State Owned Companies oversight: Department of Public Enterprises briefing, with Deputy Minister

Meeting report

State Owned Companies (SOC) Governance: Department of Public Enterprises briefing

Mr Gratitude Bulelani Magwanishe, Deputy Minister, introduced the delegation from the Department of Public Enterprises and outlined the mandate of that Department (or DPE). He emphasised that a resounding concern for the Department was the need to address the root cause of the regression in the annual audit outcomes of the State Owned Companies (SOCs). This was to be realised through implementing performance management measures, linking bonus payments of executives to audit outcomes, and fast-tracking the development of the Shareholder Management Bill. The first draft of the Shareholder policy paper, which had been informed by the recommendations in the Presidential Review Committee Report on SOCs, had been prepared, and was submitted to Cabinet in November 2016. The second draft paper was to be presented to Cabinet by mid-March 2017. The DPE was working around the clock to ensure that by February 2018, subject to approval by Cabinet, the Shareholder Management Bill would be before Parliament.

Across the whole SOC portfolio, the Department had seen overall improvements in financial and operational performance of the SOCs. Although there were regressions in some areas, the Department had developed systems to address them. The SOCs falling under the Department of Public Enterprises for the financial year 2015/16 had posted a profit of R5.4 billion. However, the Department acknowledged continuing challenges and concerns in the portfolio and was providing support to address them.

Ms Matsietsi Mokholo, Deputy Director General: Legal Affairs, Department of Public Enterprises, then took the Committee through the presentation on governance of State Owned Companies. She outlined the roles of various stakeholders in the SOCs’ governance system, with particular emphasis on the interface between the Department and its entities.

She stated that the Department had in place various governance guidelines, such as the method of appointing and dealing with the Chief Executive Officer and board appointments, remuneration standards, quarterly reporting and corporate plan guidelines, as part of its oversight. Various risks such as financial and operational sustainability, and revenue shortfalls within SOCs had been isolated. Specific SOCs affected by such risks were identified (see attached presentation for full details).

Ms Mokholo acknowledged that SOCs’ audit outcomes and financial performance over the past three years were of concern. Observations such as relatively low levels of operational efficiencies resulting in high wastage, ineffective performance management measures and ineffective governance mechanisms to provide clear direction for SOCs were made by auditors. Wasteful expenditure was also a concern in most of the SOCs audited.

She emphasized that the Department had committed itself to improving supply chain management and significantly reducing fruitless and wasteful expenditure, eliminating misstatements in the SOC financial statements, to ensure that they reflect the correct companies’ position, and enhancing capacity of SOCs in the future. Contrary to the portrayal by the media, she asserted that the governance of SOCs did continue to improve.

Discussion

The Chairperson commended the presentation, which was comprehensive. She commented that the procurement management system had to be looked at, as there were notable challenges. She conceded that the challenges were not only unique to the Department of Public Enterprises, but affected other Departments as well. There was a need for drastic measures to deal with these inherent challenges. 

Mr J Julius (DA, Gauteng) felt that it was premature to say SOCs were doing well. There were huge problems within SOCs in South Africa- most of the SOCs were “in the red”, and problems cannot be dealt with if not acknowledged. He further noted that the Department’s logical planning, and monitoring and evaluation processes, were largely flawed, saying that this was obvious from the fact that the Department's mandate to ensure good performance of the SOCs had not been fufilled. He commented that the Committee wanted to hear what had been done by the Department rather than hear how the Department intended to carry out its oversight mandate in the future. He was also critical of the various delays in implementation, saying that the Department seems to hide behind legislative processes.

Mr Julius asked what had been done with regard to the implementation of the Eskom report. He noted a wide range of recommendations made by the Presidential Review Committee, and identified a need for more elaboration as to how far the Department had gone in implementing the recommendations and what was hindering the process. One of the recommendations was that the Department should set up a State Owned Companies Committee to spearhead the implementation process. Another recommendation was that the Department’s long-term strategies on SOCs were to find expression in a White Paper. He asked how far the Department had gone in formulating and producing the White Paper. He asked how frequently the Department had noted multiple transactions to a fuel contractor. In the same vein, he asked what the Department would do to redress the SOCs' remuneration standards, citing one example of an SOC executive giving himself a raise of over R1 million.

He asked whether the Minister’s performance management exercise had been done. If so, could the documents be tabled before the Committee. He asked whether the Department took corruption into account when analysing risks within SOCs, as he asserted that it was their main problem. He asked the Department to give the Committee instances of good practices, in its efforts towards combating corruption. Finally he asked for an indication of what came out of the visit of the Minister and her entourage recently to China.

Ms C Labuschagne (DA, Western Cape) asked the Department to give an indication as to how many aspects of the recommendations of the Presidential Review Committee Report on SOCs had been effected; she requested that a report be tabled before the Select Committee. Speaking to performance monitoring, she asked who would determine, in relation to the quarterly reports and investors’ briefs, what had to be assessed or evaluated in the quarterly reports. She asked whether the reports would come to the Department for perusal, and whether the investors’ brief included the renewal of contracts. If not, she requested why not, and in that case, what would the Department plan to fix that.

She further noted that shareholder compacts represented an agreement between the executive authority and the accounting authority with regard to performance expectations. These expectations were determined either by the Minister, the Board or by the shareholder, but she wanted to know what these expectations would be based upon. She also wanted to know what the criteria were for awarding bonuses, and how these related to the performance expectations. She made the point that in order to get a bonus, a person would have to exceed, not merely meet, expectations.

Ms Labuschagne asked whether there were instances of multiple transactions being awarded to a single contractor, where the accumulated monetary value will be over the threshold. If so she asked how were these currently being reflected on the Department’s reports. She also asked whether the corporate plan of the SOCs would give the Department an indication on how government guarantees will be utilised, and what, at the moment, was actually being implemented by the Department?

Ms Labuschagne further asked who was doing the research on changes in structure of the energy industry, as part of the risks, as well as the security of energy supply – and whether this was being handled by the Department of Energy, Department of Public Enterprises, Eskom itself or a combination of the various stakeholders?

Mr L Gaehler (UDM, Eastern Cape) asked whether the Department, as part of its oversight exercise, called upon any individual to explain the irregular expenditure, and if anyone had been disciplined for that. He further asked whether SOCs were operating in line with the government’s radical economic transformation framework, by supporting Small, Medium and Micro Enterprises.

He commented that customers were not happy with SA Express flights often being cancelled or delayed. He asked if SA Express’ turnaround strategy was being monitored, and if indeed there was a clear strategy, with a maintenance plan to address the issue of the flight cancellations.

Mr Gaehler further noted that Eskom promised it was going to attend to the losses incurred by private citizens in 2016, when people’s vehicles were burnt during protests in the Eastern Cape. He asked whether there had been any follow up by the Department on that point.

Mr A Singh (ANC, KwaZulu Natal) pointed out that the presentation did not mention many of the challenges in SOCs. He also asked about challenges that the communities had. He wanted to know when the DPE was intending to make permanent appointments, pointing out that most of the senior executives were working in acting capacities? He too wanted to know the plan with regards to SA Express (SAX) turnaround strategy and said that there was a need for a report on that. He also wanted to know what the Department was doing to address corrupt practices, and cited recent media reports that South African Airways was charged R1 billion for some corrupt activities with an agent. He wanted to know how the Department was acting to investigate and deal with these allegations.

Mr J Parkies (ANC, Free State) noted that Eskom’s coal supplies were sourced from private companies and therefore the South African economy was vulnerable to challenges such as sabotage. He asked when the Department was going to address the issue of unfavourable regulatory and policy frameworks. He asked whether people were safe in SAX aircraft as there were elements of unprofessionalism in the entity’s operations. He asked whether the DPE and / or any other relevant authorities did any research on the socio-economic conditions of ratepayers, before increasing prices and tariffs and he maintained that tariff increases should not only be granted on the basis of arguments from the suppliers of services and utilities, such as Eskom, but that the impact of tariff increases on ordinary people should also be taken into consideration.

The Chairperson noted revenue shortfalls in SOCs. She asked why SAX was in such financial distress, if it was the Department’s responsibility to identify risks in order to avert such situations. She also asked why apparently the Department’s oversight exercises seemed to have so little impact on the performance of SOCs.

The Chairperson commented that the Department’s own staff complement was 200, whereas the six entities under its oversight mandate had staff complements of more than 2 000 each. She asked whether the Department could be effective in carrying out its oversight roles with such a small staff complement.

Adding to that, Ms Labuschagne asked how the Department carried out its oversight role to ensure that SOCs could comply with the auditors’ recommendations as expressed in the audit findings.

Mr Julius asked the Department to elaborate on its interaction with the Presidential State Owned Companies Coordinating Council.

Mr E Mlambo (ANC, Gauteng) commented that there were discussions some years ago that Denel was to be shifted to the Department of Defence, due to its strategic grounding. He asked what was happening around the possible shift of Denel.

The Deputy Minister responded on the issue of procurement management. He noted that the Department and Cabinet identified that junior personnel in procurement management did not need to declare their financial interests. However, a new directive would see all persons within the procurement space declare their financial interests. With regard to people involved in procurement irregularities, for instance in South African Forestry Company (SAFCOL), there were investigations done, and the matter was handed over to the National Prosecuting Authority. He confirmed that a final report on each entity and the investigations will be submitted.

The Deputy Minister responded to Mr Julius by welcoming his suggestions on redressing the regulatory framework that was “flawed”. As far as the Department was concerned, the logical planning, and monitoring and evaluation frameworks were more robust now than they had been in the past.

The Deputy Minister then spoke to the implementation of recommendations arising from the reports. The 60 recommendations from the audit report had been grouped into 18 themes, and the implementation was being closely monitored. To date, 13 of the recommendations had been implemented and that could be demonstrated. The other five recommendations were in course of reference to the security clusters, and these were also being implemented. He commented that, generally, the Department did influence the outcome of any legislation, as it would make the departmental views known. He maintained that there was a need for a more holistic state approach to turnaround strategies.

Answering the concerns about private contractors, the Deputy Minister responded that private contracting by SOCs was a contentious issue. However, it was being dealt with, as most of the long-term contracts would be expiring between 2018 and 2021. The main concern would be whether alternative suppliers had the capacity to do the work. He commented that the Department was running a number of programmes consistent with the radical socio-economic transformation framework, and there were still more in the pipeline.

The Deputy Minister noted the concerns about the staffing as raised by the Chairperson. He acknowledged that indeed departmental capacity was a challenge. He noted that departmental capacity was a challenge and conceded that the Department was continuously buried in piles and piles of papers, due to short-staffing, and this had to be looked at. The Department did not have enough people to do oversight over close to a trillion rands-worth of assets.

Ms Mokholo responded that the Department determines Key Performance Indicators and Areas (KPAs and KPIs) together with the SOCs, through negotiations. The Department uses its own benchmarks but engages with SOC executives to come up with robust KPIs and KPAs.

She responded that the Department noted good performance in most SOCs from a financial perspective, in terms of their profitability. The Department also helps SOCs to secure funding, whether from the National Treasury or international and domestic markets. The Department plays an active role in ensuring that SOCs secure funding that is not onerous, from a funding perspective.

Ms Orcilla Ruthnam, Chief Director: Governance, Department of Public Enterprises, spoke to questions on the bonuses. There were guiding principles that informed the remuneration standards of SOCs, especially for top management. The Department holds SOC boards to account, to explain the rationale of incentives such as bonuses.

She further added that the Public Finance Management Act framework was being used to combat wasteful expenditure within SOCs. A template had been developed whereby the accounting authority was expected to report every incident of wasteful expenditure in the quarterly and annual reports. If people had to be disciplined and money has to be recouped due to such irregularities, then that was something that had to be referred back to the Minister.

Ms Makgaola Makololo, Chief Director: Energy, DPE, answered the questions on energy. She responded that a number of role players with clear mandates conducted research on energy. Research on energy was guided by the current White Paper, which envisaged the need for reforms in energy generation and distribution. She explained that there were a number of key stakeholders and lobby groups, which included municipalities and other interested groups within the industry.

In relation to the SOCs' pricing, she confirmed that Eskom had the responsibility of submitting robust price increase applications. The Department, in the last three years, had been looking at Eskom’s costs to ensure that they were driven down, to try to spare consumers as much as possible from the burden of tariff increases. She noted efforts by government to cushion the poor against electricity tariff increases, which included the free basic electricity scheme and subsidies. However, administrative challenges in efficiently running these schemes were acknowledged, especially at municipal level.

Ms Makololo emphasized that Eskom did not own coal mining sites, but sourced coal from private players. However, there were risk mitigation strategies such as stockpiles, strategic coal reserves and contractual instruments meant to reduce risks related with reliance on private suppliers. Post 2007, risk mitigation strategies around coal supply had been quite effective. In relation to climate change, the country had a climate change response plan driven by various emission contributors, and Eskom has its own compliance roadmap around minimum emission standards.

Mr Weekend Bangane, Chief Director, Department of Public Enterprises, responded that the call on the migration of Denel to the Department of Defence was initially strong, but later it no longer became a point of emphasis. The important point was that the current Defence Review acknowledged Denel as a strategic national asset, and it linked the importance of Denel directly to the Department of Defence. He noted that the question of ownership might not, however, be as important as the role that it fulfilled in practice.

He further stated that the Department was looking into reviewing Alexkor’s Deed of Settlement. The draft of the Deed of Settlement was well-intentioned but the implementation of this was problematic. Ms Mokholo noted that the Presidential Review Committee had 31 recommendations, and the Review Committee acknowledged that the Department will have to adopt a phased-in approach in its implementation. She responded that the Department was dealing with corruption through effective contract and procurement management.

Ms Makololo commented that there were positive results from the Minister’s trip to China; there was stronger collaboration between China and South Africa and diffusion of critical skills between the two countries. The Department was also looking beyond China for strategic partnerships to grow the SOCs.

She also responded that the Department was closely monitoring SAX’s turnaround strategy. Some of the maintenance issues were compounded by the shortage of parts due to the discontinuation of some aircraft models within the industry.

Mr Julius asked for clarity on the recommendations of the Presidential Review Committee. He noted that one of the recommendations was for the establishment of a transitional SOC committee. He asked if this had been considered and established and if so, who were the stakeholders?

Ms Mokholo amplified that the recommendation by the Presidential Review Committee said the Department should have a SOCs Coordinating Council. However, Cabinet advised that the Coordinating Council should rather be brought in line with how Cabinet works. Thereafter, an inter-ministerial committee chaired by the Deputy President was formed, to look into SOCs operations. The recommendations had been implemented, through the inter-ministerial committee.

The Deputy Minister, in closing, thanked Members for their questions, stating that they helped the Department in focusing on carrying out its oversight on SOCs more effectively.

The Chairperson noted that the Committee looked forward to reports from Eskom and the Department in the near future.

The meeting was adjourned.