SOE Shareholder Management Model: Department briefing

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Public Enterprises

07 June 2006
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Meeting report

PORTFOLIO COMMITTEE ON PUBLIC ENTERPRISES
7 June 2006
SOE SHAREHOLDER MANAGEMENT MODEL: DEPARTMENT BRIEFING

Chairperson: Mr PAC Hendrickse (ANC)

Documents handed out:
Shareholder Management Model: Status Report & Way Forward: Part 1, 2 & 3

SUMMARY

The Department of Public Enterprises presented a new shareholder management model for state-owned enterprises to the Committee. It was stressed that this was a preliminary presentation of the new model which was not yet ready for implementation. The legal context of State-Owned Enterprises (SOEs) was outlined. The differences in accountability of state-owned compared to private companies were listed. The historical perspective of SOEs was described. Much time was spent on the discussion of the classification of SOEs. It was admitted that the situation was complex and confusing. An important requirement was for a clear strategic intent, which was often lacking or poorly communicated. The documentary requirements were listed, together with a schedule of when these documents should be prepared so that proper reporting was done. All the factors needed to compile a meaningful shareholder management model were discussed.

Members asked questions about the need for parliamentary input into the process. The position of subsidiary companies was discussed and the appropriate policies. The implications of possible listing on the Stock Exchange were also mentioned. Models in use in overseas countries were also discussed.

MINUTES

Mr Hendrickse took the chair in the absence of the normal Chairperson and the Portfolio Committee Whip, who were both ill. He explained that the presentation to be made was on a document which was still being developed. It was therefore not for publication at this stage, and the final version would be presented later.

Presentation by Department of Public Enterprises (DPE): Part 1

Ms Sandra Coetzee (Deputy Director-General) said that DPE had facilitated an autumn school. This had featured discussions and presentations on State-owned Enterprises (SOEs) and their shareholding philosophy. She explained the types of considerations DPE was working on. The subject matter was wide and deep. Success in one element had a domino effect on other elements.

The context in which SOEs operated had been covered during the autumn school. These companies were in a class of their own. Expectations and the oversight role held their own challenges, which were directly related to the unique characteristics and status of an individual enterprise.

The most immediate legislative framework was the Companies Act, while the Articles of Association contained critical elements which defined the relationship, roles and rights of shareholders and the Board. An opportunity was being lost to precision the shareholder management model. SOEs also had constitutional requirements such as the accountability of the relevant Minister to Parliament. The Public Finance Management Act (PFMA) also imposed obligations on the Board, Minister and Chief Executive Officer (CEO). Some were also subject to specific enabling legislation.

She said that the Companies Act specified there should be a minimum of seven owners. In the movement of parastatal companies to corporate status a single shareholder situation might exist. In the traditional company structure, the line of accountability stopped with the shareholder. SOEs had a broader view. There were direct arrangements for intervention by the Minister of Finance in particular regarding financial matters.

The situation with DPE was very similar to a holding company but without a budget. The DPE had an asset base bigger than any South African company, and could be compared to Anglo American. The Auditor General reported to Parliament on the finances of SOEs. Parliament was a critical part of the accountability chain, and the state therefore had an impact on the economy.

Ms Coetzee said that the model was not just a list of items. She painted a historical perspective, starting with the parastatal era. The SOEs had evolved from these parastatals. Shareholder management was a focused area, and some elements had been lost. One key point was the need to communicate strategic intent.

The corporatisation era had brought the benefits of ringfencing and good corporate governance, but internal communications had been lost. In the PFMA era, SOEs were “floating”. There was a concept of them not belonging to the state any longer. Communication of strategic intent was poor, and there was a lack of performance monitoring.

In terms of privatisation, she said that initiatives were complete. The state was a minority shareholder. The concept of strategic intent had been lost. One lesson learnt was that the shareholder management model was not a one-element issue, but consisted of multiple building blocks and layers of participation. A comprehensive approach was being taken and implementation was on a step-by-step basis, which allowed easier measurement of progress. However, a goal was needed. The challenge focused on shareholder empowerment.

The rationale for SOEs was seen against a background of natural monopolies, market failures and development requirements. A critical element was the consideration of what the concept of state shareholding meant. If it was only geared for a financial return, then the state already had pure financial return vehicles available.

She said that there was some confusion regarding the classification of SOEs. There were definitions for public entities, national and provincial government business enterprises and for the PFMA schedule listings. However, these were not used consistently. The Schedule Two major public enterprises were not defined. National government business enterprises were seen as independent juristic persons, which were not dependent on state sources for finances. All were accountable to Parliament.

DPE had developed a model which distinguished between government businesses and government enterprises. There was a clear distinction between commercial enterprises and government institutions which existed outside departments for specific purposes, such as the Road Accident Fund and various Tender Boards. Company law distinguished between the rights of majority and minority shareholders. She felt that clinging to bureaucratic definitions led to a loss of intervention possibilities.

There was a distinction to be considered between State Owned and State Reporting Entities. If government was a minority shareholder, it could not dictate the company’s operations but it still had to report to the State.

She said that the PFMA Schedule Two entities included wholly owned subsidiaries, and there were about forty half-owned subsidiaries.

Discussion (Part 1)

The Chairperson asked for more clarity on the different types of entity.

Ms Coetzee said that the situation was very confusing. There were three layers of government entity, and the situation was far too complex. It was hard to decide which of approximately two hundred rules applied to a particular entity. An important distinction was in its funding. She asked why a company should exist if it was dependent on inter-government transfers for funding, such as was the case with some of the defence industries? DPE’s view on a business enterprise was focused on shareholders and reporting.

Ms Coetzee repeated that SOEs had been ineffective in communicating their strategic intents. A transparent mechanism was lacking. In Australia, SOEs operated in accordance with a Ministerial Charter. Community and socio-economic priorities were communicated through a gazette. DPE was looking for a means to do this, but the scope and content needed to be precisioned. Strategic intent translated into an economic return. A legal mandate was needed. Enterprise performance targets needed to be aligned with their strategic intent.

Ms Coetzee said that shareholders had reserved rights, which were beyond provisions of the Companies Act. In terms of 100% state shareholdings, definitions were about the reserved rights of the Board regarding borrowing powers, significant and material transactions and the establishment of subsidiaries. The PFMA needed further precisioning regarding significance and materiality, and the procedures for exercising rights. Transaction guidelines were being developed as was a database of criteria and procedures. In the case of a minority state shareholding, the relationship between the shareholders and the Board had to be defined as well as the relationship between individual shareholders.

Ms D Carolus (ANC researcher) asked if these lessons had been learned from DPE’s experiences with Telkom.

Ms Coetzee replied that this was not exclusively based on the Telkom experience, but it had been a big lesson. DPE’s intent was to issue guidelines for shareholder agreements. There should also be a call-back option. Shareholders had to make investments. Priorities would differ based on the nature of the specific industry. The key intervention needed was the establishment of a significance and materiality framework. This should contain guidelines for borrowing powers, National Treasury Regulations regarding the establishment of subsidies and dividend policies. Allowance had to be made for the varying nature of companies.

Ms Coetzee touched on the appointment of Board members and their remuneration. There were no guidelines, but profiling was being done and a shadow database of candidates was being compiled. Remuneration depended on various factors, such as the size of the business, its complexity, comparative salaries in the market or sector, and performance. Uniform benchmarks and criteria were needed. She said that no legislative amendment was needed in this matter.

The Chairperson reminded her that the Portfolio Committee was still waiting for a list of Board members.

DPE presentation: Part 2

Ms Coetzee said that consistency was needed with integrity and accountability. Each SOE needed to submit a Corporate Plan. This was a three-year forward-looking document required by the PFMA. However, the PFMA did not give any specific rights of approval to either DPE or the Treasury. It was required to set a three-year target, which would enable the Portfolio Committee to track progress.

Ms Coetzee said that the Shareholder Compacts were catch-all documents. By focusing on these as a means of monitoring targets, DPE was able to work on rationalisation and harmonisation. Quarterly reports were used to measure if the enterprise was on track with its Shareholder Compact. However, they were not well defined and their analysis took too long, often only being completed when the next one was submitted.

Ms Coetzee pointed out that the Annual General Meeting was a means of measuring performance. However, these meetings were often only publicity events, and were not able to measure performance properly.

Ms Coetzee said that the line of integrity and consistency was lacking. Key interventions would be to review the format of Corporate Plans. Draft plans should be prepared for approval by the shareholders, and the format would be reviewed for material compliance with the provisions of the PFMA. Shareholder Compacts should focus on targets. Quarterly reports should show whether the enterprise was on track to realise its targets. She felt that a separate General Meeting should be held to discuss the strategic plan with the Board.

Ms Coetzee said a SOEs accountability to Parliament required it to submit Annual Financial Statements (AFSs) and Annual Reports for a retrospective assessment. However, she felt that Parliament needed to have some input into the forward-looking expectations. In fact, Parliament should have insight into the Shareholder Compact. The strategic intent should be a transparent process.

Ms Coetzee pointed out that the current schedule was that Corporate Plans were submitted in February before the end of the financial year at the end of March. AGMs were held between April and July so that the AFS and Annual Report could be submitted to the relevant executive authority in August. These documents were then to be submitted to Parliament in September. Quarterly reports were due in March, June, September and December. She said that this schedule made no provision for intervention regarding Corporate Plans, and there was no target date for Shareholder Compacts. A lot of reporting was being done, but it was not always well linked.

Ms Coetzee presented a revised schedule. This would see draft Corporate Plans being submitted in January for approval in February. Shareholder Compacts would be finalised in March and April, with AGMs being held in May and June. AFSs and Annual Reports would then be submitted to the executive authority in July, and they would be presented to Parliament in August together with the Shareholder Compacts. From September to November, strategic intent meetings would be held with the respective Boards. Quarterly reports would still be presented in March, June, September and December.

There was a lack of intra-government role and function definition regarding shareholder status and capacity. Co-ordination was needed regarding policy, finances and regulators. Clarity was needed on shareholders’ role. DPE should not be regarded as a regulator, either indirectly or by proxy. There was an asymmetry of information generation and availability. This was a constraint on effective oversight. A conceptual framework for management was being developed and a framework for SOE legislation and PFMA amendment recommendations. DPE functions shared the characteristics of a holding company. Within DPE there was a developing governance workflow.

Ms Coetzee turned to the shareholder management model. This was a combination of people, entities, rules, management tools and processes. Healthy personal relations were needed. Management relationships were needed with other shareholders, with the Board, with Parliament and with intra-government objectives. At the same time, there were rights and duties in relation to the Constitution, the PFMA and National Treasury Regulations. The Companies Act also had relevant sections. Finally, other documentation to be considered included the Founding Document, Articles of Association and Shareholders’ Agreement.

She said that the shareholders management model was about applying effective tools such as Company Plans, Quarterly Reports, Shareholder Compacts, AFSs and Annual Reports. These should be clear and transparent instruments. There should be integrity of information to support informed decision making within the statutory timeframes. The approach should not be to re-invent but to strengthen existing rights and duties through the clearer definition of the information and accountability chains.

A conceptual framework was needed to serve as a basis for government-wide consultations. Legislation would be drafted and reforms implemented where legislative changes were not needed. The key aspects of the legislation would be its simplicity. Strategic intent interventions might be needed with reference to different types of entity. Legislation would be a mechanism to issue guidelines for consistency. Relationships between SOEs and the State and performance monitoring would be included. Co-operation with governance principles would be ensured, and representation would be made to Parliament.

Discussion (Part 2)

Mr J Stephens (DA) said that the presentation was much appreciated. He asked about the process of reclassification, which would be in the forthcoming legislation. He asked if input from Parliament could be part of the Portfolio Committee’s discussions, as legislation often came as a fait accompli. Consultation was important. Concerning the remuneration of Board members, he said that incentives were one of the most important parts of any Board business. However, they should not be perverse numbers, as inflated remuneration would be a wrong action by the members.

Prof E Chang (IFP) said that a lot of government-owned enterprises had subsidiaries. She asked if they would also be included in the law. She remarked that there were a lot of 100% government-owned enterprises.

Ms Coetzee replied that she anticipated that there would be a conceptual framework for consultative opportunities with the Portfolio Committee before the legislation was drafted. On the question of remuneration, she said that it was an issue of appropriateness for non-executive directors. Independent advice was sought. Once the member of the Board had been approved by the Minister, it was an issue for that SOE. She was very conscious of the sensitivity of the issue.

Ms Coetzee said that the Industrial Development Corporation (IDC) was an SOE that did not fall within the portfolio of DPE, but instead was part of the Department of Trade and Industry (DTI). It was a Schedule Two enterprise. Oversight was provided for over the subsidiary, and the parent company must report on their activities. DPE relied on the SOEs for their oversight role in this situation.

Mr Y Wang (ANC) asked what the criteria were to decide if a company was indeed a subsidiary of an SOE. In particular, he asked where the Airports Company of South Africa (ACSA) fit into the picture, as SA Airways (SAA) was a shareholder.

Ms Carolus said that SAA had left Transnet without any legislation. There was a difference between a state corporation and an SOE.

Mr C Gololo (ANC) asked whether a government business enterprise could be listed on the stock exchange. He asked about the historic perspective of the South African Railways, as he believed there was both state and private ownership involved, and asked to whom they had been accountable.

Ms Coetzee said that the sub-layers were an interesting issue. Most questions had already been considered in some form. Final positions had not been taken on some issues. The PFMA defined what a public entity was. Ownership control was a characteristic of the public entity. The problem was complex, as one answer led to more questions. The terms used were restrictive. Ownership control gave the state the right to appoint and dismiss Directors and CEOs and to influence any vote by the Board. This situation applied either to a wholly-owned organisation or majority shareholder situations. Minority shareholders needed special rights.

Ms Coetzee was concerned that more layers of subsidiaries made the line of sight longer. She questioned the need for subsidiaries at all. Transnet’s restructuring had been through a group focus. A good reason was needed for fourth and fifth-tier structures, and a guideline mechanism was needed to inform the process. She believed that ACSA was a Schedule Two concern under the wing of the Department of Transport, and that SAA was not a shareholder to the best of her knowledge.

Prof Chang said that internet research showed that SAA was indeed a shareholder in ACSA.

Ms Coetzee said that a new classification model was needed as the current one was confusing. The proposed new model was a step forward, but a lot of work still had to be done. In the current framework, SAA was deemed to be a Schedule Two concern, and was a subsidiary of a Schedule Two enterprise. Enabling legislation was not needed for them. There was an over-reliance on legislation to restructure company functions.

According to Ms Coetzee, in the case of the conversion of SA Railways & Harbours (SAR&H) to Transnet, a once-off transfer of assets had been legislated. No government business enterprise was listed on the Johannesburg Stock Exchange. She thought that these might not comply with the Stock Exchange rules, bud did not know of any rules preventing this happening. It was possible that new entities might need to be listed in the future.

Ms Coetzee said that SAR&H had always been an SOE. It was a parastatal under the Minister, as was in fact a stronger organisation than the Department at the time. It was then corporatised to become Transnet. There was no change of ownership, although some non-core assets had been disposed of.

Prof Chang said that an SOE would no longer be state-owned if it did list on the Stock Exchange. She asked what the regulations were concerning privatisation, and what the procedure was to qualify for this process. On the question of the creation of subsidiaries in the past, she asked if Departmental of Parliamentary approval was needed. She thought that anything with less than 51% state ownership had to follow the law. She suggested that legislation in other countries should be used as a guide.

Mr SE Kholwane (ANC) said that the issue of subsidiaries raised many questions. Most of the reasons for the downfall of SOEs were linked to subsidiaries, as these were non-core businesses. He urged a forward-looking approach. In Brazil, all SOEs belong to the same government department. Other Ministers merely set policy for the SOEs functioning under their portfolio. The Department of Communications budget had set aside a lot of money for shareholder management.

Ms Coetzee said that the intent of legislation was not necessarily to serve the process of privatisation. The state should guide strategic intent, and this right was secured where the state held shares in the company. More focus was needed on minority shareholders. Government was a participant as a shareholder. There was a wide spectrum of companies involved.

Ms Coetzee added that the oversight role was not the same in all cases. In some cases oversight was not met to the same extent, and this had to be corrected. While the PFMA recognised ownership, oversight of the conduct of shareholders was needed, and shareholders had to report on this. The scope of these reports had to be defined.

Ms Coetzee said the approach was to go through the Minister. DPE did not know if a decision had been taken. Subsidiaries were aware of their obligation to report on their activities. Company analyses were being done. The PFMA resembled the shareholder management models currently in use in Australia, New Zealand, Sweden and China. In the latter case, the issue of asymmetry was very wide. She underscored the comments on subsidiaries. The Treasury was in agreement. The forward-looking perspective of consolidating all SOEs under one Ministry was not a new concept. There was a lot of potential in this, but it would have to be done in phases. Progress of the model would be success-driven, and would be a long-term exercise. DPE would also be held responsible.

The Chairperson said that the Portfolio Committee should have inputs into the shareholder compacts. This was a matter for future discussion. He requested that the process of Board induction should be demonstrated to the Portfolio Committee, so that they could see the roles played by different players. This would be a useful exercise.

Prof Chang said that the first two quarterly reports would be projections. The second would include elements of actual performance.

Ms Coetzee noted the question and the suggested approach. Discussions were needed regarding the conceptual framework. She asked if consultation was more important than the issue of strategic intent. She agreed that going through the Board induction process would be an excellent idea. It would give all parties an idea of the various roles to be played. In the quarterly reports, a level of comfort could be achieved if progress during the financial year was reflected. The first report of the year should reflect events of that quarter.

The Chairperson said that the presentation had been most useful, and the Portfolio Committee had been given much food for thought.

The meeting was adjourned.




 

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