State-Owned Companies’ governance challenges: Minister’s progress report

Meeting report

The Chairperson said Eskom had sent a letter that they were releasing their financial results today, and as Transnet were having a “bosberaad,” they had sent a formal apology that they were unable to attend the meeting.

Ms Lynne Brown, Minister of Public Enterprises, said that a member of the Transnet board was present at the meeting. The presentation would be led by Mr Mogokare Seleke, Direct General (DG) of the Department of Public Enterprises.

Minister on state-owned companies’ governance challenges

She emphasised that the only way to get to the bottom of the swirl of allegations of malfeasance and to restore public and investor confidence in the state-owned companies (SOCs) was to investigate them diligently. In addition, she had asked President Zuma to fast-track the proclamation of the Special Investigating Unit (SIU) investigation into contract management and procurement at both Eskom and Transnet. The investigation would tie up loose ends left behind by a series of investigations commissioned by the Eskom board, and provide the present administration with critical knowledge to empower procurement reform and further instil confidence in the company.

The mandate of the SOCs remained to drive industrialisation and the economic growth necessary to address the high levels of inequality in society. In the constrained economic environment, government was continuing its programme of fiscal prudence and consolidation. The expectation was that all financial instruments, including government guarantees with loan conditions, would be managed in such a manner that no debt default would occur.

Despite a new board being appointed at Eskom, Moody’s had just downgraded the utility, citing its deteriorating liquidity position and the ability of government to provide direct equity support. That was the reality of the current environment. The government remained resolute in its efforts to turn the company around, and Eskom was already seeing investors and lenders reviving their engagements with it. Eskom would today announce its 2017/18 mid-term results, which was why they were not present at the meeting.

Emphasis was made that the Eskom board was legally constituted in terms of the company’s Memorandum of Incorporation (MOI). The message to the boards of all SOCs was that they must “shape up or ship out.” If they were unable to instil confidence in their management and fufill their oversight responsibilities, they would be rotated. The Department of Public Enterprises (DPE) was presently vetting nominees for the new Denel board. The process to rotate the board members of the other SOCs was currently under way as well.

Regarding the contestation of the audit opinion of the Denel 2017 integrated report, the company and the DPE were working together with the Auditor-General (AG) to reach a solution. A major departmental priority for the current year would be to address the root causes for the regression in the audit outcome through implementing performance management measures and linking bonus payments of executives to audit outcomes, and ensuring that board members collectively possessed the requisite skills and capacity to provide effective leadership for the SOCs, and fast-tracking the development of the Shareholder Management Bill. The Department had devised an advanced set of oversight practices and platforms for regular engagement. Work was under way to develop a shareholder risk management framework to collaboratively mitigate systemic risks that could affect SOCs’ ability to meaningfully contribute to the government’s objectives.

A set of guiding principles linked to performance would be rolled out for application by all government departments which exercised shareholder oversight over commercial public entities. Informed by the report and recommendations of the Presidential Review Committee on SOEs, the first draft of the government shareholders’ policy paper was prepared and submitted to Cabinet in November 2016, and the second draft paper was presented to the Inter-ministerial Committee (IMC) last April. This year, they would work to ensure the Bill came before Parliament, subject to Cabinet’s approval.

Progress could also be reported as part of the SOC reform progress on finalising a guide for appointments to boards of state, and state-controlled, institutions. The development of the guide had been led by the Minister of Public Service and Administration, with the support of the IMC. In the medium term, through consultation with relevant Ministers and the Cabinet, the process of filling vacancies at board level continued. The boards were under instruction to fill vacancies in executive management levels urgently.

Ms Brown said that for the 2016/17 financial year, all the SOCs, with the exception of SA Xpress, had complied and tabled annual reports in Parliament. The DPE had been working closely with SA Xpress and the AG to finalise and table its report as a matter of urgency. To strengthen SA Xpress in the short term, the DPE and the airline had agreed to second Ms Matsietsi Mokholo, the Department’s Deputy Director General: Legal and Governance, to act as the Chief Executive Officer (CEO) in the short term. For the medium-term, discussions had taken place in the context of the SOC reform process to create an optimal corporate structure for the state airline.

Governance Challenges within the DPE Portfolio

Mr Seleke said that leadership instability was being addressed through the filling of vacancies, particularly Executive Directors (CEOs and CFOs), and the urgent capacitating of Boards. Other steps being taken included:

• A review SOCs’ Memorandums of Incorporation (MOIs);
• Revising and submitting delegation of authority frameworks across Eskom to minimise risks and eliminate key-man dependencies;
• Implementing consequence management across all SOCs in the DPE portfolio;
• Aligning all DPE SOCs with the “Guide on Remuneration and Incentives” approved by Cabinet and issued to the Minister;
• Ensuring proper and timely compliance in SOCs through adherence to reporting and communication protocols, such as the submission of the requisite copies of board resolutions, timely submission of reports and notifications outlined in the Public Finance Management Act (PFMA), the Significant and Materiality Framework (SMF), the Government Support Framework Agreement, and in the case of Eskom, the National Energy Regulator of South Africa (NERSA) methodology and licence conditions.

The SOCs audit outcomes and financial performance over the past three years had been concerning. With the exception of SA Xpress, they had all successfully complied with the PFMA and tabled their annual reports, and had held annual general meetings (AGMs) and signed shareholder compacts (SHCs). However, there was a relatively low level of operational efficiencies, and limited functional and managerial skills required in often highly complex environments. There were ineffective performance management measures, and ineffective governance mechanisms and policies to provide clear objectives and direction. Internal controls and delegations required review.

Mr Seleke listed the audit findings of the following SOCs:

• TRANSNET: Financially unqualified
• DENEL: Financially unqualified with findings
• ALEXKOR: Financially unqualified but modified
• ESKOM: Financially qualified
• SAFCOL: Financially qualified
• SA Xpress: Qualified for previous two financial years.

He said that the positions of Chief Financial Officer (CFO) and CEO were still vacant at SA Xpress. In Alexkor, the positions of CEO and CFO had been filled, and both were present at the meeting. At SAFCOL, the position of CEO was in the late stage of being filled.

A summary breakdown of the management of SOCs showed that in terms of race and gender in leadership roles, representation of females was still very minimal and required urgent attention.

An evaluation of the SAFCOL board had been conducted and they had scored a cumulative rate of 5.82, which was considered “better than acceptable”

Mr Seleke described three risk profiles of SOCs.

Financial Sustainability Risk

The risk factor was the lack of adequate price/tariff increases because of unfavourable tariff guidelines, methodologies and models (revenue), inadequate working capital and cash flow management, and high debt levels (weak balance sheets). This had a negative impact on credit ratings, created an inability to secure funding and a high cost of debt, led to financial bailouts and over-reliance on government guarantees which constrained the fiscus. It had an impact on a company’s going concern, the possibility of defaults and a debt portfolio recall by lenders. The response plan was to create and secure funding to support SOCs, and to review and reduce operating costs.

Governance and Reputational Risks

The risk factors were ineffective boards, non-compliance with regulations and governance prescripts, and overall leadership instability. A consequence of this was the inability to convince potential investors to invest in SOCs owing to the erosion of good governance, and overall it created an inability to implement effective turnaround strategies. The response plan included board rotations and/or the filling of vacancies.

Fraud and Corruption

The risk factors were non-compliance with procurement regulations, such as irregular procurement practices. This resulted in poor service delivery, fruitless and wasteful expenditure, and loss of public trust and confidence. SOCs affected were Transnet, Eskom, Denel and SAFCOL, and this had led to the Special Investigating Unit investigations.

Steps were continuously being taken to improve the governance framework. These included:

• Platforms for formal engagements, such as the Chairpersons’ Forum, chaired by the Minister, as an intervention to re-iterate shareholder expectations, to share best practice and ensure continuous improvement of board governance;
• A governance forum for company secretaries, an executive forum for Directors General and CEOs, and a CFO forum;
• Monthly DPE management meeting meetings and quarterly review sessions with SOCs;
• A dedicated DPE/SOCs risk forum function, with full participation by the chief risk officers of SOCs;
• A DPE/ SOC procurement governance forum to be launched in the 2017/18 financial year, with targeted participation by SOCs’ Chief Procurement Officers;
• Enhanced oversight practices on SOC risk and audit matters through a forum for the DPE, the Agricultural Research Council (ARC) and SOCs’ risk and audit committees.

SOCs were currently reporting in their quarterly and annual reports on the progress made in addressing the findings and recommendations of the auditors. There was induction and on-going training of boards, executives and company secretaries. SOCs had to ensure consultation with the DPE during April, prior to their boards’ recommendation on the payment of performance incentives and annual increases to executives, and they had to submit CEOs’ performance agreements within three months after the commencement of new appointments.

Mr Seleke concluded that the development of governance tools, while the Government Shareholders Management Bill was being considered, continued to improve in an effort to hold the boards and managements to account. Efforts to codify a transparent, consistent and coherent framework that encouraged the sustainable performance of the SOCs and long-term value creation were being fast-tracked.

Discussion

Ms D Rantho (ANC) said that considering the substantial resources that had been used to come up with turnaround strategies, the failure to implement them did not create a favourable outlook on the SOCs. At the previous meeting, SA Xpress had presented such a good strategy and implementation plan, yet nothing had happened and the CEO had resigned from his position. In the back of her mind, she did not actually expect anything to happen, as it was a continuous thing that the SOCs presented a plan and they never got implemented. She wanted to know how they could change that cycle.

Ms N Mazzone (DA) wanted to know if any of the recommendations were being implemented. Were there any people currently on suspension at the DPE, and how long would their suspension last? She was pleased with the new Eskom board, and commented that it had restored a lot of people’s faith in Eskom. In the light of all Transnet’s dirty laundry of being aired in the media recently, had anyone been suspended or taken to task for that? Had the financial taps at Transnet been turned off, or was money still pouring out? She found it confusing as to how precisely Denel had a good year, as firstly they had blatantly lied and been fraudulent by submitting the wrong reports and secondly, reports that were leaked stated that Denel could not even pay salaries.

Regarding SA Xpress, the Minister had promised in March 2017 that the annual general meeting would occur, but to date she was not aware of any meeting occurring – had it taken place, and if not, why not? She sought clarification on the short-term aircraft leasing agreements that SA Xpress had, because their costs were spiralling out of control. Environmental impact studies had shown a huge problem in Alexander Bay, so had Alexkor been called in, and was there any programme under way to rejuvenate the land that was being destroyed by the mining in the area?

Mr M Dlamini (EFF) asserted that the delegations from the various companies presented an appearance that looked full of integrity, but when reports were presented it was hard to believe that any of them had any integrity. He asked the Chairperson to intervene, as the Minister had got up and left when he had begun to speak, which he found very abrupt and rude. He believed that she was not a punctual person and did as she pleased and did not follow protocol, which he ascribed to her ‘consistent arrogance.’

The Chairperson responded that the Minister had indicated to her that she would need to go in and out of rest rooms due to personal reasons, and therefore it was allowed. The Minister would be informed of the questions upon her return by the DPE members present.

Mr Dlamini said that he would then wait for the Minister to return.

The Chairperson said that she would not allow this, and that Mr Dlamini should either continue or lose his turn as time was of the essence, and she would not allow for a break in the middle of the proceedings. She told Mr Dlamini to proceed.

Mr Dlamini said he wanted to know who had appointed the new board of Eskom, and what had been done in the processing of their appointment. The Minister had stated that she was very confident in the new board, but he found this unbelievable and wanted to know why she would think that the Committee should trust her confidence. A different approach needed to be found on how to consolidate and put the boards together. He sarcastically remarked that board members got appointed and removed so quickly and they never complained, as they were aware that they were not appointed to their positions through the correct procedures. What were the new boards’ relationship and proximity to politicians?

He sought clarification as to where the Minister’s internal and external auditors were, stating that if the same companies that had failed the Minister were still being used, why was this the case. They had not even taken note about the compliance issue, so why were they being paid when they were not compliant and not doing the paperwork. He wanted to know if they were if still within Eskom, adding that if they were, then there was no hope. Alerts should be made at least in the quarterly reports to state if and when things were not going well so that something could be done about it, and not only after millions of rands had been wasted while waiting for months to raise the issue.

Dr Z Luyenge (ANC) said that the Minister should indicate if all of the boards were actually engaged in ensuring a similar way of applying policies and managing these entities. He appreciated that most of the Executive positions in Management were filled, which reflected positively on the vacancy rate that was previously an issue. He added that the marketing of the entities was poorly done and many of the community members did not know about them.

Mr S Swart (ACDP) said he welcomed the new Eskom board. He sought clarification on the expenditure by Transnet on its Saldanha operations.

Ms G Nobanda (ANC) said that its the 2017/2018 annual performance plan, the DPE had stated that the Shareholder Management Bill would be released by July 2017, but now it said that the Bill must still go to Cabinet. She had come in 2014, and four years later the Bill was still going to Cabinet -- how long would the road to the Cabinet be? The DG had said that one of the things that the Department was doing was to provide service providers to SOCs to do an evaluation, and those results would be used to evaluate which boards would stay and which were not favourable, what the Minister should do then. The reason she had asked was because she wanted to know if the Department was going to take over the responsibility of the boards and if so, should the DPE not be finding ways to make sure the boards were keeping to their functions and doing what they were meant to, such as ensuring compliance.

With Alexkor, one of the things the DPE had agreed upon was to find a solution and a way of using the R45 million available. Had the meeting ever materialised, and how long would Alexkor be talking about the R45 million without actually releasing the evidence of its whereabouts? Was it in a bank, or a cupboard at someone’s home? Why were different answers always given? She wanted to know if there was something specific that the DPE could be doing about the issue to resolve the Richtersveld community crises, as it had already been going on for five years.

Mr E Marais (DA) wanted to know what the Ministers review of SA Xpress was in the current economy.He had requested a report from the DG at a previous meeting on the updated status of the capital expenditure programme in Saldanha of the Transnet operation, but had not yet received it, and wanted to know why and when he could expect to receive it.

The Chairperson said most of the SOCs were always in the media headlines for the wrong reasons, and most of the news was around the supply chain processes that were not being followed. If the supply chain processes were not being followed, it meant that the procurement processes were not being complied with, or there was very little actual compliance.

Minister’s response

The Minister responded on the issue of SOCs’ attendance, saying that they reported directly to Parliament and therefore when they were called for meetings, they would have to make it a priority to be in attendance. However, Eskom and Transnet had valid reasons for non-attendance at the meeting today.

With SA Xpress, the issue around the previous CEO was one of “stress” – having to do two jobs. SA Xpress was becoming a seriously growing concern, and the entity was and continued to be in a major crisis. Since the appointment of an Acting CEO from the DPE, the entity seemed to be strengthening slowly, and they would work to achieving an optimal outcome. Emphasis had been made that the aviation industry was one which was ever evolving and unviable unless it was subsidised. The reason that SA Xpress had high lease costs was due to the lack of maintenance of its own fleet, and therefore it remained grounded which had resulted in the lease agreements for chartered aircrafts. The airline wished to purchase aircraft and that was the goal, but insufficient funds made that goal unrealistic at present. That was a high-level issue.

The other issue was that an optimal structure had to be looked at for not only SA Xpress, but also for Mango, South African Airways (SAA) and and Airlink. National Treasury was being consulted on how a structure would be put together. She was not currently worried about the appointment of executives, because if it were decided that SA Xpress would be absorbed into SAA, then only one CEO would be needed.

The Minister emphasised that risk management actually involved a committee on its own in the companies, and it had been discussed that there should be a separation between audit and risk management. The DPE would have to up its game to deal with risk management in respect of shareholder oversight. The boards should be competent enough to pick up risks before anyone else and be able to report them to the shareholders in order to get the issues resolved quickly and efficiently. The supply chain processes linked up with the fact that in the past two financial years, procurement and contract management had been identified as key risks by the Audit Committee. At the time, the Minister had immediately applied to have an SIU investigation into procurement and management at both Eskom and Transnet.

Regarding the ‘taps being open’ in Transnet, she said she had written to the President and was awaiting his sign off on the SIU -- it had gone off three months ago and was currently at the Presidency awaiting signature. She hoped that it would identify what the general kind of procurement issues were within the SOCs, as they were huge companies.

The Minister responded on the R45 million at Alexkor, referring to the deed of sale and who would get the interest, and said the money was in the bank and that the amount included the interest on the R45 million as well. 3 000 families would each receive about R15 000 in the Richtersveld. This was a very poor community, and it was known that they were ready to receive the money. This would take place within the next year.

The Minister sincerely apologised to Mr Dlamini, in that he had considered her to be arrogant and rude to the Committee and that her overall attitude was appalling. However, she was over 50 and with age came natural tendencies which she could not control. She added that the only time she had not committed herself to the Committee was when she had a Cabinet meeting on Wednesdays.

She cleared up the confusion that she had not sanctioned the Brian Molefe case, and that this had been proved in the court case.  

Lastly, internal and external auditors were appointed annually for each of the SOCs. Mr Dlamini had made a very good point, but she was unsure of the processes used to assess the internal and external auditors. She was pleased, though, that they were accountable to the AG.

Mr Dlamini said that he wanted to know who had appointed the new board of Eskom.

The Minister replied that that the Deputy President, the Minister of Finance and herself had met with the President and discussed various businesses to get names for the board. A list had been drawn up which largely contained names from the businesses discussed, although a few names were added by those present at the meeting. The Minister had conducted all the other processes herself, which was to check the qualifications and criminal records and verifications that needed to be checked, and after that the names had been taken to Cabinet.

Input by SOCs

Ms Hansi Matseke, Chairperson, Alexkor, said that Alexkor had recently agreed with the municipality that they would hand over the money in the next year. The money was being kept in a trust with Webber Wentzel.

Mr Zwelakhe Ntshepe, Chief Executive Officer, Denel, explained that most of their sales were international and that Denel sold high end goods. The problem with the audit report had been that there were issues that were not highlighted by the auditors. Denel had moved in a very positive direction. The issue of the salaries was that Denel’s expenditure was over R600 million per month, and it had faced certain challenges in prioritising what to pay in December due to a backlog and late payments from clients. It had therefore prioritised payment to the banks, as if they had not then they would have defaulted which would have led to further implications which they could never allow. To say that Denel had not paid salaries was totally false -- all salaries had been paid, and they had never had a problem, nor would they in the future. The media had taken the situation out of proportion. The liquidity of Denel was an issue. It had never really made a lot of money. The expenditure and income had been at the same level, and its goal had never been to make a big profit.

The matter of marketing was relevant, as Denel was not exposed to the South African market at large. However, they did have programmes such as corporate social investment (CSI) initiatives, where they offered tuition to students in grades 11 and 12 at high school, who achieved great results and ended up working for Denel. Localisation was a major issue, with the majority of its business being overseas, but they had been trying to change that – programmes had been developed and would be implemented in due course. Risk management was critical, especially in the defence sphere. If the risks were not managed they affected the products -- products that had to do with people’s lives.

Mr Ntshepe was happy to say that Denel was very stable and they were securing new orders and many old clients were coming back. With an employee of Denel being seconded to the position of CEO of SA Xpress, it had to be remembered that he had work to do for both Denel and SA Xpress, so this had led to a big stress factor. He was very important to Denel and was needed in his primary job where he was currently working on big aviation programmes after his resignation from SA Xpress.

Mr Odwa Mhlwana, Chief Financial Officer, Denel, said that Denel’s competitors sourced their businesses locally, and this impacted on the leverage to negotiate better terms to sustain themselves. Over 75% of Denel’s business was international, which reduced its ability to gain beneficial leverage for sustainability in the international market. On the liquidity issue, between 2001 and 2012, Denel had accumulated in excess of R46 billion, but the net cash in the bank was a negative R4 billion. Throughout that period, Denel had made no money and he therefore reiterated that Denel’s aim was not to make a profit but to provide an essential service to the market. In 2013, the turnover had been in excess of R6.5 billion, and the current turnover was around R8 billion. There was a constraint on cash generation in the business. As far as salaries were concerned, however, Denel was able to pay salaries and seemed to be on a good path going forward. It had put strategies in place to combat any issues that may arise or had previously arisen.

Ms Matsietsi Mokholo, Deputy Director General: Legal & Governance, DPE, said that SA Xpress was not looking at any new strategies but rather implementing the ones which they had, and their environment was ever evolving. Their strategy needed to be able to evolve with it. Their aim to improve their aircraft maintenance would result in less reliance on chartered aircraft and lower their expenditure. Their current model of operation was also putting them backward, and they were negotiating with Treasury in order to solve their current operational model.

Mr Mark Gregg-MacDonald, Group Executive, Business Services, Transnet, said that at the moment there were four people who were suspended at the management level and above. If the suspension was due to the involvement of fraud, a case with the Hawks was filed. The issue of the Saldanha capital expenditure would also be made available to the Committee.

The meeting was adjourned.