Restructuring of State-Owned Enterprises: briefing

This premium content has been made freely available

Public Enterprises

15 February 2000
Share this page:

Meeting Summary

A summary of this committee meeting is not yet available.

Meeting report

PUBLIC ENTERPRISES PORTFOLIO COMMITTEE
15 February 2000
RESTRUCTURING OF STATE-OWNED ENTERPRISES


Documents handed out:
An overview of the Department of Public Enterprises (See Annexure 1)

SUMMARY
The Department gave a workshop on the restructuring of state-owned enterprises, focusing on methods to maximise economic impact and development.

MINUTES
Restructuring of state-owned enterprises
A presentation was given by Mr S Gounden, Director-General; Mr A Merrifield, Chief Director of Business Process Re-engineering and Mr A Nkuhlu, Chief Director of Restructuring.

The following points were made in relation to the restructuring of state-owned enterprises:

Does the state have any business in business?
· the state has the overall policy and regulatory role of government,
· where the private sector provides goods and services efficiently and effectively, the state should provide an enabling environment for such activities,
· in cases of market failure, the state should play a role.

Cases of market failure:
· the creation/maintenance of strategic public utilities (energy, transport, telecommunications, steel, etc.),
· Where there are monopolies and/or problems arising from transforming public into private monopolies,
· the inability of the poor to pay market rates for services,
· to overcome the social inequities of Apartheid, and
· to ensure that the overall strategic interests of the state are realised.

State's role:
· install an appropriate regulatory environment;
· establish an appropriate competition policy;
· provide services within a framework of alternative service delivery.
The state will pursue these options in a manner to ensure the most appropriate level of private sector involvement possible.

Policy on restructuring SOE's:
· RDP (expand and/or reduce role of the state depending on 'balance of evidence);
· GEAR (total/partial sale of assets, phased restructuring within adequate regulatory framework, protocol on corporate governance to ensure 'decisive leadership by Government";
· 1995 Cabinet Bosberaad.

1995 objectives of restructuring
· facilitate economic growth
· fund the RDP
· create wider ownership in the South African economy
· mobilise private sector capital
· reduce state debt
· enhance competitiveness of state enterprises
· promote fair competition
· finance growth and requirements for competitiveness

Refinement of 1995 objectives
1995 objectives have become more refined and more focused due to:
· recent experience with restructuring;
· different restructuring processes are suited to the achievement different priorities;
· greater pressures for improving the infrastructure to support industrial policy and facilitate regional and international trade;
· the impending crises in several SOEs arising from debt, adverse economic conditions, under-investment and un-manageable structures.

Objectives of restructuring:
· mobilise private sector capital and expertise
· attract foreign direct investment
· reduce state debt
· create wider ownership in the South African economy
· enhance competitiveness of state enterprises
· access globally competitive technology
· promote fair competition
· finance growth and requirements for competitiveness

International perspective:
Stiglitz's 'post-Washington consensus':
· introducing competition is more important than just selling assets
· most of the benefits from corporatisation arise prior to privatisation and introducing effective market incentives;
· need for Government's to manage the process to limit 'rent-seeking';
· there is a range of partnership arrangements' between public and private ownership.

International experience
· Latin America and East Asia have accounted for 48% and 30% of initiatives, with Sub-Saharan Africa accounting for 2% - middle to high income countries have more pre-conditions (better financial markets and institutions) for restructuring than poor countries;
· Telecommunications and Energy accounted for 43% and 36% of initiatives - technology changes which reduce the value of existing infrastructure, accelerate market reform and facilitate competition.

Of the top 30 SOEs in South Africa:
· ESKOM, TRANSNET, TELKOM, and DENEL have 91% of total assets, provide 86% of turnover, provide 94% of net income;
· ESKOM, TRANSNET, TELKOM, and DENEL employ 77% of all SOE employees (91% incl. Post Office and Sapekoe) which is 5% of non-agricultural employment;
· ESKOM, TRANSNET, TELKOM, and DENEL dominate the key strategic economic sectors and have the potential to boost or undermine overall industrial policy.

Restructuring experience past 5 years (HSBC report):
· lack of overall restructuring policy, plan, procedures and timetable;
· lack of clarity in the roles (shareholder, policy-maker, regulator) of different line departments;
· Lead role of co-ordinating ministry
· unequal balance between financial and commercial terms and socio-economic objectives of Government;
· reassess the suitability of the National Framework Agreement for the restructuring process;
· questionable role of management and the boards in the restructuring process.

Development of a new policy framework:
The absence of a comprehensive policy framework for the restructuring of SOEs has created uncertainty in the market-place, contributed to the ambiguity of roles and responsibility for restructuring between different state actors and with other stakeholders, and has not provided guidelines for empowerment, procurement, un-solicited bids or post-restructuring performance monitoring and evaluation - DPE to produce a policy framework bringing together prior policy, IMCC decisions and evaluating this against past experience (31 March 2000)

Focus on the 'big 4':
Restructuring will focus primarily on the four large public corporations (ESKOM, TRANSNET, TELKOM, DENEL) although other on-going restructuring processes will continue and the Department will refine the programme for other restructuring endeavours.

Refining the programme:
Given the on-going requirement to update and refine the focus of the Government's restructuring programme -
DPE and DoF to refine the programme for restructuring and conduct an audit of the portfolio of public enterprises with the view of providing a complete analysis of the state's portfolio (identifying strategic assets, firms for immediate disposal, potential synergies and opportunities for alternative service delivery) (31 March 2000)

Protocol for corporate governance:
The separation of the roles of the stakeholders (shareholder, board, management) and those in the state tasked with overall policy, with the regulation of service and with the restructuring process needs to be more clearly defined by a protocol on corporate governance - DPE and line function depts. to affirm the protocol for corporate governance through shareholder compacts/performance agreements with boards and management of 'big four' (31 March 2000)

Re-capitalisation of SOEs:
Since many of the key state-owned enterprises are under-capitalised and have not adequately maintained their infrastructure and asset base, this is undermining their performance and negatively affecting their market value -
DPE and DoF investigate the re-capitalisation of strategic state-owned enterprises (31 March 2000);
DPE and DoF to develop a position for the appropriate financial management of SOEs including a focus on tax and optimising dividends (31 March 2000).

The 'social plan':
Given that the state is burdened with the costs of addressing large-scale un-employment arising from restructuring - DoL to develop an appropriate strategy to align the social plan to the restructuring process (February 2000)

Clarifying the roles of different departments:
IMCC affirmed the co-ordinating role of the MPE/DPE in leading the restructuring process;
DTI and DPE (with a working group involving line function departments) to develop a broader set of regulatory principles to guide sector-specific regulatory authorities (31 March 2000).

Transnet - Re-engineering debt:
· study the extent and nature of liabilities;
· accelerate the disposal of non-core assets;
· identify possibilities for 'burden-sharing';
IMCC has authorised a joint task team on Transnet debt restructuring by the Departments of Finance and Public Enterprises (to report IMCC February 2000).

Augment the management capacity at Spoornet:
· corporatise the main operational divisions of Spoornet separately;
· re-examine definition of core and non-core activities prior to further restructuring;
· augment the management at Spoornet to focus on General Freight Business and Main-line Passenger Services.
IMCC authorised the augmentation of management capacity for Spoornet (report at IMCC February 2000).

Other TRANSNET decisions:
· DoT needs to re-examine policy with regard to road and rail haulage in Southern Africa.
· DoT to establish an appropriate regulatory framework for Portnet prior to restructuring, and DME to do the same for Petronet (report February IMCC meeting).
· DPE to develop a proposal and programme for the restructuring of Portnet and Petronet and initiate the process of identifying strategic equity partners for Orex and Coal-link by the 30th September 2000.

Un-bundling of regulated business of ESKOM:
· distribution to introduce competition through the establishment of REDs;
· transmission to be regulated and to ensure "open access";
· generation stations to be organised into separate business units;
· revision of the regulatory framework.
IMCC noted the present restructuring initiatives undertaken by ESKOM. Department to provide proposals and a programme by the February IMCC meeting.

Finalising the establishment of Eskom Enterprises :
· define core business;
· identify and value assets;
· capitalisation options;
· dispose of non-core assets;
The IMCC received a business case and plan from Eskom by 31st January 2000 indicating future focus areas of Eskom Enterprises, re-grouping proposals and core components of the business.

Options for restructuring of Aerospace:
The IMCC authorised a rapid investigation of options for restructuring Denel's aerospace divisions including the involvement of international equity partners (progress report by the 31st February 2000).

Expediting the restructuring of Ordnance:
DENEL to complete the restructuring proposals for the rest of the Divisions in Ordnance by the February IMCC meeting.
The IMCC noted the current initiative to restructure Ordnance to complete corporatisation process (progress report at IMCC February 2000).

Other DENEL decisions:
· DPE to investigate Strategic Equity Partners for Denel as a whole;
· IMCC requested the DPE, DoD and DTI to investigate options regarding aircraft maintenance synergies, and other aerospace options and report on progress to the February IMCC meeting.

Organisational chart (Diagram not included)

Public Enterprises - Programmes
· Management and Administration
· Restructuring of State-Owned Enterprises
· Performance Monitoring of State Owned Enterprises
· Business and enterprise re-engineering
· Alternative Service Delivery


Management and Administration
· formulating policy by the Minister, Director-General and other members of the Department's management;
· organising the Department, rendering centralised administrative, legal and office support services, managing departmental personnel and financial administration, determining working methods and procedures and exercising managerial control.

(Diagram not included for the following)
Restructuring activities and outputs
Performance Monitoring of State Owned Enterprises
Business process re-engineering
Alternative Service Delivery

The discussion period was not minuted.

Annexure 1:
DEPARTMENT OF PUBLIC ENTERPRISES
AIM
The aim of the Department of Public Enterprises is to manage the restructuring of state-owned enterprises (SOEs) to maximise economic impact.

THE NEW DEPARTMENT
The Office of Public Enterprises was upgraded to a schedule 1 Department on 1 August 1999. The newly established Department will focus on the following activities:
· Developing of and directing a coherent approach to restructuring and transforming State Owned Enterprises (SOEs), to ensure greater economic impact across Government. In this regard the department will publish a restructuring programme outlining the timetable, sequencing and focus of the transactions over the next 36 months;
· co-ordinate the inter-departmental efforts between the line policy departments and public enterprises;
· providing a systematic method of monitoring the performance of SOEs, and ensuring the alignment of their activities with Government policy;
· promoting the business process re-engineering of state-owned enterprises to restructure such enterprises either internally (i.e. to bring about the transformation within the work environment) and/or externally (to ensure appropriate integration and/or alignment of similar enterprises). In this regard we are engaged in a programme to identify synergies in the procurement practices of parastatals with the aim of maximising our mandate shareholder value;
· developing a comprehensive approach to public-private partnerships and the use of alternative service delivery as a means of restructuring and transforming SOEs.

Whilst the Department's responsibility for restructuring and transforming SOE's has primarily focused on the designated SOEs, currently estimated to be worth R120 billion, the Department aims to play a greater role in the restructuring of other SOEs, as it is well positioned to identify opportunities for the alignment and integration of activities across the diverse portfolio of all SOEs.

In the last term of government (1994-1999) some progress was made in the restructuring of SOEs, but clearly the next five years requires an acceleration in the restructuring programme. This imperative has warranted a review of the capability within government to effectively direct the restructuring of SOEs to the benefit of the shareholder. A review of the past five years indicated that the Office was severely under-resourced and heavily dependent on outside advisors. This meant that it was difficult to develop an integrated and coherent approach to restructuring.

The activities of the new Department of Public Enterprises will be organised into four programmes:
· Management and Administration which includes the overall management of the Department and the Ministry;
· Restructuring of State-Owned Enterprises responsible for implementing the Restructuring programme as defined by the Cabinet sub-committee. This programme will be responsible for the day to day management of restructuring exercises as well as interfacing with public enterprises and various governmental and non-governmental stakeholders;
· Performance Monitoring of SOEs which monitors financial performance, corporate governance and socio-economic indicators of state-owned enterprises. It is also responsible for developing a range of transformational strategies that are necessary in the restructuring of state-owned enterprises including the integration of service delivery of the various designated SOEs to ensure maximum developmental impact;
· Alternative Service Delivery which will be responsible for the development of best practice guidelines and the promotion of alternative service delivery strategies in the delivery of services by state-owned enterprises.

The following benefits are likely to accrue to the State from the new department's mandate:

· Better return on investment: The Department is committed to improve the return on investment from state assets. This return will encompass both an improvement in actual financial return as well as the social returns and development impact that can be achieved through a broader process of restructuring and transformation.

· Economic integration of public enterprises: The Department believes that the improved returns can be achieved by both restructuring enterprises and integrating the activities of such firms across sectors thus rationalising their business processes and market potential for greater benefit to the citizens of this country.

· Alignment of public enterprises with Government's objectives: The Department, representing Government as the majority shareholder, will ensure better alignment of public enterprises processes and outputs with the social, economic and political objectives of Government.

· Expanding opportunities for empowerment: The Department commits itself to expanding the range of opportunities for empowerment (such as investment, capacity, development, operational joint ventures, community collaborative partnership) in a sustainable manner.

· Contributing to the reduction of national debt: The Department, is conscious of the fiscal constraints being imposed by the current public sector debt, will direct its activities towards ensuring its reduction.

· Promotion of South Africa as a prime investment location: The Department, through the restructuring and transformation of state assets and the advocacy of public private partnerships intends to promote South Africa as prime investment location.

Programme 1: ADMINISTRATION
The Administration Programme comprises policy formulation by the Minister, Director-General and other members of the Department's management. It also includes activities related to organising the Department, rendering centralised administrative, legal and office support services, managing departmental personnel and financial administration, determining working methods and procedures and exercising managerial control.

Administrative spending, mostly personnel expenditure, increases substantially in 2000/01 in line with the Department's new mandate. Expenditure decreases in both nominal and real terms in the last year of the MTEF period as initial restructuring work is completed.

Policy developments
Policy Framework on restructuring

In December 1999, the Inter-Ministerial Cabinet Committee (IMCC) instructed the Department to develop a comprehensive policy framework on the restructuring of SOEs. It was argued that although the views of Government around restructuring had been defined at an IMCC Lekgotla in 1995, the experience since then indicated that a more comprehensive framework was required to ensure a consistency across Government and to address market uncertainties. The main thrusts of the proposed policy framework were spelt out by the IMCC, includes the following:
· restructuring initiatives over the next five years should prioritise the larger SOEs although current transactions of smaller entities would be completed;
· restructuring would need to ensure that the overall objectives of Government were realised including the need to promote investment and competition, broaden ownership, reduce the public sector borrowing requirement and enhance the efficiency and competitiveness of SOEs to support the Government's overall industrial strategy and improve service delivery;
· the policy framework will explore the issues of competition and regulation, corporate governance, the social plan, empowerment and procurement to create an appropriate enabling environment for the accelerated restructuring programme. It is the intention of the Department to deliver a final draft of the policy framework to the Minister by 31 March 2000. Thereafter, the policy framework will proceed through the political process in Government prior to it being made public.

Administrative changes
The expansion of the Department from 40 to 116 personnel requires that significant effort be devoted to the creation of an expanded establishment. The recruitment process is underway and the Department will have appointed most of its senior management and professional expertise by the 31 March 2000. The process of defining the organisational structure, developing an appropriate corporate culture and creating a productive work environment will continue as the new staff come on board. All senior staff are on five year performance related contracts and a performance management system is in the process of being introduced. Since it is assumed that the functions of the Department will change significantly once the current phase of restructuring is complete, it is expected that the staff and organisational requirements of the Department will be re-examined at the end of the current five year phase.

Programme 2: RESTRUCTURING OF STATE OWNED ENTERPRISES
The restructuring programme is focused on the co-ordination of specific restructuring initiatives and interfacing between various governmental and non-governmental stakeholders. Management is responsible for the formulation of policy, policy co-ordination and the overall management of restructuring and transformation. Sectoral transaction management refers to expenditure on auxiliary advisors to the state in respect of specific programmes of commercialisation, restructuring or service transformation. Specialist services are carried out by the Department in support of the restructuring process. They include economic analysis, transaction marketing, legal services, financial modelling and risk analysis.

