the private sector. What needed to be clarified was what was meant by a developmental state in the current context. The issue was not about monopolies but about competition. There was a role for the private sector. The issue was not whether the private sector participated, it was about the form it should take. It was about operational efficiency and how one managed SOEs. It was about avoiding undue political influence and preventing government using SOEs for political purposes while exercising firm government oversight. This was the big challenge.

He said the PBO report needed to be discussed further by the Public Enterprises Portfolio Committee and the Standing Committee on Finance could send representatives to the meeting.

He said the Standing Committee on Finance had started the work and it was now for the Public Enterprises Committee to take it forward.

He said it was outrageous that the shareholder compact was not being made available to the PBO. How could an entity be monitored without access to the shareholder compact.

He said ex Minister Alec Erwin had made available the Transnet shareholder compact when Mr Carrim had been Public Enterprises Committee chairperson. The committees had a right to this information.

Ms D Letsatsi-Duba (ANC), Public Enterprises Committee chairperson, said there was a need to relook at how the Committee related to SOEs as this needed to be changed because SOEs were getting away with things. Of critical importance to the Committee was the Bill on managing SOEs which was taking a long time to finalise as well as the PRC report.

The meeting was adjourned.
 

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