PRESIDENTIAL REVIEW COMMITTEE TERMS OF REFERENCE AND RECOMMENDATIONS

The following are the twenty-one (21) terms of reference on which the PRC made recommendations

1. A common understanding and definition for State Owned Enterprises;

2. The place of State Owned Enterprises in a developmental state;

3. Strategic importance and value creation of State Owned Enterprises;

4. The viability and funding of State Owned Enterprises;

5. The existing portfolio of investments by the State in strategic businesses;

6. The efficiency and effectiveness of State Owned Enterprises with respect to service delivery;

7. Current policy and regulatory framework and the impact thereof on the management of State Owned Enterprises;

8. The balance of social, political and economic imperatives in delivering objectives for State Owned Enterprises;

9. Harmonisation of performance measurements among State Owned Enterprises;

10. Standardisation of accounting and reporting processes for State Owned Enterprises;

11. Owner/ shareholder oversight and governance of State Owned Enterprises;

12. Recruitment, selection and appointment of boards and executive management of State Owned Enterprises;

13. Remuneration policies of State Owned Enterprises taking into account wage differential aspects;

14. Current restructuring initiatives (privatisation, retrenchments, Public Private Partnerships etc.) of State Owned Enterprises, and implications thereof;

15. State Owned Enterprises as a platform for sustainable human capital development and a catalyst for scarce skills;

16. Establishment of a comprehensive database of State Owned Enterprises across all spheres of government;

17. Policy for the establishment and de-establishment of State Owned Enterprises;2 18. Criteria and framework for identifying and establishing priority State Owned Enterprises, relevant global benchmarking and best practices;

19. Alignment, collaboration and cooperation among State Owned Enterprises for the purpose of optimising state resources;

20. Relationship and collaboration between Government Ministries to facilitate achievement of State Owned Enterprises objectives; and

21. Compliance of State Owned Enterprises with government's development and transformation agenda.

Summary of the 31 recommendations outlined in the Review for a forward looking approach to enable SOEs to help realize the aspiration of a Developmental State.

1. The Government should develop an overarching, long-term strategy for SOEs.

2. The Government should enact a single overarching law (State Owned Entities Act) governing all State Owned Entities.

3. Appointment: a. Board Appointments - the Government should develop a framework for the appointment of SOE Boards b. CEO Appointments - the appointment of the CEO shall be done by the Minister in concurrence with Cabinet, at the recommendation of the Board.

4. The Government should develop a mandatory framework for effective collaboration among SOEs, and between SOEs and national, provincial as well as municipal authorities.

5. The Government should establish a Central Remuneration Authority (CRA)

6. Economic Regulation a. Government should develop a uniform framework for economic regulation.

b. Government should undertake a process of identifying policy inconsistencies and policy conflicts; clarify the roles of economic regulators; and develop a blueprint to guide regulatory designs.

7. The Government should develop a common performance management system.

8. The mandates of SOEs should be subject to critical strategic review every five years, and the requirement thereof should be factored into the SOE Act.

9. The agreement and sign-off of statements of strategic intent and corporate performance plans should be; a. Made mandatory for every executive oversight authority; and b. Developed within a specified time.

10. All Government entities and SOEs should be required to develop transformation plans.4 11.SOEs should lead the South African economy in prioritizing skills development.

12. SOEs should ensure that the procurement process is transformational 13.SOEs should play a leading role in socioeconomic development.

14. Transformation should be an integral part of the contractual agreement between the Executive authority and SOEs.

15. Sanctions for corrupt activities as well as fronting should be supplemented by a register of lawbreaking individuals and companies that are involved in corrupt practices. The common register should be made available to SOEs.

16. The empowerment framework and legislation should be streamlined to facilitate substantial contribution towards transformation as opposed to boxticking compliance.

17. Government should rationalize its holdings by focusing on those SOEs that provide public goods and those deemed to be strategic, namely serving national interests, national security and priority sectors.

18. The Government should develop a consolidated funding model for commercial SOEs and Developmental Finance institutions (DFIs)

19.The Government should develop and adopt a policy shift towards a greater mix of debt finance and equity finance.

20.Private sector participation in partnering with SOEs to deliver on the provision of both economic and social infrastructure should be encouraged and expanded.

21. A funding model for the funding of public infrastructure based on a distinction between economic and social infrastructure must be developed.

22. Mining as a strategic sector and significant economic user of infrastructure in line with practices from other mining communities around the world should contribute fairly to the development of infrastructure for economic use. This entails that in addition to tariffs that are based on user pay principle for economic use of infrastructure, consideration of the use of various policy tools to achieve fair contribution by the mining sector should be examined; these could include mandatory local beneficiation and ring-fencing of a portion of the proposed resources tax to develop infrastructure.

23. The Government should turn select SOEs into national world-class State commercial (industrial and economic) flagships.

24.Government should address the issue of non-financially viable commercial SOEs.

25. The Government should actively promote a common national understanding and commitment to a Developmental State vision.

26. The Government should build its capacity to develop and implement an overarching strategy for SOEs.

27. A transitional SOEs Reforms Committee [Execution Management and Monitoring Task Team] must be established to drive the implementation of the PRC's recommendations.

28.The proposed SOE Council of Ministers and the Central SOEs Authorities should develop customised human capacity building programmes 29.The Government should ensure that the Executive Authorities' SOE strategic management and relationship is professional.

30. The Government should improve financial decision-making capacity in all departments dealing with SOEs.

31. The Government should deal with an integrated reporting, monitoring and evaluation capacity for SOEs across all spheres of Government.

A. Critical challenges identified by the PRC

The main problem under investigation was whether SOEs were responding to the State's developmental agenda. This requires that the State be an active and decisive shareholder, that it plays a leadership role in creating an enabling environment to drive the performance of SOEs in delivering their mandate.

The PRC through research established that there has been an increase in proliferation of SOEs across the various PFMA SOE schedule since 1994, including commercial and non-commercial entities and their subsidiaries, PRC's consolidated database established that as at end May 2012 there were approximately 715 SOEs and their respective subsidiaries (namely, chapter nine institutions, public entities, statutory corporations, state owned companies, development finance institutions, state investment companies). This figure may increase as further investigations are conducted.

With such a large portfolio of SOEs, the PRC had to pay particular attention to the best practices on the capability of the State to effectively oversee these SOEs and identify the best options to manage SOEs without compromising their service delivery and financial performance.6

The PRC made a number of notable observations and findings regarding strategic, environmental, and operational challenges, namely

Dealing with strategy for SOEs; South Africa has no common agenda for and understanding of SOEs. This diversity ranges from varying terminology used to denote SOEs to the perceived absence of a universal and obligatory long-term vision and plan for SOEs that clarifies their role in the country at large.

There are no commonly agreed strategic sectors and priorities across the three spheres of government as well as a common database on the SOEs. In addition to the absence of a consolidated national repository for all SEOs, there is confusion regarding SOEs categorisation.

There are also challenges and an endemic tension with balancing the tradeoffs between commercial and non-commercial objectives of SOEs including the funding those mandates and as well capitalisation model for the SOEs.

Creating an enabling environment; the legislative framework for SOEs was found to be inadequate, displaying evidence of conflict in treating homogeneously public and private entities and also characterised by duplication of legislations.

The governance, ownership policy, and oversight systems in some respect were found to be inadequate. There is no clarity and precise delineation the role of the executive authority; boards; and the Chief Executive in the governance and operational management of SOEs The process and the quality of the board and executives' recruitment were found to be disjointed and inconsistence thus requiring policy and best practices improvements.

The remuneration frameworks and practices are inconsistent. They require urgent reconsideration because they impact directly on the performance of SOEs and influence the supply and demand for skilled personnel in the market.

SOE performance; many SOEs currently need a massive injection of capital and finance policies require close re-examination. Ownership policy and funding models for social and economic development mandates of SOEs are in some instances blurred and bewildering, at times leading to undercapitalisation, which impedes the SOE's ability to meeting national challenges. 7 The service delivery performance of SOEs was found to be mixed, some exhibiting excellence and providing high quality services, while in other areas there are deficiencies characterised by low levels of customer satisfaction, complaints, loss making, poor return on investment/assets and service delivery civil protests.

Some SOEs tend to lack robust leadership and initiative on crucial transformation imperatives such as broad-based black economic empowerment, the creation of meaningful employment opportunities and comprehensive skills development.

State capacity enhancement; the performance of SOEs is subject to a number of variables, including the performance contracts between the executive authority and the board of SOEs.

Despite the importance of these shareholder compacts, the primary and secondary research indicates that they are often not signed on time and make insufficient provision for objectives beyond the narrow goal of profitability.

Collaboration and coordination among SOEs and their oversight is poor. This reduces the impact made by SOEs in service delivery and it increases their costs.

B. Key international trends and lessons on SOE governance reforms

As the world becomes more interconnected and faces similar challenges, governments are learning from each other, while at the same time striving to deal with their unique conditions through innovative approaches.

International experience shows that governments worldwide are increasingly making use of SOEs as catalysts of growth, development, employment generation and transformation of economies and societies.

Similarly, in South Africa, SOEs are seen as essential agents of change that are able to contribute positively to economic and social transformation, the creation of decent work, growth and development of society.

Many of the countries evaluated have embarked on review processes to investigate and reformulate the specific goals, rationale and mission of SOEs, individually and collectively, in terms of

• accelerating wider economic growth,
• expanding industrialisation,
• providing infrastructure, and
• ensuring quality and timely public service delivery. 

In countries, such as Canada, New Zealand and Sweden, SOE reforms have proved to be reasonably successful. They were amongst the first to focus on formulating a clear overarching legislative framework for SOEs and setting out objective for the management of SOEs.

Many successful reformers have focused on clarifying the multiplicity of roles of the State, whether as shareholder, policymaker, regulator, operator etc.

Some countries have consolidated the ownership and monitoring of SOEs in a single central agency. In this way, one government agency acts as the ‘owner' on behalf of the State and ‘exercises the shareholder rights'. Related to this is the reality that many governments have formulated an explicit ‘ownership policy' that defines the overall objectives of State ownership; the State's specific role in the corporate governance of SOEs; and how the State will implement such ownership policy efficiently.

China, for example, established the State Owned Assets Supervision and Administration • Commission of the State Council (SASAC) to oversee the ownership, supervision and monitoring of SOEs.

Singapore, on the other hand, formed a separate company, Temasek Holdings, to serve as the central ownership and monitoring agency for SOEs.

Similarly, France established the Agence des Participations del'Etat to oversee SOEs.

In cases where the formation of a single entity is not politically feasible, a separate State agency was set up to monitor the performance of SOEs. This is the case in New Zealand, where ensuring the accountability of SOEs was split between line function ministers and a semi-independent Crown Company Monitoring Advisory Unit, which not only monitors the performance of SOEs but also provides strategic advice to line ministers on how to maximise the resources of SOEs.

Reforms have also focused on clarifying interactive roles between governments as shareholders; entity boards; executive management; and regulators.

Some governments have attempted to set clearer objectives and performance targets for SOEs, including financial targets, developmental impact and employment creation. In the case of multiple objectives - which are often the case, the best practice is for the State to rank them in order of importance.

A strong focus has been on developing less opaque mandates and creating vigorous monitoring and evaluation and systems. The idea has generally been 9 to set clearer ‘objectives and targets, which can be monitored and reported on over time'.

Furthermore, reforms have focused on improving overall State capacity in the SOE as well as in the SOE oversight institutions such as Parliament and the executive authority, including State independent governance and oversight agencies.

These governments and their parliamentary oversight organs have tried to bring more transparency into the operations of SOEs i.e. transparency similar to that of listed companies. As an example, Sweden has a requirement for SOEs to provide quarterly reports, which must include financial statements.

In addition the State has to make a public disclosure of the goals, assessments, and guidelines for oversight of SOEs.

Various countries have also made robust efforts to improve performance and initiated groundbreaking policies to attract and retain those with the requisite talent, expertise and innovative ideas to serve on SOE executive management and boards.

C. Moving forward

With South Africa aspiring to be a Developmental State, the PRC envisioned a framework for SOE reforms and optimal contribution to equitable growth, development, transformation, and service delivery in South Africa.

The framework takes into account international experience and encapsulates the following principles that enhance the SOE environment.

The PRC recommends that the following principles should be endorsed by Government to guide SOE reforms:

1. The Government must have a vision and strategy for the Developmental State.

The Government must develop a shared understanding of the objectives of the Developmental State and must stipulate how it should inform the strategies of key stakeholders in the country, including SOEs

2. The Government must identify strategic sectors. The Government should identify strategic sectors that will support the vision and strategy of a Developmental State and within which SOEs will play a role.

3. There must be recognition that SOEs are critical in attaining the objectives of the Developmental State. SOEs are instruments of the State and all have the primary imperative of assisting the State in achieving its developmental objectives. The different types of SOEs - commercial, noncommercial, constitutional, regulators, agencies and other - each have a defined contribution to make. Clarity should be provided on the role of each 10 entity in achieving developmental objectives as well as how resourcing, governance and performance management will be conducted.

4. Profit and non-profit objectives of SOEs must be clearly defined. This principle embodies the unique nature of SOEs, embracing their need to service social-objectives. These objectives should be clearly defined articulating tradeoffs between profit and non-profit objectives. The primary and core mandate of entities and their viability should be prioritised.

5. The Government must maintain a consolidated SOEs database. There should also be comprehensive strategic categorisation and standardised terminology and definitions.

6. The Government must strive to create legislative clarity. There must be an enabling environment for SOEs.

7. The Government must delineate the separate roles of Government as owner, policymaker, regulator and implementer. In the legislative environment that should be created for SOEs, the role and function of the owner/ executive authority should be clearly defined. Separation of policy, regulation, operations and performance monitoring should be implemented and a proper framework established to balance governance and financial oversight of the SOEs. This principle should facilitate competitive neutrality and also allow for sound decisions on what should be centralised and what should be/remain decentralised.

8. The Government should adopt a policy for mandatory periodic reviews of SOEs. International best practice dictates that the mandates of the SOEs are rigorously reviewed by Parliament and the shareholder/owners periodically.

9. The owner or executive authority must play a stronger role in setting the strategic direction and framework for SOEs. Owner/executive authority must be active (shareholder activism) in performance monitoring of SOEs.

If the Government oversees service delivery that falls short of the realistic expectations of the people it serves it will incur significant reputational damage.

10. The Government should adopt appropriate funding principles and models. There must be clarity on the use of funding instruments to fund SOEs and public infrastructure to achieve viable and sustainable development and service delivery.

11. The Government should ensure consolidation of the SOEs. Clustering and centralising should be in the following groupings:

Commercial: The rationale for the commercial SOEs being their ability to command market-related revenues, having a bankable balance sheet, the ability to post profits, and the ability to maintain and replenish market capitalisation autonomously from the State. In cases where the State requires these entities to undertake non-commercial mandates, then the State should contract and fund them for these mandates.

Development finance institutions: The rationale for development finance institutions being their ability to command market-related revenues, having a bankable balance sheet capability, the ability to post surplus, and the ability to maintain and replenish market capitalisation autonomously from the State. In cases where the State requires these entities to undertake non-commercial mandates, then the State should contract and fund them for these mandates.

Statutory corporations: The rationale for statutory corporations rests in their ability to provide basic and essential services. Statutory corporations manifest a hybrid of commercial and non-commercial characteristics. The entities lend themselves to a cross-subsidisation mandate. These entities should remain wholly State-owned. From an ownership perspective, statutory corporations should remain in the line function.

Non-commercial SOE. These entities are predominantly dependent on State funding through budget vote transfers as well as State subsidies and grants. In certain instances, special tax arrangements are made to support the income of entities. Additional resources can be attained through donor funding and in kind support by multilateral institutions as well as fundraising or sponsorships. Some of these entities may have a limited income stream. A significant number of these entities are established in response to constitutional or State policy mandates. These entities should remain under the full control and ownership of the State and should remain in the line function.

12. Performance should be assessed on the basis of efficiency and effectiveness as well as service delivery. The balance of socioeconomic imperatives should inform articulation of performance indicators as well as pre-determined objectives.

13. Financial information should be improved. A good accounting system should be established. Furthermore, the flow of information to the supervisory agencies must be improved by requiring regular and detailed reporting from the SOEs.

14. SOEs must play a leadership and catalytic role in transformation and development. This should be achieved through transparent and development-focused procurement processes; gender parity and progression; targeted skills development in collaboration with other stakeholders (State, 12 business and the community); as well as focused and coordinated social development.

15. Financial viability. The principles should measure how well a SOE delivers on its core mandates as well as meeting its determined developmental objectives. The principles should take into account the fact that in some SOEs, viability will have a bottom line or commercial orientation, while in some SOE's entities other attributes will have equal or even more importance in determining viability. Adequate funding is necessary to ensure viability.

16. SOE remuneration principles. These should ensure competitiveness and optimum retention by improving remuneration policies and practices to ensure alignment and harmonisation across SOEs as well as improving governance and oversight of SOE remuneration by the executive authority.

17. Invest in human resources. Good enterprises require capable people to run them. Investment should be made in training at all levels, from managers and research scientists down to the level of ordinary workers to improve skills. Incentive systems should be related to performance.

18. SOE collaboration and coordination principles. These should focus on breaking down silos and ensuring collective responsibility. They should enable different SOEs to be measured and held accountable collectively for their contribution to achievement of a national objective where they need to cooperate to achieve optimal outputs/results.

19. SOEs should champion relevant skills and human resources development. To drive success of entities in skills development, collaboration with the State and industry is vital.

20. Reduce the number of SOEs/and streamline where appropriate. This will mean better synergy and efficiency and it will reduce the demand on monitoring resources.

21. The Government should enhance its capacity. The Government should be sufficiently capacitated with appropriate and specialised skills and expertise to successfully manage the State's SOE portfolio. Likewise, the entire SOE including boards and executives must be appropriately skilled in understanding the unique role they play in society. Specialised capacitybuilding interventions for SOEs are developed to position them to fulfil their strategies such as SOE board training, and executives training programmes.

Conclusion

The SOEs reform principles supported in this report among others - the separation of roles by Government; the formulation of a strategy for SOEs; creation of an enabling environment; and ensuring adequate performance evaluation and monitoring of SOEs - are designed to guide South Africa towards comprehensive reforms in the SOE environment to enable addressing both current and future challenges facing the nation.

SOEs are not necessarily a panacea for solving all challenges of South Africa, but based on international developmental state benchmarks and trends, they are undoubtedly an added strategic and catalytic state mechanism at the disposal of policymakers' that can enable transformation, growth, development, service delivery and employment creation. The SOEs can definitely make a significant contribution towards attainment of the Developmental State outcomes.

However, without strong vision and committed leadership; an enabling legal environment; effective performance drive and management; appropriate competencies and capacities, an effective and sustainable change will not occur in the SOE environment and the attainability of the objectives of the Developmental State will not be realised.

The PRC indispensable institutional recommendations include the following;

• that the Government must ensure the requisite capacities to implement these SOEs reforms are in place, including visioning and strategy-setting, appropriate human capital and structures, as well as an effective electronic oversight systems to enabling monitoring and evaluation of SOEs.
• that Government should establish a SOE Council of Ministers to drive implementation of the recommendations of the PRC and in order to capacitate effective State oversight of SOEs.
• that Commercial SOEs and DFIs should be overseen by two distinct Central SOE Authorities respectively responsible for each cluster of SOEs.
• that a Central Remuneration Authority for SOEs is recommended to ensure consistency and accountability of remuneration frameworks and practices in SOEs In order that South Africa achieves optimally performing SOEs that contribute to transformation, growth, development, and service delivery, the proposed reform principles and recommendations in this report must be implemented and driven from the highest office in the land and throughout all Government structures across all spheres in partnership with key stakeholders.

Issued by The Presidency, May 28 2013

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