Outputs and service delivery trends
Table 1. Key activities and outputs

 

Key activities

Outputs

Restructuring of state-owned enterprises

Directing state-owned enterprises restructuring

Effective process management in terms of restructuring plans, timeous completion and effective monitoring

 

Facilitating stake holder participation in state-owned enterprises restructuring

Effective process management in terms of consultation and co-ordination

 

Promotion of business opportunities, both locally and internationally, relating to state-owned enterprises activities

Increased number of tender bids received to perform service activities, from a broader range of business entities


Directing restructuring
The department will publish a comprehensive plan outlining priorities, timetables and the steps to implementation. The core focus areas on the restructuring agenda are the "Big Four' i.e. Telkom, Transnet, Eskom and Denel. The restructuring of these four entities will have considerable impact on the economy as a whole. Collectively these four comprise 91 per cent of estimated total assets, provide 86 per cent of turnover, 94 per cent of net income and employ 74 per cent of all employees in the top thirty state-owned enterprises. The department has established four clusters centred around telecommunications, transport, energy and defence to give effect to this programme.

Stakeholder consultation
The department will establish clear procedures and policy guidelines on the appropriate consultation of stakeholders in the restructuring programme. Our approach is informed by a commitment to transparency and dialogue with key stakeholders with the view to develop common approaches to restructuring in particular the social impact issues such as employment, empowerment, and pricing policies. We will highlight the public policy and strategic dimensions of particular restructuring initiatives to facilitate public debate and social consensus.
Marketing of business opportunities

The aim of this programme is to collate and process research on particular transactions as directed by the Restructuring Plan. The programme is also dedicated to effectively market restructuring initiatives with investors locally and abroad to attract private sector financing.

Policy developments
Regulatory framework
A central policy was will be on regulatory reform. The monopoly characteristics of many infrastructure activities such as electricity, transport and telecommunications require that government play a prominent role in areas such as a regulation of entry, of prices and of quality of services.

The output of entities such as electricity and transport is both widely consumed and often considered essential. The policy agenda will include research on the role of stakeholders and regulating authorities in shaping the delivery of these services.

PROGRAMME 3: PERFORMANCE MONITORING AND BUSINESS ENTERPRISE RE-ENGINEERING OF STATE OWNED ENTERPRISES
Management is responsible for policy formulation, co-ordination and overall management with respect to the systematic monitoring of the performance of state-owned enterprises. Performance monitoring evaluates the financial performance, corporate governance, social responsibility and empowerment efforts of state-owned enterprises.

Business enterprise re-engineering co-ordinates the integration of service delivery by state-owned enterprises so as to maximise the developmental impact. It entails enterprise analysis, business restructuring, sectoral and macro-analysis and guiding the consistent application of empowerment strategies.

Performance monitoring and business re-engineering are new areas of responsibility for the Department in line with its revised mandate. Expenditure will decline in 2002/03 as monitoring procedures are put in place and initial re-engineering is completed.

Outputs and service delivery trends
Table 1. Key activities and outputs

 

Key activities

Outputs

Performance monitoring of state-owned enterprises

Monitoring and evaluating financial performance of state-owned enterprises

Improved financial performance within state-owned enterprises
Reduction in public sector liabilities

 

Monitoring and evaluating corporate governance of state-owned enterprises

Adherence to corporate governance protocol

 

Monitoring and evaluating empowerment requirements

Consistent application of empowerment strategies within state-owned enterprises

Business and enterprise re-engineering

Identification of restructuring strategies through enterprise, sectoral and macro economic analysis

Appropriate restructuring strategies that are aligned with the efficient and effective operation of the enterprises, sectoral markets and the overall macro-economic performance of the Nation.

 

Integration of service delivery by state-owned enterprises

Enhanced participation across state-owned enterprises in service delivery to maximise development impact


Improved financial performance
Although the Government already monitors the financial performance of SOEs, it is the intention of the Department to improve its activities in this regard. In part, this improvement will come from the introduction of new information systems which will enable the Government to more rapidly access financial information. In part, the Department will be interacting more closely with the Financial Managers of the various SOEs to address specific concerns. A recent example, is the Task Team that comprises representatives from Government and Transnet who are developing a solution to that corporation's debt situation.

Improved corporate governance
The draft protocol on Corporate Governance will serve as the basis of a new initiative to create an appropriate framework for the governance of State-Owned Corporations. Within this framework, and in conjunction with the major SOEs, the Department will be developing shareholder compacts that more clearly spell out the rights and responsibilities of all parties. Through this process it is intended that the draft protocol be refined and a new framework for Corporate Governance be created for all SOEs.

Ensuring empowerment objectives
The Government remains committed to ensure that its empowerment objectives are achieved through the restructuring process. Since the lessons on empowerment in both the private and public sectors over the past five years has indicated some weaknesses in the initial approaches, which focused primarily on financial means, the Department will be seeking to expand the range of empowerment options to ensure greater participation and broader share-ownership. In this regard, the approach to alternative service delivery discussed below, will enable the Government to expand the range of empowerment options.

Service integration
In its preliminary review of the portfolio of state-owned enterprises, the Department has begun to discover areas of overlap in operations and service delivery arising from the activities of different state-owned enterprises. It will therefore be seeking to encourage the rationalisation of service delivery through the merging and integrating of operations from different enterprises. A number of such opportunities have already been identified in the Information Technology and Telecommunications fields.

Business and enterprise re-engineering
The longer term agenda of Government will be informed by an in-depth analysis of the restructuring options for different enterprises. This analysis will seek to complement the restructuring initiatives of individual enterprises by conducting business process studies, sectoral and market analysis and situating these studies within a macro-economic perspective. These studies will provide input to the restructuring programme along with the initiatives of service integration and alternative service delivery.

Policy developments
Performance monitoring and business re-engineering
Since performance monitoring and business re-engineering focus on the applied areas of the business of the Department, policies developed will primarily address operational concerns.
It is intended that the Department's performance monitoring activities be better supported by an information management system. Thus policy development in this area will initially focus on identifying the appropriate data models and formats required for such a system development.

The area of business and enterprise re-engineering is a new activity in the department and initial policy work will focus on developing an appropriate methodology for conducting enterprise, sectoral and macro-economic analysis necessary to guide the restructuring process. Policy development in this area will not however be an academic exercise, but rather it will synthesise from the range of approaches currently used in the business environment.
Programme 4: ALTERNATIVE SERVICE DELIVERY
Alternative service delivery will focus on the development of best practice guidelines and the advocacy of alternative service delivery strategies in the delivery of services by state-owned enterprises.
Alternative service delivery is a new function of the Department. Expenditure will decline in 2002/03 following the establishment of an alternative service delivery framework.

Outputs and service delivery trends
Table 1. Key activities and outputs

 

Key activities

Outputs

Alternative service delivery

Promoting and advocating alternative service delivery mechanisms within state-owned enterprises

Policy framework for alternative service delivery strategies

 

Developing best-practice guidelines for alternative service delivery

Guidelines for consistent application of alternative service delivery strategies within state-owned enterprises

 

Providing a technical resource base to state-owned enterprises on alternative service delivery

Increased empowerment via alternative service delivery strategies


Policy framework
Alternative Service Delivery (ASD) is a relatively new concept that had evolved internationally to expand the range of public and private sector partnerships possible from the restructuring of public sector activities. The Department will be developing a framework to use ASD in the restructuring of SOEs. In this endeavour, it will be working in conjunction with the ASD team at the Department of Public Service and Administration and the Public-Private Partnership Task Team in the Department of Finance to ensure a consistent approach across Government.

Best practice guidelines
As part of its ASD programme, the Department will be developing best practice guidelines on a range of service delivery options. These guidelines will seek to learn from the best of international practice to ensure an appropriate response to the range of service delivery options possible by individual restructuring exercises. This focus on best practice to expand the range of service delivery options will also support the Department's intention of broadening its approach to empowerment.

 

Audio

No related

Documents

No related documents

Present

  • We don't have attendance info for this committee meeting

Download as PDF

You can download this page as a PDF using your browser's print functionality. Click on the "Print" button below and select the "PDF" option under destinations/printers.

See detailed instructions for your browser here.

Share this page: