DPE on challenges faced by SOEs & measures to improve oversight

NCOP Public Enterprises and Communication

08 September 2021
Chairperson: Mr T Matibe (ANC, Limpopo) & Ms T Modise (ANC, North-West)
Share this page:

Meeting Summary

Video

The Committee convened with the Department of Public Enterprises (DPE) in a virtual meeting for a briefing on the measures taken to improve oversight over state-owned companies (SOCs) following the collapse of South African Airways (SAA) and the challenges faced by other SOCs such as Denel, SA Express and Alexkor.

Among the measures to improve oversight and bring stability to SOCs, it had been recommended that a new state-owned asset management company be established to act as a 100% state-owned investment management company with a mandate to transform economies, grow middle income populations and deepen competitive advantages. This new investment company, headquartered in South Africa as an asset management SOE, would be an active investor and shareholder that aimed to deliver sustainable value over the long term for its stakeholders. It would be 100% owned by the South African government through the DPE or the Presidency. The long-term strategy was to have the SOE report directly to the President. Its long-term objectives would be to include a sizable and diversified portfolio of quality assets, amongst other key objectives. Its long-term strategy was to see its portfolio evolution as a mid- to long- term process, amongst other key strategies.

Members were generally in support of the recommendation, but expressed doubts over the DPE's capacity to implement it, as many of its good ideas had not been brought to fruition. They questioned who would be appointed to the board to run the asset-management SOE, and sought assurance that there would be foolproof processes to ensure that no fraudulent activities would take place. They also wanted to know if the Department could give a timeline of when the company would be established

In the discussion, Members asked about the composition of the Presidential State-Owned Entity Council (PSEC); to what extent Denel’s decision to exit some of the non-core activities of the business had anything to do with the PSEC; whether a funding model for sustaining SOEs had been developed, and if would it include public-private partnerships. They wanted to know why had it taken so long to review the legislation governing SOC’s, and with new legislation in the pipeline, how would the Department address the restoration of SOE's borrowing power to make sure they did not collapse?

Meeting report

Chairperson Matibe said that the Committee had received an apology from the Minister of Public Enterprises, who had to join another meeting being held at the same time. He also had join another meeting at the same time, but would rejoin this meeting as soon as he could. He proposed that Ms Modise chair this meeting with the Department, and this proposal was adopted by the Committee.

Measures to improve oversight over State-Owned Companies (SOCs)

Mr Kgathatso Tlhakudi, Director-General, Department of Public Enterprises (DPE), said the national development plan's (NDP's) vision was that “by 2030, SA needs to be serviced by a set of efficient, financially sound and well-governed state-owned enterprises (SOEs) that address the country’s developmental objectives in areas where the executive arm of government or private enterprise were unable to do so effectively.

The Presidential State-Owned Enterprises Council (PSEC) was there to:

  • Support the reform process. It had outlined a clear set of reforms that would enable these vital public companies to fulfil their mandate for growth and development.
  • Provide overarching legislation for state-owned companies, which would be tabled in Cabinet this financial year and in Parliament in the next the financial year.
  • Implement a centralised SOE model this financial year, which would ensure standardised governance, financial management and an operational performance framework for all SOEs.
  • Re-evaluate the mandates of all SOEs to ensure that they were responsive to the country’s needs and the implementation of the NDP.

The purpose of the executive summary was to inform the Committee on the progress made by the government in stabilizing SOEs; identifying and recommending an ownership model for SOEs; proposing a governance structure; a sustainable funding model for SOEs; a process for the establishment of a new state-owned asset management company; and case studies of immediate opportunities available to the Government.

Mandate of PSEC:

The Presidential State-Owned Enterprises Council's mandate was to provide support to the government’s intent to reposition SOEs as effective instruments of economic transformation and development. It included strengthening the framework governing SOEs, including the introduction of an overarching Act governing SOEs and the determination of an appropriate shareholder ownership model. SOE-specific interventions were being implemented to stabilise companies through the strengthening of their governance, addressing their immediate liquidity challenges and implementing agreed turnaround strategies.

The Council's mandate would extend to a review of the role and mandate of SOEs to ensure a positive socio-economic contribution and alignment to the national development agenda; review SOE corporate plans to ensure alignment to government priorities and to ensure appropriate systems were in place to monitor implementation of such plans, as well as the operational and financial performance of SOEs; review business models, the capital structure and sources of financing for SOEs, would monitor and mitigate risks.

The DPE would serve as secretariat for the Council, as it was the shareholder representative for government, with oversight responsibility for SOEs

Challenges identified

Extracts from the Presidential review committee on SOEs state that South Africa had no common agenda for and understanding of SOEs, and that there were no commonly agreed strategic sectors and priorities. In addition to the absence of a consolidated national repository for all SOEs, the governance, ownership policy and oversight systems were inadequate; the quality of the board and executives’ recruitment was inadequate; there was no clarity on the role of the executive authority (shareholder representative Minister), board of directors, and the chief executive in the governance and operational management of SOEs; many SOEs currently require a massive injection of capital, and finance policies require close re-examination; funding models for social and economic development mandates of SOEs were blurred and confusing, leading in some instances to under-capitalisation.

Establishing of and restructuring of stabilisation unit:

Mr Tlhakudi said the challenges identified by the review committee indicate the broader SOE portfolio was not in steady state or stabilised, due to internal and external requirements. Experience from the South African Airways (SAA) business rescue process had identified the need for a dedicated team within government to implement the required restructuring, as crises facing SOEs demand a significant amount of management time. To address the challenges, an independent and discrete team needed to be established with the focus on:

  • Stabilisation of SOEs;
  • Repositioning the SOEs to be commercially competitive;
  • Management of the turnaround process.

The team would report directly to the PSEC, the Minister of the DPE -- as the secretariat of PSEC -- and the Presidency. The duration would be the time required to restructure and reposition the SOE portfolio.

The restructuring and stabilisation unit would provide a stable platform for strategic equity partners (SEPs) to enter and take the SOEs to the next level, increase the market attractiveness of the portfolio, and identify the assets ready for SEP entrants.

The new state-owned asset management company would enable the identification of assets classified as non-core, facilitate the disposal process to prevent value erosion, and offer innovative solutions for the disposal and stimulating the economy.

Recommendation

It was recommended that a new state-owned asset management company be established to act as a 100% state-owned investment management company with a mandate to transform economies, grow middle income populations and deepen comparative advantages.

This new investment company, headquartered in South Africa as an asset management SOE, would be an active investor and shareholder that aimed to deliver sustainable value over the long term for its stakeholders. It would be 100% owned by the South African government through the DPE or the Presidency. The long-term strategy was to have the SOE report directly to the President.

Its long-term objectives would be to include a sizable and diversified portfolio of quality assets, amongst other key objectives. Its long-term strategy was to see its portfolio evolution as a mid- to long- term process, amongst other key strategies.

Mr Tlhakudi said the current shareholder oversight tools include:

  • Companies Act

This sets out the general framework for the governance of all public and private companies, and prescribes the rights and responsibilities of shareholders and boards (e.g., fiduciary duties).

  • PFMA and Treasury Regulations

These prescribe the processes, roles and responsibilities for strategic planning; reporting; auditing; issuance of guarantees; regulation of borrowings and major transactions; and sanctioning for financial misconduct. They also establish the additional fiduciary duties and responsibilities of boards.

  • Laws establishing the SOEs

These generally set out the broad mandate of the SOE and prescribe processes, roles and responsibilities for the appointment and dismissal of board members.

  • King Code on Corporate governance and Protocol on Corporate Governance in the public sector

This sets out the best practice corporate governance guidelines

  • DPE Guidelines

These cover the guidelines for the appointment of the chief executive officer (CEO),  quarterly reporting guidelines, and transaction guidelines.

  • Other laws and regulations

These would be sector laws and policies.

Current shareholder oversight guidelines include:

  • Appointment guidelines for CEOs and CFOs

The boards were responsible for the recruitment and appointment of CEOs and chief financial officers (CFOs), as per the guidelines which were further emphasised in the Memorandums of Incorporation (MOIs). The Department would then make a final decision on the appointment of executive directors.  The intention was to set out clear roles for the board and the shareholder in giving effect to the government’s reserved ownership and control rights, as contemplated in the PFMA.  

  • Board Appointment Process

The draft methodology set out steps to review Boards and fill vacancies. The DPSA guide for the appointment of persons to boards was under review, and would be presented to the PSEC soon. Enhancing the guide must address ethical behaviour at the top, stressing meritocracy and a culture of courageous leaders who could act decisively and swiftly to root out fraud, corruption and mismanagement.

  • Guide for the remuneration and incentives of SOC executive directors, prescribed officers and non-executive directors

The review of the guide sets out the principles for the remuneration of non-executive and executive directors. The intention of the review was to ensure that a method of calculating guaranteed pay and incentives was state-linked, and not private-sector linked. The Department had undertaken a survey of approximately 60 SOEs at national, provincial and local government level. Survey results had been shared with the economic cluster DGs, and feedback was expected to assist in the review. The focus was on commercial SOEs, and the review seeks to strike a balance between public sector salary scales and competitive private sector benchmarks, while ensuring that public sector principles of remuneration are aligned. Internal discussions, as well as discussions with the Ministers of Finance and the DPSA, must be held to ensure greater alignment.

  • Risk and integrity framework

This introduces stringent background checks for SOC employees, and prohibits SOC officials from doing business with the SOC. It has been designed to standardise integrity assessments of SOC officials and companies doing business with SOCs through stringent background checks.  It prohibits SOC officials from doing business with their employer, and introduces reforms designed to enhance and integrate risk and performance in SOCs, including standardised reporting requirements to the Department. It also provides for greater management of conflict of interest.

Discussion

Mr M Nhanha (DA, Eastern Cape) commented that in his years at Parliament, this presentation made by the Director-General was one of the most detailed presentations that he had sat through. At face value, there was no reason other than to think that this was a good presentation. The plans look good. However, the Committee had heard plans which had since been collecting dust. To have a good plan was one thing, but to implement it was something else.

Regarding the Presidential State-Owned Entity Council, he was interested to know who constituted this Council, and what criteria had been used to appoint its members. What skills did the people who served on this Council possess, or would possess? Last week he had listened to an explosive interview on television, where Mr Montana had been interviewed, and he had made startling revelations that SOEs were being used by this government as slush-funds. Mr Nhanha asked whether the Director-General had investigated the veracity of these accusations.

About a week ago, the Committee had heard a presentation by Denel, which had told the Committee that they were exiting some of the non-core activities of the business. To what extent had Denel’s decision had to do with the Presidential SOE Council? Had the shareholder in this case given the go-ahead for Denel’s turnaround strategy? He noted that in the presentation, the Committee had been told that the long-term strategy of centralising the operations of SOEs was to have them reporting to the President. This should be worrisome to everyone, because when President Ramaphosa was reshuffling his cabinet, they had seen Intelligence moved to the Presidency. They were now seeing that the Presidency was intending to have the operations of SOEs under its wings. Was it fair to create a super-presidency in South Africa? Who would run the asset management SOE? Had the Department started the recruitment process yet?

The state would be a 100% owner of this entity. Often there were lots of brilliant plans, but when it came to implementation, they end up shooting themselves in the foot. What criteria would be used to recruit executives who would be running this entity? Would affirmative action be part of criteria? Why was the state still in the business of doing business?

The presentation states that they had to create a credible state. Mr Nhanha said that the state was not yet credible. The state had lost credibility. How did the Department hope to juggle and balance this notion? How would it re-create this credibility? How would the markets and fund managers react to this? He commented that he liked the comparative analysis that the presentation had made with other countries in terms of the centralisation or decentralisation of SOEs. South Africa and France were not comparable. However, mentioning Argentina and Kenya were comparable with South Africa. The presentation stopped short of mentioning that in countries where the model was successful, the criteria to appoint executives who run those SOEs was not determined by one's membership card. If one was a French citizen, one got the job if one had the requisite skills needed for the job. It was important to note that this model had been successful in most countries, but the basis of who got to lead this model was key.

Ms L Bebee (ANC, KZN) said that the real challenge South Africa’s SOE’s were facing involved capitalisation, or equity funding. This matter had never been properly addressed when speaking about SOEs. Had a funding model for sustaining SOEs been developed? Did this include public-private partnerships? Regarding the appointment of board members, their role in running SOCs was of major importance. One could not allow a situation where a board member sat on 21 boards, no matter how skilled that person may be. Could a board member of an SOE sit on more than ten boards?

Ms W Ngwenya (ANC, Gauteng) said that the NDP had also expressed concern for SOCs not achieving their development goals, and referred to credibility challenges in terms of board appointment and instability. Would the DPE develop a framework for the appointment of boards in the form of a handbook? She asked why had it taken so long to review the legislation governing the SOCs. As part of addressing oversight over SOCs, had the Department conducted an international benchmarking exercise against global threats in order to strengthen the capacity of SOCs? If the answer to this question was yes, what country did the Department draw lessons from, and what had been the nature of these lessons? How often would the SOC’s mandates be subjected to review and renewal?

The Chairperson noted that the main problem among South Africa’s SOEs which had to be addressed, were their borrowing powers. This had been because of the collapse of the SOE’s. With new legislation in the pipeline, how would the Department address the issue of borrowing powers, to make sure the country's SOE’s did not collapse?

Department's responses

Mr Tlhakudi commented that there was a Presidential SOE Council which was chaired by the President. The Department was looking at the form that a centralised function would take. A decision would be made regarding this function. The SOE Council was an advisory body and provided guidance to Ministers and the President on how to manage those entities. This advice was implemented through the various official processes. The commercial SOEs which were the ones which were best positioned.

The Council's membership was composed of Ministers and industry leaders, and included representatives of labour.

The Department could not say much about Mr Montana’s comments without any evidence. The Department had not come across any information that would support his allegations in its oversight of the entities.

The new business model was approved by the Minister. Denel had an opportunity to present to the PSEC. A consolidation working group had had a chance to hear its plans. The portfolio had been driven by the need to ensure Denel had an affordable cost base for its revenues.

The implementation point made by Mr Nhanha was a fair comment. Through the structures put in place, the Department would be able to address that particular point. The Department was harnessing the capabilities which existed in government to ensure that the Department showed progress in getting an optimal SOE portfolio management oversight function. A risk-integrated framework was being rolled out which would inform the appointment of members of various boards. This showed that the Department was working hard to show that there was trust in custodianship by government.

Responding to Ms Bebee’s question regarding funding, he said that the Department had tabled the need for bringing the private sector into the fold. This would become clearer as time went by. They had to break away from funding operational shortfalls. SOEs must create new cash flows, infrastructure, etc, when bidding for funding. Funding must create employment and stimulate the economy.

Responding to Ms Ngwenya, who had pointed out that the performance of SOEs and the quality of leadership and instability had not helped performance, he said this area was receiving attention. The Department had a framework in place. The proposal for handbooks had been noted. This would increase transparency.

Some recommendations from the Presidential Review Commission (PRC) could have been implemented. Since 2018, there had been lots of work done, considering recommendations such as having capable men and women sitting on boards and executive committee’s with the necessary levels of skills. This was not an easy task. With the reputation of South Africa’s SOE’s, attracting good people had proved to be a challenge. The Department was hopeful as time went on, people would have confidence in being associated with the SOEs.

The Department had referred to the experience of their international counterparts in the presentation. They had spoken to Malaysia and Singapore. On an annual basis, the Department produces strategic statements, which indicates the government priorities that SOEs were expected to undertake. This had a medium to long-term review on SOEs. This was translated through the boards, to the review of the business model of SOEs. In the past, the DPE had not done enough in this regard, to ensure the business model kept up with developments in the marketplace. The role of the board would come into place, to assess and intervene quickly.

In response to the issue of prudent access to borrowing, they would not create new problems for SOEs, who carry massive burdens of paying interest on debt holdings. This was an area which would be receiving attention.

Ms Orcilla Ruthnam, Chief Director: Governance, DPE, responded to the question as to who the PSEC members were. The committee had a multidimensional or multi-tiered structure, with various workstreams. In the workstream that relates to governance, there were Christine Ramon, Nazmeera Moola and Michael Sachs. She listed who was in the workstream that was related to finance, consolidation, and crisis management of SOEs which had to be stabilised. The skills component was varied, and there were labour representatives present as well. All the Ministers who had shareholder oversight responsibilities over entities that were mainly commercial, were also part of the PSEC. Within the Department, it was a matrix organisation, comprising legal and financial personnel, and experts who look at socio-economic issues, etc.

Regarding the benchmark question, the Department tried to keep their finger on the pulse by looking at the Southern African Development Community (SADC) region, specifically Namibia, which had developed an ownership manual. In all the countries that they had looked at, the review of SOE oversight was a continuous process. Botswana had gone from 100 SOEs who were mixed, so they had had to segregate all those SOCs that were commercial, that would fulfil their mandate.

Ms Jacky Molisane, Deputy Director-General: Strategic Partnerships, DPE, responded to the debt-level question. She said that for any entity it was not prudent to have unsustainable debt levels. It was important to go back to the basics to make sure there was an optimal mix of debt and equity, so that there were no entities with unsustained debt levels. Innovative ways must be looked at to bring equity into the entities.

Follow-up questions

Mr Nhanha wanted to place it on record that the issue he raised about Lucky Montana had nothing to do with him personally. He did not understand why the Director-General had said that if he had information, he should bring it forward. If he had information, he would have gone to the Zondo Commission. My name should not have arisen. He was asking a question as a Member of Parliament about an interview he had heard on television, which millions of other South Africans had watched. His question had been what the Department was doing about those startling allegations made by Lucky Montana, which the Director-General had responded to.

In the Director-General's response regarding the long-term strategy, it was envisaged that the asset management company would report to the President, but the Director General did not recall this. He referred to slide six of the presentation, and asked the Chairperson if this could be shown to the Committee.

The Chairperson asked the Director General if he could show the Committee slide six.

Mr Nhanha referred to slide six under ‘Profile’, where the last sentence began with “Asset Management State-Owned entity…” He wanted a comment from the Director-General on this.

Ms Ngwenya thanked the Chairperson and the Department for their responses. She commented that one of the most common challenges that she associated with the Department's strategy was their implementation. How would the Department ensure that these strategies worked and yield good results? What would the Department do if these strategies were ignored or failed? Could the Department give a timeline of when the company would be established? Could the Committee be assured that there would be foolproof processes that would ensure that no fraudulent activities would be conducted?

DPE's response

Ms Molisane responded that in terms of implementation and operationalisation, what was envisaged was that there should be very clear criteria for getting people who had a credible track record of asset management. This would be assisted by having a clear outline plan. When the Department had conceptualised this, it was based on best practices and had been benchmarked across various jurisdictions. The Department would look at people in the private sector who had a proven track record of managing entities so that implementation did see the light of day.

Mr Tlhakudi showed the slide which Mr Nhanha had asked about. Authority had direct oversight of complexes, as representative, and this structure was in line with those in many parts of the world.

Chairperson's closing comments

The Chairperson thanked the Director-General for the Department's responses. She said that if the Members were not satisfied with some of the responses, that they should pose questions in writing so that the Department could provide written responses to the Committee.

She stressed the point of implementation, and said that the Department had very good ideas, but implementing them was of importance. She also stressed the importance of board members. Yes, lots of board members have skills, but if one looked at the SOEs, the board members had left them in tatters. Sometimes they did not have the best interests of communities at heart. If one did not have the interest of the community in mind, one did whatever one wanted. The Department must ensure that board members were credible people so that the SOEs did not collapse. A lot of South Africa’s SOEs were in tatters, regardless of whether the members of the boards had skills.

The Chairperson thanked the Department, and said that if they could implement good initiatives, the Committee would be happy. She released the Department.

Committee minutes

The Committee considered and adopted its minutes of 2 June 2021.

In closing, the Chairperson commented that it had been a very important meeting with the Department.

The meeting was adjourned.

Audio

No related

Present

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: