Harmonisation of performance of SOE’s
Version:
1.10
Date:
7 March 2012
Document Name:
Harmonisation of performance of SOE’s
Document
Author/Owner:
Tefo Giliana/ Dr Simo Lushaba
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Strategic Management and Operational Effectiveness (SMOE)
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Position paper as part of meeting the requirements of the Terms of Reference (TOR)
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Document Sign-off
Name
Position/Work Stream Role
Dr Simo Lushaba
PRC Committee Member
Mr Deon Crafford
PRC Committee Member/ Work stream
Date Signed
Chairperson
DOCUMENT CONTROL INFORMATION
Effective
from
Version Number &
Amendment Details
12/10/2011 Origination of document
07/10/2012
Final document from
SMOE
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of the
Amended By
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Table of Contents
1.
Problem statement ........................................................................................................................................ 8
2.
Assumptions ................................................................................................................................................... 9
3. Imperatives of performance harmonisation for State-owned Enterprises (SOE)............................................ 10
3.1. Reconstruction and Development Programme .................................................................................... 10
3.2. Accelerated and Shared Growth Initiative for South Africa and Joint Initiative on Priority
Skills Acquisition........................................................................................................................................... 11
3.3. New Growth Path.................................................................................................................................. 11
3.4. Industrial Policy Action Plan 1 and 2 ..................................................................................................... 12
4. Methodology .................................................................................................................................................... 14
4.1. Annual and quarterly reports................................................................................................................ 14
4.2. Shareholder compacts .......................................................................................................................... 14
4.3. Stakeholder engagements .................................................................................................................... 14
4.4. PRC Commissioned studies on SOEs ..................................................................................................... 15
4.5. Other relevant studies/viewpoints ....................................................................................................... 15
5.
The Foundations of performance management in the SOE environment .................................................. 15
5.1. Assessing mandates, national and business objectives for SOE ........................................................... 16
5.2. SOE performance oversight ................................................................................................................. 18
5.3. Performance management process and structure .............................................................................. 20
5.4. Systems and measures .......................................................................................................................... 24
6.
International perspectives on SOE performance ......................................................................................... 38
6.1. Mandates for SOEs ................................................................................................................................ 39
6.2. Performance of SOEs ............................................................................................................................ 40
6.3. Monitoring and reviewing performance of SOEs.................................................................................. 41
6.4. Aggregate reporting of SOE performance ............................................................................................ 43
6.5. Performance and accountability ........................................................................................................... 45
6.6. Auditing performance in SOEs .............................................................................................................. 47
6.7. Overview of international perspectives regarding harmonisation of performance ............................. 48
7.
Findings emanating from the review of harmonisation of performance .................................................... 49
8.
Recommendations ....................................................................................................................................... 50
9.
Conclusion .................................................................................................................................................... 53
10.
References ............................................................................................................................................... 54
List of Figures
Figure 1: Oversight management of SOEs
18
Figure 2: Performance management process of SOEs
22
Figure 3: JRA performance value chain (traffic lights)
25
Figure 4: Performance value chain to improve access to decent housing
26
Figure 5: Eskom performance history
33
Figure 6: Harmonised performance – Achieving integrated value adding performance of SOEs
50
Abbreviations and Acronyms
AsgiSA:
Accelerated and shared Growth Initiative for South Africa
BSC:
Balanced Score Card
CBRTA:
Cross-Border Road Transport Agency
CEO:
Chief Executive Officer
COGTA:
Co-operative Governance and Traditional Affairs
CSDP:
Competitive Supplier Development Programme
CSO:
Community Service Obligation
DA:
Democratic Alliance
DFI:
Development Finance Agency
DoC:
Department of Communication
DoT:
Department of Transport
DPE:
Department of Public Enterprises
DWA:
Department of Water Affairs
FY:
Financial Year
FPCL:
Fiji Ports Corporation Limited
HSRC:
Human Sciences Research Council
IPAP1:
Industrial Policy Action Plan 1
IPAP 2:
Industrial Policy Action Plan 2
JIPSA:
Joint Initiative on Priority Skills Acquisition
JRA:
Johannesburg Road Agency
KPI:
Key Performance Indicator
MDG:
Millennium Development Goal
NGO:
Non-governmental organisation
NGP:
New Growth Path
NHFC:
National Housing Finance Corporation
OECD:
Organisation for Economic Cooperation and Development
PFMA:
Public Finance Management Act
PLC:
Performance linked compensation
RDP:
Reconstruction and Development Plan
RMI:
Republic of Marshall Islands
RoE:
Return on Equity
RSR:
Rail Safety Regulator
SA:
South Africa
SAA:
South African Airways
SACAA:
South African Civil Aviation Authority
SAMSA:
South African Maritime Safety Authority
SANS:
South African National Standards
SAPS:
South African Police Services
SCOPA: Standing Committee on Public Accounts
SMOE:
Strategic Management and Operational Effectiveness
SOE:
State-owned Entities
SOEGC: State-owned entity Governing Council
TETA:
Transport Education Training Authority
T$:
UK:
Tongan dollar
United Kingdom
1. Problem statement
South Africa has over 6001 SOEs across the three spheres of government, namely: national,
provincial and local. These entities are established as focused arms to bolster government service
delivery towards realising its national imperatives. These imperatives are: ………Moreover, it is
generally expected that these entities will deliver services effectively, or at least far more effectively,
than their counterparts in the public service. According to the Minister of Public Enterprises (Malusi
Gigaba): “Our challenge is … to ensure that the contribution of our SOEs to national economic and
social development is optimised, quantifiable and affects the lives of socially-excluded South
Africans” (Business Day – How State-owned companies can better serve SA’s needs, 07/02/2012).
In FY 2008/09 the state spent R4.6bn. This amount decreased to R555m by 2010/11 as a result of
reductions that were made to transfer payments to SOEs. Between FY 2007/08 and 2010/11 the
state spent R11.8bn on Public Enterprise (National Treasury: Estimates of National Expenditure
2011:240). According to the Democratic Alliance in its submission that was made to the PRC, in
South Africa R281, 75bn was spent by government between 2005 and 2011 to bailout SOEs.
Regardless of the amounts, it is clear from the above that the state has spent considerable amounts
of a scarce financial resource from the fiscus on SOEs. The question that needs to be raised is
whether the performance of SOEs warranted this investment, which may have been spent far more
effectively by direct government intervention in development programmes. Government needs to
give good account of the application of the tax base in improving the country. The bailing out of
badly managed SOEs can never be defended, when the need for development and poverty relief in
the country is so vast.
In order for an SOE to perform and deliver its mandate, its environment, policies, systems and
practices must work in harmony. It is also important to recognise that an individual SOE, whilst
serving its main purpose, is the collective harmonised performance of SOEs that generally result in a
greater social and economic impact. Therefore, whilst oversight of a single SOE performance is
necessary, it is also equally important that there is oversight over the collective performance of
SOEs, particularly those in the same sector. Harmonising performance management of individual
SOEs that are in the same sector, or are part of the same value chain, may result in a wider impact in
society.
1
Source: PRC KPMG Database, December 2010.
2. Assumptions
The following assumptions were made, tested and researched in order to establish the state of
harmonisation of SOEs, identify opportunities for improvement and make recommendations:
Assumption 1: SOEs have performance management systems that appropriately measure their
strategy and intended outcomes of the mandate and government policy objective.

Are performance measures and metrics aligned to the mandate and strategy?

Is performance measurement directly informed and driven by the agreement between
Oversight Authority and SOEs?

Do any of the objectives indicate the entity’s contribution towards the national
objectives?
Assumption 2: Performance management systems in SOEs consolidate at macro level to enable
government policy monitoring.

Has the Executive Authority translated the government policy into performance
objectives and are these reflected in the shareholder compact?

Do the SOEs use performance management systems that allow comparison and
consolidation of performance reports?
Assumption 3: Performance management systems in SOEs use verifiable and reliable data.

Are data sources used by the SOEs to measure and report on performance reliable and
do they follow any standards?

Does the data used for performance management have integrity, that is, Is there an
audit trail, central repository and source documents?
Assumption 4: The SOEs use a standard framework to report on their performance to their
Executive Authority.

How often do SOEs report in terms of frequency, appropriateness and compliance to
the pre-determined cycle?

Are SOEs in the same industry using comparable performance management
frameworks/templates?

Does the standard framework enable SOEs’ performance monitoring and reporting to
be accessible, transparent and accountable to parliament and the public?
3. Imperatives of Performance harmonisation for State-owned
Entities (SOE)
All organisations, including SOEs, exist for a purpose whether legislated or defined by the
memorandum of incorporation. This is also the case with South African SOEs. The main and general
reason for the existence of an SOE is usually, if not always, to assist governments to fulfil the
national objectives. Since 1994 there has been a proliferation of SOEs which one has to assume had
plenty to do with the massive developmental backlog faced by the country at the dawn of
democracy2. The state therefore relies heavily on SOEs to execute their mandates with effectiveness
and efficiency and as such it is important to maintain strong performance management and
monitoring of the SOEs.
The national objectives for South Africa as a developing economy evolved through Reconstruction
and Development Programme (RDP), Accelerated and Shared Growth Initiative for South Africa
(AsgiSA) , Joint Initiative on Priority Skills Acquisition (Jipsa), New Growth Path (NGP)and Industrial
Policy Action Plan (IPAP1 and IPAP2). In addition, SOEs may be tasked with other goals that relate to
global issues like sector/technology leadership, or national issues like development of specific
competencies and capacity for the country. Mandates given to SOEs, therefore should direct
performance areas for the SOE.
3.1. Reconstruction and Development Programme
RDP is a South African socio-economic policy framework implemented by the South African
government in 1994 after the dawn of a new democracy after months of discussions, consultations
and negotiations between all relevant stakeholders at that time. The main aim of RDP was, and still
is, to address the immense socioeconomic problems brought about by the consequences of the
Apartheid regime. Specifically, it sets its sights on alleviating poverty and addressing the massive
2
The HSRC survey report reflect that the establishment of most Schedule 1and 3 entities was post the 1997.
Schedule 1 and 3 entities’ mandates are mostly for delivering of services to South Africa citizens.
shortfalls
in
social
across
services
the
country
(en.wikipedia.org/wiki/Reconstruction_and_Development_Programme). To achieve this, the country needs
a stronger and resilient economic environment. It attempts to boost investment in infrastructure
projects and provision of social services among others. The social service provision includes the
following:
 Housing
 Electrification
 Access to clean water
 Healthcare
 Land reform and
 Public works
3.2. Accelerated and Shared Growth Initiative for South Africa and Joint Initiative
on Priority Skills Acquisition
Asgisa was formed in early 2006, with the aim of addressing the high levels of unemployment in
South Africa. The Government committed to reduce unemployment and poverty by 50% by 2014.
Jipsa was also initiated in the same year to address one of the six binding constraints on achieving
the required economic growth rate of 5%. This would then enable the government to achieve the
objective
of
halving
the
level
of
unemployment
by
2014
(www.info.gov.za/asgisa/ASGISA_Annual_Report.pdf). Therefore Jipsa attempts to address the issue of
scarce and critical skills needed to meet AsgiSA's objectives. All six binding constraints are outlined
below:

The relative volatility of the currency

The cost, efficiency and capacity of the national logistics system

Shortages of suitably skilled labour, and the spatial distortions of apartheid affecting lowskilled labour costs

Barriers to entry, limits to competition and limited new investment opportunities

The regulatory environment and the burden on small and medium enterprises (SMEs)

Deficiencies in state organisation, including, capacity and leadership
3.3. New Growth Path
The NGP is a special purpose vehicle that the government intends using to achieve the creation of
decent but sustainable jobs. In terms of numbers, the government plans to achieve the creation of 5
million jobs by 2020 (www.ilo.org/jobspact/news/WCMS_151955/lang--en/index.htm). To do this the
government, according to NGP, needs to invest in education and skills development, encourage
investment in the local economy and increase exports among others. This is done in a bid to realise
an annual economic growth of 7%, in order to reach the target of 5 million jobs.
3.4. Industrial Policy Action Plan 1 and 2
Its purpose is to expand production in value-added sectors (manufacturing) with high employment
and growth multipliers that compete in export markets as well as compete in the domestic market
against imports. IPAP places emphasis on more labour absorbing production and services sectors
(www.info.gov.za/speeches/2010/10021909551001.htm) . The minister of Trade and Industry, Dr Rob
Davies, highlighted the four pillars on which the Action Plan rest, during his statement to the
National Assembly early in 2010, and what each tries to achieve. These are noted below:
I.
Concessional industrial financing for investment in IPAP priorities and other productive
sectors on terms comparable to those of our major trading partners. This in a bid to:
a. Generate a mix of import replacement and exports which will help to lower the
current account deficit and reduce balance of payments risks
b. Increase supply in productive sectors and as a result lower price pressures, which
will help in moderating inflation
II.
Revision of procurement legislation. Regulation and practices, in order to have the following
results:
a. Improvement on local supplier development
b. Increased competitiveness in local procurement
c. Support for BBBEE in all three spheres of government
III.
The use of trade policies in a more strategic manner to:
a. Reduce Custom fraud
b. Eliminate smuggling and illegal imports
c. Address under- invoicing
IV.
Dealing with anti – competitive practices in a decisive manner, especially where these affect
intermediate inputs to labour absorbing production and goods to low income households in
the republic.
In addition to the above national imperatives, South Africa has also committed to other international
agreements like the Millennium Development Goals (MDG) and the Kyoto Protocol. SOEs would
naturally find themselves needing to align with these as well.
In order for the state to effectively measure the effectiveness of policy and other initiatives geared
towards economic growth, service delivery, alleviation of poverty, job creation and wealth
redistribution, it developed a programme of action where ten strategic priority areas were
identified. Even with strategic priorities identified, it was still difficult for the state to realise the
levels of service delivery proportionate to resources being spent. As a solution the state came with
the outcome and measurable outputs approach to maximise results on service delivery and this form
the
basis
for
performance
agreements
between
Ministers
and
the
President
(www.info.gov.za/speeches/2010/10021211051001.htm). Ministers take into account these performance
agreements when determining strategic objectives of SOEs.
Below are twelve national outcomes that were approved by Cabinet:

Improved quality of basic education

A long and healthy life for all South Africans

All people in South Africa are and feel safe

Decent employment through inclusive economic growth

A skilled and capable workforce to support an inclusive growth path

An efficient, competitive and responsive economic infrastructure network

Vibrant, equitable and sustainable rural communities with food security for all

Sustainable human settlements and improved quality of household life

A responsive, accountable, effective and efficient local government system

Environmental assets and natural resources that is well protected and continually enhanced

Create a better South Africa and contribute to a better and safer Africa and World

An efficient, effective and development-oriented public service and an empowered, fair and
inclusive citizenship
In his speech, Minister Collins Chabane said that since 1994, government has made great strides in
providing services to South African citizens. Despite massive increases in expenditure it did not
always produce the results the state wanted, hence the outcomes and measurable outputs
approach. The minister further said priorities are meant to bring about focus and ensure sufficient
emphasis on the most critical areas of the electoral mandate and these choices are made to further
ensure that the limited resources are used efficiently to achieve the desired outcomes. Also, this will
enable government to measure delivery and better manage performance over the long term
(www.info.gov.za/speeches/2010/10021211051001.htm) .
4. Methodology
Our review sought to analyse the current situation, to establish if there are any challenges, lessons
or improvement opportunities and to identify international best practice to harmonise performance
of SOEs. This forms the basis of the term of reference, “Harmonisation of performance amongst
SOEs”.
The findings of this report are as a result of reviewing both primary and secondary research
information. The primary research information covered a) Annual & quarterly reports, b)
Shareholder compacts and c) Stakeholder engagements. Secondary research information included
the research reports by OECD, Asian Development Bank, PwC, KPMG and HSRC. PwC, KPMG and
HSRC reports sourced primary data from a sample of 102 that was determined by the RDU of the
PRC for SOEs that operate across all three spheres of Government. Deep dives were conducted by
the SOME work stream of the PRC into oversight functions of DoT, DPE, DWA, and DoC to further
validate, substantiate and verify findings of the macro review. Below are areas the analysis of
primary research information covered:
4.1. Annual and quarterly reports

Compliance with legislation by SOE, for example, reporting frequency as outlined by the
National Treasury

Alignment of reported areas by SOE under the same classification

The level to which SOE address and report on National Objectives
4.2. Shareholder compacts

The presence of signed performance agreements and corporate plans

Alignment of business strategic objectives to SOE mandates

The frequency in which compacts are signed and if they are signed by all relevant parties
4.3. Stakeholder engagements

The process Executive Authority and SOE follow in determining the business strategic
objectives

The systems SOE use internally to manage performance

Performance management systems used by Executive authorities to manage SOE
performance
4.4. PRC Commissioned studies on SOEs

KPMG

PWC

HSRC
4.5. Other relevant studies/viewpoints

OECD

Asian Development Bank
Information obtained from secondary research was used to support and expand on the findings from
the primary research information and was not only limited to the above mentioned reports. It also
included the National Treasury report on governance oversight and reports on various government
initiatives, such as the New Growth Path.
5. The foundations of performance management in the SOE
environment
The above outlined and briefly explained government imperatives since the advent of democracy in
South Africa. It reflects the need for all stakeholders in the local economy, that is, the public and
private institutions, to work together in order to achieve the national outcomes. It is therefore
paramount for SOEs to align their respective mandates and performance management systems to
the national objectives.
The work stream is of the opinion that a performance management system for SOEs should be two
dimensional at the very least, that is, an enterprise sustainability assessment (internal systems and
management performance to produce outputs efficiently) and a service delivery value chain
assessment (more external perspective on how the SOEs has played its part in a collective delivery to
expected outcomes).
The responsibility of the oversight authorities is by and large directed by PFMA (Public Finance
Management Act, Act Number 1 of 1999 as amended by Public Finance Management Amendment
Act Number 29 of 1999). This is to ensure that SOE performance is managed by ensuring that SOEs
have strategic objectives reflective of their mandate, business strategy national objectives and
executive authority (Minister) objectives. (National Treasury: Governance Oversight Role Over SOEs, p 2)
Once objectives, goals and KPIs are determined, the ministries (executive authority/ownership
entity) must agree and sign shareholder compacts annually. The shareholder compacts contain roles
and responsibilities of executive authorities and boards, corporate plans, performance agreements,
and risk management strategies3. Systems should be in place to analyse quarterly and annual
reports to determine if these entities are achieving agreed targets. The Executive Authority that
exercise ownership and oversight over SOEs should, upon review of the SOEs’ quarterly and annual
reports, present recommendations to SOEs demonstrating areas of performance concern against
signed shareholder compacts. In addition, there should be regular follow ups on the implementation
of these recommendations and ministries offer support where needed by SOEs.
It is thus clear that a performance management system or process has been defined. What remains
to be tested though is whether this process or system is adhered to or whether it is corrupted by
inconsistent execution and double standards.
5.1. Assessing mandates, national and business objectives for SOEs
From the assessed SOEs and surveys conducted by HSRC it appears that the majority (58%) of the
sampled SOEs have mandates based on legislation and are clear on their respective purpose for
existence (HSRC: Survey of State owned Entities in South Africa October 2011: 13) . Although the remainder
of these SOEs are not based on legislation, but on founding documents such as memorandum of
incorporation, they also have clearly defined purposes or core business indicated in their corporate
plans or annual reports. The more important assessment to make is whether these mandates are
appropriate in terms of the SOEs role in government policy, whether they actively serve as the
foundation elements for performance management processes and systems and whether they have a
level of consistency, that is, they do not change every time a new Minister is appointed. SOE
mandates and/or founding acts which are the primary source of mandates in most cases do not
contain a measurable statement of objectives, but they state the role of the SOE. The measurability
of the mandates is usually clarified by the objectives stated by the SOE in their strategic documents.
3
Information obtained from shareholder compacts of SOEs reporting to DoT and DPE comprises of these
sections. Refer: DoT performance agreements and shareholder compacts 2010/11.
Results of the sample survey of 102 SOEs that was conducted by the HSRC indicates that these
entities have diverse mandates that include the following:

Human capacity development – 17%

Natural resource – 15%

Human self-actualisation – 15%

Transport – 9%

Infrastructure – 8%

Housing – 7%

Energy – 7%

Finance – 6%

Regulation – 4% and

Tourism – 4%
It can be inferred that some of the SOEs’ mandates are linked to some of the national objectives but
no clear reference or stated link of SOE mandates to national outcomes was found. Whilst SOEs
report a commitment to the objectives of a developmental state, the studies commissioned (by,
example, PWC) has found inconsistent evidence to support this view (PwC: State-owned enterprises, A
subjective review July 2011, p 25). It appears then as though the entities in question have not been
educated and directed as to building proper strategic objective links to the aims of the
developmental state. It is assumed they will honour the message and inculcate that throughout, but
the findings on strategic objectives defined tell an entirely different story. The link between SOE
strategic objectives and the developmental state is weak at best.
SOE strategic objectives (which may or may not be aligned to the national outcomes) are agreed
between the shareholder and the SOE through the approval of the shareholder compact by the
Oversight Authority. The corporate plan and other corporate documents which are annexure to the
shareholder compact (for instance, financial plan, corporate scorecard as per National Treasury
guidelines) detail how the objectives/SOE strategy is to be executed by SOEs. However due to
capacity constraints in the oversight ministries these shareholder compacts are not always reviewed
or signed annually by the shareholders nor submitted timeously as per the PFMA requirements4.
4
During the meeting of the 29 September 2011, the Auditor General noted that some SOEs reporting DPE for
example had shareholder compacts that were not signed for one and half years. This claim was proved during
the analysis of the shareholder compacts as well.
This has been observed during the review of the SOE strategic documents with 8.3% of the reviewed
annual reports not signed and the remaining 91.7% signed by all relevant parties. Literature
reviewed under paragraph 6.1 of this report indicates that even internationally, whilst mandates are
reviewed regularly, they are rarely changed. In SA, based on our engagements with SOEs and
reviews of shareholder compacts, a trend was evident that mandates are rarely reviewed but can
change very easily especially when a new executive authority (Minister or MEC) is appointed.
5.2. SOE Performance Oversight
Oversight is a critical governance function. It ensures that organisations operate in a way that they
realise their set strategic business objectives as agreed to with their respective shareholders. In the
case of SOEs this includes not only realising the set strategic business objectives but also addressing
the developmental agenda of the state as a shareholder. It is the role of oversight to ensure that
entities are adequately resourced to carry on functioning in an effective and efficient manner. The
diagramme below depicts various levels of oversight management for South African SOEs. In
addition to these levels, the Auditor General and independent external auditors review annual
performance reports by SOEs. They provide assurance on the integrity of performance information
and performance reports.
Figure 1: Oversight management of SOEs
Source: The National Treasury’s Report on Governance Oversight Role
Oversight is an integral part of corporate governance of SOEs. As depicted in the diagramme above,
it starts with the Accounting Authority (the Board), the Executive Authority (ownership controller - in
most cases a Minister), Cabinet and Parliament. The Executive Authority, as mentioned before, is
responsible for making sure that SOE have strategic objectives that reflect their purposes for
existence and that they contribute to the national objectives. This should be reflected in the signed
Shareholder Compacts. The Executive Authority in turn reports SOE performance to Parliament.
The Executive Authority tracks performance against strategic objectives of the entity and national
objectives of government using performance reports that are submitted by the SOE. This is done in
the quest of the state to meet its goals in providing a better, and inclusive, service to the citizens of
the Republic of South Africa. The Executive Authority has to make sure that there exist, within each
SOE, the necessary processes and systems to aid these entities in achieving their objectives. The
Executive Authority is not the only player and point of contact on SOE oversight; it is the
predominant point of contact for the SOE in respect of primary performance measurement.
Parliament, represented by the Standing Committee On Public Accounts (SCOPA) and Portfolio
Committees, are critical in assessing performance of SOEs after reports are presented to the two
committees by the Executive Authority. They make sure that these entities not only meet their
objectives, but also that their activities advance government imperatives. SCOPA assesses the annual
financial performance covering, among others, issues raised in the Auditor General’s report, while
Portfolio Committees evaluate service delivery by the SOEs. The Portfolio Committees are involved
on issues of budgets, legislation and process monitoring annually (National Treasury: Governance
Oversight Role Over State owned Entities: 3 – 5). The Auditor General was established in accordance with
Act No. 108 of 1996 as an institution supporting constitutional democracy. Its constitutional
functions are set out in section 188 of the Constitution and section 4 of the Public Audit Act No. 25
of 2004 and include auditing and reporting on the accounts, financial statements and financial
management of public entities listed on PFMA.
The National Treasury is indirectly involved in the performance value chain by exercising financial
oversight through the following, as prescribed by the PFMA:

Setting reporting guidelines to promote and enforce transparency in respect of revenue,
expenditure, assets and liabilities

Funding/borrowing programmes

Controlling the utilisation of contingent liabilities and

Effective treasury management models
The board of directors remain the first line in the stewardship of the SOE performance management
and are answerable to Executive Authority for performance/non-performance. Decisions that they
take must be consistent with the mandate of the SOE and should enhance the entity’s ability to
achieve on performance commitments between the Executive Authority and SOE.
5.3. Performance management process and structure
Strategy maps out the modus operandi that the SOE has chosen to follow towards achieving its
purpose. During SOE round tables engagements5, discussions with some ministries and analysis of
Shareholder compacts, it was clear that the processes SOEs follow to determine their objectives, as a
first step in performance management and its harmonisation, show differences. It emerged for an
example during the engagements with SOEs that DFIs and Water Boards determine their objectives
from bottom up. These entities determine what their objectives should be, taking into account
national objectives linked to their purpose for existence. The results emanating from this exercise
are then presented to the oversight authority for scrutiny and approval. Water Boards are currently
guided by DWA’s Guidelines for the Preparation and Evaluation of Water Boards Policy Statements,
Business Plans, Quarterly Reports and Annual Reports of March 2008, in developing their
shareholder compacts.
According to DPE and DoT their entities use the top down approach to formulate the strategic
objectives, where oversight authority determines the strategic objectives of SOE taking into account
the overall objectives of the ministry, SOE mandates, national objectives and the capacity of the SOE
to deliver on these objectives. An example of entities that follow this approach is Eskom and Airports
Company of South Africa who report to departments of Public Enterprise and Transport respectively.
Once the strategic objectives are formulated, the goals and performance indicators for a specific
period are then established to enable oversight authority and SOE to work towards measurable
outcomes and track progress towards the achievement of these goals on a regular basis. The result
of the process of determining strategic objectives, goals and key performance indicators (KPIs) is
agreed upon in writing by signing of shareholder compacts and any strategic documents attached to
it. Other Executive Authorities, such as Department of Public Enterprise, would at times impose
objectives and targets on SOEs even though the entities in question express inability to achieve
these targets. As a result shareholder compacts do not always represent agreement on all aspects of
performance (in direct engagement with DG of Public Enterprises).
According to the survey carried out by HSRC on 102 entities, only 61% of the shareholder compacts
spelled out the rights and 74% the responsibility of the oversight authorities (HSRC: Survey of State
owned Entities in South Africa October 2011: 36). This occurrence has the potential of then limiting the
entities with regards to understanding the limits of the duties and responsibilities of their Executive
Authorities. There were also frustrations expressed by SOEs, during engagements with SOEs held by
5
The work stream (SMOE) met with various ministries among them DPE and DWA. The purpose of the
engagements was to understand the processes these ministries follow overseeing SOEs performance. Areas
covered planning, monitoring and evaluation of performance.
the Strategic Management and Operational Efficiency (SMOE) work-stream of the PRC, about the
ever-changing objectives when new Ministers come into office. It deviates from the principles of
good governance. Through public submission the Democratic Alliance Party (DA) attest to this,
pointing out that there is an institutional and structural problem regarding governance oversight.
This according to the DA manifests itself through inadequate performance assessment and weak
accountability. It highlighted the extent of this problem by R281.75 billion bailout amounts spent by
government on some of the SOEs between 2005 and 20116.
The reviewed annual reports and shareholder compacts indicate that the majority of SOEs comply
with PFMA by adhering to signing and adopting shareholder compacts on time. There are, however,
exceptions. A few entities at times go for years without signing, as a result of the lack of capacity at
the Executive Authority level. This was also revealed by the Auditor General during various
stakeholder engagements. Executive Authorities evaluate performance on quarterly and annual
bases with the annual report results being subjected to independent audit. Audited results are also
submitted to National Treasury as per Public Finance Management Act (PFMA) requirements. The
audited annual reports are then sent through to Parliament for further assessment by SCOPA and
Portfolio Committees.
The performance management and oversight process as it stands currently is depicted by the graph
below:
6
All public submissions including DA submission to the PRC were accessed from HSRC’s data base.
National PolicyPrograms
Assurance provided by
Internal auditors/
independent external
auditor & AG
National Priority Areas
SOE Performance Management
SoE Performance
Measurement
SoE, KPA's, KPI's &
Performance Targets
SoE Strategic
Objectives
Ministerial
Objectives
National Outcomes
• Agreed between
Minister & President
• Approved by the Board
• Agreed in a Shareholder
Compact between
Board and SoE
• Using reliable and
verifiable data/
information
SoE Performance
Reporting
OVERSIGHT RESPONSIBILITY ON
Oversight of SoE by
Cabinet and
SOEs
Pariament
SoE Performance
Oversight by the
Board SoE
Oversight (Incl.
Board) by Executive
Authority and
National Treasury
(Financial)
• on agreed formats with
Executive Authority
• Quarterly, and
• Annually.
• Stated in the Corporate
Plans attached to the
Shareholder Compact
that is approved by the
Minister
• As approved by Cabinet
Figure 2: Performance management process in SOEs
Looking at the SOE performance management process above, it is clear that the current processes
only put emphasis on the so-called “internal perspective”, which only looks at the performance of
the entities against their own individual pre-determined objectives. It disregards the fundamental
aspect of harmonisation of performance management to achieve national outcomes, which
evaluates the combined performance of entities in the same value chain in terms of impact on
service delivery. An example of this problem is with DFIs on housing finance. Such a DFI cannot just
restrict itself to measure the amount of loans or projects approved (“internal perspective”) but in
the end must also be concerned with how many new owners have received the keys to fully serviced
and quality housing. For this to be possible would involve a value chain that includes, amongst
others, human settlement, local government, electricity service providers and water service
providers. The review indicates that there is no current process or system in the oversight structures
of SOEs where such harmonised views of performance are developed, reported, overseen and
directed. Oversight structures of different departments in Government do not currently have
integrative platforms to conduct this.
Ministers have though entered into performance agreements that indicate interdependencies
between themselves. International perspectives outlined below indicate that elements of such
coordination already exist elsewhere in the world in the form of centralised reviews of performance
of SOEs, aggregated performance reports of SOEs, combined accounts of SOEs as well as
establishment of co-ordinating entities. During the stakeholder engagements with Board members
of SOEs the PRC was lead to believe that some minister/s e.g. Minister of Science and Technology
now meets regularly with chairpersons of Boards of entities that they oversee and that the agenda
of such meetings is entails the performance agreement of the Minister based on National Outcomes
and the assessment of the role of the SOEs. They discuss how entities are contributing towards
achievement of such performance agreements. Further the PRC was led to believe that this forum
will now invite other entities like the Agricultural Research Council, the Water Research Council etc.
that are currently overseen by other ministers but contribute to the research capacity and outputs
of South Africa.
5.4. Systems and measures
5.4.1. The importance of information and business intelligence
At the centre of any successful decision making within any value chain, is the existence of reliable
information, effective performance measures and understanding of how competitors and players
within the value chain operate. As per the abstract of Florian Melchert and Robert Winter on The
Enabling Role of Information Technology for Business Performance Management, performance
management can only be implemented successfully, if operational execution is tightly linked to
strategic planning. In this, strategic planning information is critical as it is the basis on which budgets
are formulated, and on which long and short term decisions are made. Systems used by entities to
collect and process data need not only be consistent among those within a value chain but they
must also be reliable in producing relevant information and business intelligence. The Auditor
General, who is responsible to provide assurance on the quality of financial information and
adherence to the requirements of PFMA, has in recent times started with the auditing of SOEs
performance information as well.
During engagements with SOEs, six out of nine SOEs noted that their internal data gathering and
processing systems are automated and reliable and that they have audit trails, even though there is
no concrete evidence to substantiate their views. There were, however, SOEs that felt that as much
as their systems have audit trail they are not perceived to be reliable. There are no systems or
performance measures that provide information and intelligence over a broader value chain. At best
one would have to manually try and connect various SOE performances within the same value chain
to derive some sense on how the National Outcomes of service delivery in a particular area are
served.
5.4.2. Harmonised performance management system
A harmonised performance management system exists where all elements (such as shareholders,
stakeholders, partners and staff) within different dimensions of performance management work
together to achieve the required results. In assessing the performance of SOEs in a harmonised
manner the ultimate intention is to determine the levels of service that entities offer to the public.
There are two important dimensions in which performance of SOEs should be viewed, termed the
vertical and horizontal dimensions respectively.

Vertical dimension
This dimension deals with the internal performance management of individual entities, taking into
account their mandate, strategic objectives and goals. Predetermined reporting intervals, as outlined
by legislation, are followed to report on performance. Well-defined systems and processes monitor,
manage and report on such performance. In essence this dimension deals with the economic
sustainability of the SOE.

Horizontal dimension
Unlike vertical performance management where the individual entity’s actual performance is
measured against predetermined goals, the horizontal dimension deals with how performance of
SOEs relates to the outputs of the value chain that the particular SOE contributes to through its
activities. For example, does the establishment of a new purification plant for water by a Water
Board contribute to more South Africans gaining access to clean portable water? Another example
would be the following. Does improvement of cents per net ton kilometre costs in rail lead to a
reduction in costs of doing business in South Africa, costs of goods to South Africans and/or global
competitiveness of goods produced in South Africa?
In a harmonised state of performance, SOEs and other organisations that serve in a similar value
chain ought to operate in sync with each other towards achievement of their goals. Investments,
funding and delivery of projects and processes should be harmonised to achieve the desired levels of
performance in quantity, quality, price and other performance attributes of such value chain. These
value chains are defined by service delivered and not industry sectors. They may involve entities in
different industry sectors whose performance contributes to a delivery of service towards achieving
a national outcome, such as access to decent housing. The broader context of value chain
performance may therefore integrate Government, SOEs, private sector organisation/s and NGOs
working in sync to deliver a service that contributes to a national outcome. In this paper, we focus
on Government departments and SOEs due to the scope of our review. The two examples below
indicate how collaboration between various parties in the value chain can lead to not only an
effective value chain, but also contribute towards the success of the individual entity’s vertical
performance.
Example 1:
Traffic lights operation in Johannesburg
There are some traffic intersections in Johannesburg that has experienced non-operational traffic
lights for such long periods now that traffic reporters on radio stations need not read them off
documents anymore but can recite them off memory. The Johannesburg Roads Agency claims that
they ensure all traffic lights are in functional working order and that the non-operational status of
the traffic lights are due to factors outside their control. These factors include: vandalism,
construction
work
and
power
outages
(www.joburg.org.za/index.php?option=com_content&view=article&id=7668&catid=88&Itemid=266) .
Clearly
this calls for a harmonised performance value chain between JRA, City Power, the City’s Works
Department and the SAPS (South African Police Services) or other Security Agencies. In the end JRA
cannot claim it has delivered on a mandate if they have done their part but road users are dying and
destroying their automobile assets due to non-operational traffic lights.
illustrated below:
These relationships are
JRA: 1) Infrastructure
Supply and 2)
Maintenance
Eskom: Power
supply
City Power:
Power Supply
JMPD/SAPS:
Security/Policing
Road Users: Operational
Traffic Lights
Mandated responsibility
Flow of responsibility
Figure 3: JRA’s performance value chain (traffic lights)
Example 2:
Supply of affordable housing to low and middle income households
Role of National Housing Finance Corporation and other key SOEs to ensure housing as illustrated.
Province (for RDP Houses)
NHFC
Municipality
/
Number of loans for housing
projects/applications
approved for low and middle
income house holds
MoEs
Eskom
Numbers of houses build
for low and middle income
households
Number of people with
access to decent housing
against government
targets
Water Boards
Figure 4: Performance value chain to improve access to decent housing in South Africa
As can be seen in the example above, value chain performance assessment does not look at the
internal performance processes. It looks at how the results of internal operational and strategic
decision of SOEs influence the ability of the value chain to address housing needs and targets set by
the national government for low and middle income households.
Linked to this value chain will be the performance of municipalities to provide serviced land on
which houses are built, provincial government to build (RDP) houses, water boards and water service
authorities to provide adequate access to clean portable water and Eskom as well as
municipalities/municipal-owned entities (MoEs) to supply enough electricity. The performance of
NHFC therefore ought to be harmonised with all the above institutions and spheres of government
to ensure that national objectives of government are achieved. Government should be able to have
a harmonised view of the performance of the different entities towards achievement of the
objectives of this value chain to ensure that efforts of different entities yield the desired output for
the country.
5.4.3. SOE internal systems and measures
The systems used by SOEs in managing their individual internal performances are as important as
those used to collectively manage their harmonised performance for optimal achievement of
national government objectives. It is crucial that performance areas measured by SOEs are
consistent with the performance outputs required by the Executive Authority, and that the data
used to measure performance is reliable, since many decisions are based on the performance level
of these entities. Elements dependent on SOE performance levels and reliable data to report these
can be viewed on both the vertical and horizontal perspectives.
Issues dependant on performance levels of entities, and hence the reliability and appropriateness of
performance management systems used, includes but are not limited to areas highlighted under the
following two dimensions:
Vertical Perspective

Expansion of operations

Funding models that are used to finance SOEs

Pay increases and bonus decisions

Employee requirement,

Skills complement decisions

Risk management
According to SOEs and Oversight Authorities, the Balanced Scorecard (BSC) which is often used by
private sector companies today is also used by most SOEs to track performance against
predetermined goals to measure performance. The popularity of the BSC is due to its ability to
measure both financial (short term) and non financial (long term) aspects of performance. The BSC
should be adapted to the type of organisation using it. The performance outputs of the BSC as a tool
measuring vertical performance, become the inputs of the horizontal dimension which measure the
extent to which the collective effort of SOEs contribute to various developmental objectives of the
state. Currently there is no evidence suggesting SOEs’ participation in the horizontal performance
management. This reflects the absence or weakness in collaboration among SOEs.
Horizontal Perspective

Development and review of regulations

Development of sector policies and strategies capacity improvement needs of the state

Inform delivery promises and undertakings made by government

Forecast social development and economic growth

Manage shareholder risks

Develop market intelligence

Leverage investment opportunities, etc.
5.4.4. Oversight integrative systems and measures
5.4.4.1. Quarterly reports

Commercial entities
SOEs are required by the PFMA to report performance on a quarterly and annual basis. This is the
responsibility of the Executive Authority to put in place and agree with the relevant entities on the
systems and structure for reporting performance. All of the analysed commercial entities comply
with the required reporting frequency by legislation. There is however no standard reporting
template among these entities, due to the fact that they report to different Executive Authorities. All
entities make manual submissions, where a soft or a hard copy of the quarterly report is sent to their
applicable authority, with just over a quarter (22%) of these entities having a standard reporting
template reflecting the following7:

National objectives

Business objectives

Objective measures

Annual performance indicators

Targets and

Status/performance as at the period under review
Further to the above, within the Department of Public Enterprises (DPE) there is also a semiautomated web-based system, where SOEs are required to update the system with their
performance results every quarter and this allows the Executive Authority to analyse and monitor
performance on a comparative basis. This system is still in its infancy stage, though it appears to be a
7
Commercial entities comprise of DPE and DoT SOEs. All DPE SOEs are considered commercial and only two
entities from DoT. DoT entities have standard reporting template.
useful tool to enhance DPE’s ability to better manage performance of SOEs under its authority. The
results allow comparison between entities on certain aspects of performance of these entities. The
Isibuko Dashboard system (following the discussion with DPE it remains to be seen if this will be
standardised) was developed and implemented to allow on time reporting by SOEs, enhance
detection, mitigation and monitoring of enterprise and cross-cutting shareholder risks on an ongoing
basis8. The system also assists the oversight authority to monitor trends on the following areas:

Financial and operational performance

Capital investment programmes

Environmental impact assessments

Socio economic issues

Governance

Skills development

Competitive supplier development programmes (CSDP)

Property disposals
Once quarterly reports have been received from SOEs within six weeks of the end of the quarter
under review, the SOE performance monitoring team analyses the reports. They then submit
memoranda and update the system with the quarterly report analysis results within two weeks of
receipt of the quarterly reports from the SOEs. What is concerning, is that 22% of the SOEs tend to
report mainly on operational aspects of performance and negate a balanced view that includes a
strong financial component (as these are after all commercial entities). The other 78% have balanced
reports that emphasise both operational and financial performance.

Regulators
Regulatory entities established by the state play a significant role in developing, maintaining, and
enforcing policies, creating a regulatory environment conducive to private and public entities to do
business. In creating a regulatory environment conducive for doing business, regulators support the
efforts of the state in addressing national imperatives, such as reduction of unemployment and
increase of technical skills as founded in NGP and AsgiSA. The reviewed Regulators9 reflected on the
8
DPE supplied SOME with the strategic document (Logical Planning, Monitoring and Evaluation Process) which
outlines the oversight process including the reporting system)
following primary objectives, in their quarterly performance reports in their quest to make tangible
contribution to achievement of national objectives:

Regulation development and review

Policy enforcement and

Policy advisory services
However, the following raises concern. There is no consistency on the reflection and elaboration on
the above mentioned issues, in these reports. An example is South African Maritime Safety
Authority (SAMSA) that reported performance using a performance reporting template and
elaborated on the above mentioned areas on quarter (3rd: 2010), but on the following quarter (4th:
2010) reported using only the performance reporting template and no longer reported on the above
issues. It appears that these reports are supplied for compliance with regulation purposes only.
However, reports generally highlight the relationship between national and business objectives.
SACAA is an exception in this regard.

Water Boards
Department of Water Affairs takes the assessment and reporting of quarterly performance seriously.
This view emanates from the presence of DWA’s guideline for drafting quarterly reports (DWA: The
Preparation and Evaluation Of Water Boards Policy Statements, Business Plans, Quarterly Reports
And Annual Reports of March 2008: 21) and quarterly report template for Water Boards. The
analysis of 2010/2011 and first quarter 2011/2012 quarterly reports reflects the consistency by
Water Boards in using the guidelines and reporting template.
The following areas are covered on the reporting template:

Water sales volumes

Water sales revenue

Expenses

Net interest (paid & received)

Borrowing limit

Minister’s directives

Fraud issues

Internal audit results and

Risk assessment
The quarterly performance targets for each of the above are compared to what entities actually
achieve for the period under review. Also reflected is yearly targets and the extent to which these
have been achieved year to date. Comments of deviations are provided. The Oversight Authority
sent out the performance assessment reports and highlighted areas of concern where these exist.
Other areas that Water Boards report on are water quality (SANS 241 compliance), water loss
percentage and days of water supply disruption. These measures focus on the bulk portable water
that is supplied by the water boards. The remaining leg of the water supply chain to the end – user is
operated by municipalities and Municipal-owned entities. It does not form part of the performance
reports that are overseen by DWA. At an engagement meeting that was held with representatives
from DWA Oversight it was highlighted that the Minister, whilst responsible from source – to – tap,
did not get periodic performance reports from municipalities on their performance as they did not
report to her. They stated that when problems are experienced by communities relating to water,
Parliament held the Minister of Water Affairs responsible, though. This illustrates lack of harmonised
performance management of the water supply chain from source – to –tap.

Consolidated observation
The purpose of quarterly reports appears to be just the process of adhering to PFMA for some
entities, with no accountability for the quality and consistency among entities on what and how they
report performance for assessment. The assessment on how entities perform against their
predetermined goals by the oversight authority is not carried out with consistency. This
inconsistency, according to DoT, is due to lack of capacity by the authorities to manage performance.
DWA Institutional Oversight also agreed to this lack of capacity to oversee SOEs during our
engagement with them. They cited that this resulted in slow response and assessment of quarterly
reports from the department to SOEs. This may create an impression that these quarterly reports
are a tick box exercise more than a value-adding exercise. This, according to DWA, has led to some
SOEs starting to cut and paste information from previous reports into their quarterly reports. At the
time of our engagement, feedback of quarterly reports from DWA that was signed by the Minister to
the SOEs, was outstanding by 11 months. Despite the capacity challenges, entities reporting to DWA
seem to be taking quarterly reporting seriously. There is, however, a limitation in that they only
report on a part of the water supply chain that they are responsible for, that is, the supply of bulk
portable water only. There is no requirement to consolidate these reports across the water supply
chain to provide a complete view up of the experience of the end-users.
The inability of the entities and oversight authority to take seriously the importance of quarterly
performance reporting and the assessment thereof is the opposite of how other OECD nations with
successful economies do things. As per the report on the international benchmarking tour by the
PRC, Holland SOE governance oversight utilises the same performance management methodology as
South Africa for managing performance (quarterly reporting), but the fundamental difference
between the two methodologies is that Holland government takes accountability of SOEs more
seriously. Holland impose penalties were entities do not meet their targets, while South African SOE
quarterly reports appear to be just a mere formality. This level of accountability in Holland SOE
resulted in the following observations the following observations of their reports made by the PRC:

High quality content in the quarterly reports

Timely reporting on performance

Good governance oversight and

Accountable and resourced oversight function
5.4.4.2. Annual reports

Commercial entities
All quarterly performance results and remedial actions culminate into the annual report at the end
of each financial year. The national objectives are covered across entities, even though the way they
are outlined varies. Some entities, as indicated on quarterly reports, clearly state national objectives
and show which business objectives address them. The extent to which these entities fulfil them
varies, due to the nature of the entities’ mandates and operational activities.
Commercial entities put more emphasis on reporting on profitability and liquidity performance as
they are expected to be self-sustaining, and not a burden to the fiscus. These entities however, seem
to strike a balance between reporting on financial (short term) and non-financial (long term)
matters. Activities of these entities in general cover the following non-financial areas, some of
which address the national objectives:

Skills development covers the training of artisans, apprenticeships and bursaries to needy
students. Entities such as Transnet, SAA and Eskom train more people than they require for
their operational activities. Transnet is involved with Transport Education Training Authoring
(TETA) and Technical Skills Business Partnership regarding skills development. The area of
education and training talks directly to the intentions of JIPSA and aspects of the NGP.

Infrastructure development is an activity that is mostly visible with Eskom and Transnet.
Eskom is currently busy with building of two coal fired power stations, among others, while
Transnet is busy with the expansion of Durban port and National Multi-Purpose Pipeline
from Durban to Gauteng among other things. These infrastructure developments help to
address two main issues faced by South Africa: joblessness and poverty. Eskom’s capacity
expansion programme in Medupi, Kusile and Ingula has direct and indirect implications on
job creation of 40 000 jobs. This in turn result into 160 000 people directly influenced by
these projects.

Broad based black economic empowerment is a government policy that seeks to address
economic injustices of the past. Another area in which SOEs address the requirement of this
policy is preferential procurement.

Employment equity is a policy that seeks to address among other issues achievement of a
diverse workforce that is broadly representative of the South African people.

Socio-economic development, which generally covers issues of education, arts, culture and
sports.

Risk management covers the identification of risks and finding ways to mitigate their impact
on both operational and strategic activities.

The level of customer satisfaction (Denel, SAA and Transnet).
Service delivery remains the central aspect of commercial entities even though there are inhibiters,
such as funding and escalation of costs. This is demonstrated by Eskom exceeding the government’s
target of 1.75 million grid connections, between 1994 – 2000, but decline to 1.39 million
connections between 2001 – 2009 due to increase in connection costs. The number of connections
between 1994 and 2000, as depicted on the graph below, was 2.01 million connections10, which is
15.0% more than the target. This is a testimony to the fact that SOEs can deliver on their mandate
and sometimes exceed their performance targets. The big challenge facing these entities at the
10
Some SOEs including which include among other Eskom, Transnet and ACSA made presentations to the PRC
regarding their activities and how these impacts on various government’s social and economic initiatives.
moment is delivering services to as many South African citizens as is possible in a more cost-effective
manner. This becomes tricky where new infrastructure investments have to be undertaken, at costs
that are much higher than those of existing infrastructure. Eskom’s 25% three year average annual
electricity tariff increase to fund the new infrastructure has significant knock-on effects and explains
the near disastrous consequences of an infrastructure replacement and maintenance strategy.
Unfortunately, Eskom’s troubles are reported to have been exacerbated by the then government’s
insistence of not spending on infrastructure capacity and renewal.
Figure 5: Eskom performance history11
The system provides checks and balances such as the independent audit by either the Auditor
General or independent external auditors before annual reports are published. Below are significant
findings on one commercial entity as per the latest reviewed annual reports on the predetermined
objectives. Other entities did not have significant findings.

South African Airways (SAA)

Did not report on all predetermined objectives and indicators

Shareholder compact was not received on time

Subsidiary companies’ shareholder compacts were not completed

Some predetermined objectives as stated in the shareholder compact were not well
defined, time-bound or specific and therefore not measurable.
11
Source: ESKOM PRC Presentation, December 2011.
The annual performance reporting system has checks and balances to determine the level of
compliance by entities as highlighted by the findings above. The fact that Executive Authority is
involved in developing SOEs’ strategic objectives and shareholder compacts, may indicate that there
are weaknesses in the Governance Oversight as well.

Regulators
Annual reports present an opportunity for Executive Authorities to assess the extent to which goals
have been met for the full financial year. The quality of reporting compliance is one of the areas
assessed and from reviewed annual reports, as was the case with quarterly reports, there appears to
be general uniformity and consistency on reported performance areas by regulatory entities. Entities
report on the activities relevant to the administration and enforcement of legislation. An example is
the Cross Border Road Transport Agency that reports the administration of cross border regulation
through issuing of permits (tourism, passenger and freight transport). Other areas commonly
reported by SOEs that also contribute to the efforts of the state are indicated below:

Employment equity

Skills development through bursary and learnership opportunities

BBBEE
The findings on planned targets and KPIs by the Auditor General and independent auditors which
may indicate the weakness in Governance Oversight, are listed below per affected regulatory SOE:
o
SAMSA – year ending 2011
a. Indicators are well defined, and targets are specific
b. 23% of planned and reported targets on selected objectives were not:
i. Specific in clearly identifying the nature and the required level of
performance
ii. Clear, as unambiguous data definitions were not available for data
to be collected consistently
o
CBRTA – year ending 2010
Planned and reported targets are not
a. Specific in clearly identifying the nature and the required level of
performance
b. Measurable in identifying the required performance
c. Time bound in specifying the time period or deadline for delivery
o
RSR – year ending 2010
89% of planned and reported targets on selected objectives were not):
1. Specific in clearly identifying the nature and the required level of
performance
2. Measurable in identifying the required performance
3. Time bound in specifying the time period or deadline for delivery

Water Boards
The efficient and effective management of provision of portable bulk water services is critical in
ensuring ……..Hence, the need to make sure that the performance management system of Water
Board, as the custodians of this resource, is consistent across all entities and effective in what it
intends to achieve. As per the reviewed annual reports, all of the fourteen (14) entities submit
Audited annual reports on a yearly basis covering financial, operational and sustainability issues. The
following are areas generally highlighted under the above mentioned areas of reporting:

Financial performance results with emphasis on

Liquidity and

Profitability

Skills development

Risk and risk management

BBBEE (Broad-based Black Economic Empowerment)

Employment equity

Customer Satisfaction

Environmental impact of water related activities
As stated above Water Boards generally report on the same issues. Issues mostly emphasised are
directly linked to the supply of water. These issues include:
a. Water quality. All entities report on the SANS 241 requirements and actual performance on
portable water quality.
b. Supplied water quantity.
c. Customer satisfaction. According to the analysis of the annual reports three out of the
fourteen entities (21%) report on customer satisfaction survey results.
d. Climate change and its impacts. Climate change according to reviewed reports is common
concern for all Water boards, as it brings the uncertainty regarding water supply and has the
potential to increase the cost of delivering this service.

Consolidated observation
Tabling of annual reports by SOE is one of the reporting requirements of the PFMA. All of the
reviewed SOEs submitted their annual reports, with some reflecting lack of clarity and timelines
regarding goals and objectives, which in turn makes it difficult to measure performance against
targets. Annual reports outlined both the sustainability and service delivery intent of SOEs,
highlighting the need for SOEs in a developing economy for aiding the state in realising its
developmental objectives.
6. International perspectives on SOE performance
Our review of (1) literature, (2) engagements with different organisations that are concerned with
performance of SOEs like the OECD ,and (3) international benchmarking that was conducted by the
PRC, all indicated that internationally the performance of SOEs is regarded as an important area that
need more attention.
According to the Asian Development Bank (Finding Balance 2011: Benchmarking the Performance of
State-Owned Enterprises in Fiji, Marshall Islands, Samoa, Solomon Islands and Toga: iii) SOEs can
place a significant and unsustainable strain on economies. They can absorb large amounts of scarce
resources. Poor performance leads to very low returns. Low productivity of poor performing SOEs
can act as a drag on economic growth rates of countries. They argue that poor performing SOEs
often crowd out the private sector and absorb funds that could otherwise be invested in highyielding social sectors like health and education. They reported that from FY2002 to FY 2009, the
SOE portfolios ‘average return on equity (ROE) was 0.7% in Fiji, -13.2% Republic of Marshall Islands
(RMI), 0.2% in Samoa, -13.9% in Solomon Islands, and 0.6% in Tonga. In each of these countries
these rates are substantially below the profitability target set by the government and/or the
commercially established risk-adjusted return. In RMI and Solomon Islands, the chronic operating
losses of the SOEs require regular capital infusions from the central budget. This further weakens the
governments’ fiscal positions.
The report further states that in most cases the SOEs’ poor performance is due to conflicting
mandates, weak governance arrangements, the absence of hard budget constraints and lack of
accountability. They argue that SOEs tend to have few consequences for poor financial performance
and few rewards for profitability. Other fundamental issues that affect performance of SOEs include
an inability to recover the costs of service delivery and operate on fully commercial terms within an
appropriately accountable structure. This is compounded by the lack of an effective ownership
monitoring and legislative framework for the SOE’s, which further diffuses the responsibility for poor
SOE performance.
6.1. Mandates for SOEs
According to the OECD (Corporate Governance, Accountability and Transparency - a guide for state
ownership; 2010: 23 - 24) it is necessary to (1) define clearly the mandate of each (fully owned) SOE
to build up appropriate accountability, (2) to define and limit the scope of public services or other
special obligations and as a basis for discussing more specific targets for the company’s operations.
SOE mandates are simple and brief descriptions of the high – level objectives and mission of a SOE in
the long run. They usually define the main line of business. They also provide some generic
indication regarding the ambition in terms of market leadership, quality of service or innovation.
They could also set some broad goals or constraints in terms of financial sustainability and
sometimes include some form of public service and social obligations or commitments, such as
relates to employment issues. SOE mandates often show a mix of commercial and policy objectives.
The following are some examples of mandates of SOEs from postal service SOEs of different
countries:

In Canada Post Corporation/Canada: To operate Canada’s postal service on a self-sustaining
basis with a standard of service that meets the needs of Canadians. Vision: To be a world
leader in providing innovative physical and electronic delivery solutions, creating value for
customers, employees and all Canadians.

Posten Norge AS/Norway: Norway Post aims to fulfil its societal and operational obligations
in a sound, cost effective manner, and with these parameters effectively administer the
state’s assets and promote good commercial growth of the company.

Posten AB/Sweden: Posten’s profitability target is 10 per cent of net profit in relation to
average shareholders ‘equity, assuming an equity/assets ratio of 25%.

Royal Mail/UK: Vision is to ensure the universal provision of postal services in the UK.
Within that to ensure a publicly owned Royal Mail Group, fully restored to good health,
providing excellent quality service to customers and rewarding employment to its people.
Objectives: Royal Mail to be best in class postal service provider with robust long-term,
sustainable business health. The delivery of government and other services effectively
through an efficient and fit – for – purpose Post Office branch network.
These mandates are valid over a long period and are updated only in case of fundamental change of
mission. In Canada, for instance, the Auditor General in its 2000 report noted that “only two Crown
corporations had been subject to mandatory and systematic mandate reviews. Others carried out
such reviews on a generally ad hoc basis…” (OECD: Corporate Governance Accountability and
Transparency – a Guide for State Ownership, 2010: 23-24).
6.2. Performance of SOEs
According to the OECD (International Benchmarking on SOE Reforms – Seminar Background Paper,
2010: 11 – 14) SOE performance should be aligned to their mandates. It reports how the SOE is
achieving it objectives that relates to its main line of business. Performance can also include the
SOEs contribution to developmental objectives like:
i)
Contribution by SOEs to job creation and addressing challenges such as unemployment
ii)
Skills development to address skills shortages based on the economic development
trajectory of a country
iii)
The role of SOEs in addressing transformation and other economic imbalances and
iv)
Other areas such as rural development
The importance of performance by SOEs necessitates monitoring by ownership entity. OECD
Guidelines (OECD, 2011: 11-14) mentions that a state has an obligation to review performance of its
portfolio of companies. Its primary responsibilities include setting up reporting systems allowing
regular monitoring and assessment of SOE performance. The ownership entity must ensure that it
has access to accurate and relevant information on a timely basis. It must monitor the performance
of portfolio companies both on an on-going and annual basis. It should develop appropriate devices
and select proper valuation methods to monitor performance of SOEs in respect of established
objectives. It can also develop appropriate benchmarking of SOE performance domestically and
abroad. This according to the OECD is particularly important for SOEs in non-competitive sectors.
6.3. Monitoring and reviewing performance of SOEs
OECD (Corporate Governance Accountability and Transparency – a Guide for State Ownership, 2010:
53) states that the process of reviewing performance has three important elements. These are:
1. On-going monitoring of performance
2. Developing robust systems to review yearly performance of each SOE and
3. Benchmarking of SOE performance
In Italy, for instance, the Ministry of Economy and Finance, which is the ownership entity, carries on
a constant monitoring of SOEs’ performance and management. Each company is thus required to
provide the ministry with the following detailed information and documents:

The annual budget for the incoming year

Half-yearly reports on performance and financial results, with details on the differences with
the budget and the previous year’s figures

The estimated year-end figures
SOEs, in Italy, are also required to point out the potentially critical areas and give all relevant
information, including the business plans approved by the board (OECD: Corporate Governance
Accountability and Transparency – a Guide for State Ownership, 2010: 54).
In Greece, a specific management information system has been put in place to collect directly from
the SOEs’ own information systems the relevant data to monitor their performance. Monthly data
will be automatically compared to budget data. The whole system of business plans, budget and
performance monitoring will be based on the same data, allowing closer monitoring and thus
greater transparency and accountability (OECD: Corporate Governance Accountability and
Transparency – a Guide for State Ownership, 2010: 54).
In the UK, a quarterly “Traffic Light” review is done for each SOE. It evaluates the quality of the
shareholder relationship, the implementation of the shareholder model, the quality of the board and
management team, the strategy and financial performance. An aggregate monitoring table is then
built up. It is a control board for the shareholder executive’s work (OECD Corporate Governance
Accountability and Transparency – a Guide for State Ownership, 2010: 53)
According to the OECD (International Benchmarking on SOE Reforms – Seminar Background Paper,
2010: 11 – 14) Namibia introduced the SOE Governance Act in 2006 which enabled the
establishment of an SOE Governance Council (SOEGC). The Namibian SOE Governance Act requires
that the board of an SOE should require the CEO, and such other senior management staff of SOE as
the board may determine, to enter into a performance agreement with the board. Failure on the
part of a CEO or other senior manager to comply with any provision of a performance agreement
which he or she entered into with a board of an SOE constitutes grounds for his or her dismissal
from the services of an SOE, subject to compliance with other relevant rules. In Korea, each year the
Minister of Planning and Budget sets a series of up to 30 performance indicators for each SOE. SOEs
have to submit “completion reports” on their performance both to the Minister of Planning and
Budget and other line ministries.
In the UK, according to the OECD (International Benchmarking on SOE Reforms – Seminar
Background Paper, 2010: 14 – 15), Shareholder Executive selected an economic profit methodology
to measure increase in shareholder value.
The measures of value creation have the following advantages:

It is grounded in the fundamental drivers of economic value creation, such as growth and
return on invested capital, and explicitly charges for the economic cost of the invested
capital.

It reflects generally accepted and understood practices in the financial community for how
to analyse value and value changes.

It applies to all businesses in different sectors across the portfolio

It demonstrates historic performance, rather than changes in future expectations, as well as
changes in ongoing performance.

It is flexible enough to measure both in-year performance, through economic profit, and
cross-year performance through value change.
In Malaysia, performance management, involving Key Performance Indicators (KPI’s) and
performance linked compensation (PLC) were among the key programs launched by the
Transformation Programme. Each manager’s performance is reviewed against targets, resulting in
differentiated evaluations with meaningful personal feedback, rewards and consequences. In India
yearly performances are first evaluated by the SOEs themselves, then sent to Department of Public
Enterprises (DPE) before being placed before a Task Force and evaluated on a scale of 1 to 5. The
performance of board members and CEOs is linked to this entity’s performance score. In some cases
it is linked with performance -based remuneration. In the case of Navratna, companies (that is, a
select group of Central Public Sector Enterprises which are given management autonomy by the
Indian Government), an inter-ministerial committee with the Secretary of the DPE and
representatives from the Planning Commission and Ministry of Finance, review annually their
performance and assess whether or not they should be granted more autonomy. In addition, a
“High-Power Committee” headed by the Cabinet Secretary of India reviews Navratna’s performance
every three years.
It should be evident from the previous discussion that performance of individual SOEs is monitored
,in
most of the international countries that were reviewed, by the state in its capacity as owners of
such companies/entities. Also noticeable in the above examples is the centralised approach to
setting and monitoring performance of SOEs. Whilst it is not explicitly stated in literature it would
seem that such a centralised approach gives the state a consolidated view of performance of its
entities. If so, this would enable the state to assess harmony of performance of different entities to
its intended outcomes – a concept of horizontal/ value chain-based view to performance (discussed
in clause 5.4.2 of this paper) that is aimed at understanding value created by entities that participate
or contribute to the outcomes of the value chain.
6.4. Aggregate reporting of SOE performance
There are countries (like France) where ownership entities aggregate reports of different SOEs into
one report – the aggregate report. OECD reports that aggregate reporting is a key disclosure tool
directed to the general public, Parliament and the media. Aggregate reports are also used by the
banks and other market participants. They are used as a key communication tool and trust-building
instruments. Developing them helps the ownership entities to clarify their policies and improve
internal reporting systems. They are useful for building consensus on specific issues and sensitive
policy choices. They help to make information consistent and are particularly important when the
ownership function is not centralised. Under such circumstances, aggregate reports allow the coordinating entity to emerge as a competence centre and standard-setter for state ownership. It
helps to make the ownership more professional across government, provide examples of leading
SOEs’ performance and good practice as a lever or benchmark for other companies. Aggregate
reports could also provide some form of “combined” accounts for the whole state sector. (OECD:
Corporate Governance Accountability and Transparency – a Guide for State Ownership, 2010: 78 80.)
In France, an aggregate report has provided combined accounts for the state sector since 2004. The
criteria for combination are neither economic interests nor organisational ties existing between
combined entities. They are simply combined based on the fact that they are owned by the state.
The aim is to present the capital, financial situation and results of a group of entities where the
cohesion arises from state ownership, or at another level, from organisational links leading to
common social, commercial, technical or financial behaviour. (OECD: Corporate Governance
Accountability and Transparency – a Guide for State Ownership, 2010: 81.) It is at this level that it
seems South Africa could develop and drive horizontal harmonisation of performance of SOEs that
contribute to, or have links, in the same value chain using aggregate performance reports that
include combined accounts.
The Minister of Public Enterprises in South Africa noted the complexity in shareholder management
of SOEs internationally. This has led to the trend of centralisation of shareholder management of
SOEs. He commented as follows: “Given this complexity, the department has learnt three key
lessons about the shareholder manager function:
* The shareholder management role is highly specialised, requiring the ability to mediate between
enterprise-level strategic, financial and risk concerns, sector policies, industrial policy and the broad
national economic and social development imperatives.
* There is significant value that can be extracted from "portfolio synergies" between SOEs through
shareholder co-ordination in areas such as planning, project implementation, procurement, skills
development and knowledge sharing.
* Significant value can be unlocked through high levels of co-ordination between SOEs, government
departments and development finance institutions.
Driven by the specialised nature of the function and the need for co-ordination, there is a global
trend towards the centralisation of state shareholder management of strategic enterprises. In
certain cases, such as France and China, specialised government departments and shareholder
management agencies have been established to oversee strategic enterprises. In other cases, such
as Singapore, Malaysia and Kazakhstan, SOEs are held through a single state holding company. The
result of centralisation is that the government will understand its asset base, achieve strategic
alignment, and use its asset base to leverage other investment opportunities, develop early warning
systems and exchange market intelligence on businesses’ activities.” (Business Day, How state –
owned companies can better serve SA’s needs, 07th February, 2012)
6.5. Performance and accountability
There is also a clear international trend evident from literature to link performance to governance of
SOEs. According to the OECD Guidelines, the boards of SOEs should have the necessary authority,
competencies and objectivity to carry out their function of strategic guidance and monitoring of
management. The guidelines further suggest that the boards of SOEs should be assigned a clear
mandate with ultimate responsibility for the company’s performance and carry out their functions of
monitoring of management and strategic guidance, subject to the objectives set by government and
the ownership entity (OECD: International Benchmarking on SOE Reforms – Seminar Background
Paper, 2010: 14 – 15). OECD further states that in many Global Network Survey responding countries
SOE boards are required to carry out self evaluations. The outcomes of the appraisal are generally
communicated to the ownership entities or the nominations committees. In Norway, the boards of
directors of all companies with State shareholdings are expected to perform self-evaluations which
include an assessment of the board’s composition relevant to the company’s competency
requirements, and manner in which members of the Board function both as individuals and as a
group in relation to the goals set for their assignment. In some countries, like Sweden and Finland,
external advisers or experts play a role in the evaluation process.
According to the Asian Development Bank (Finding Balance 2011: Benchmarking the Performance of
State-Owned Enterprises in Fiji, Marshall Islands, Samoa, Solomon Islands and Toga: iv) in Solomon
Islands, decades of poor governance practices have led to chronic underperformance, with close to
half of the SOEs in the portfolio now insolvent. SOE boards continue to place political imperatives
ahead of commercial objectives. All port companies in Republic of Marshall Islands, Fiji, Tonga,
Samoa, and Solomon Islands suffer the negative effects of poor governance. Fiji Ports Corporation
Limited (FPCL), which appears to have robust governance practices, has high director turnover rates.
These may adversely impact board performance. In both Samoa and Tonga the port board are
reported to have allowed management to undertake investments in non-core activities at
investment return rates that are well below the target RoE set by shareholders. In the Solomon
Islands and Marshall Islands there is no effective ownership monitor, no performance targets set by
the shareholder ministers and generally weak governance practices. Operational performances of
ports in these two countries have been comparatively poor. Asian Development Bank concluded that
SOEs, in order to perform well and deliver the expected value to the economies of their countries,
should be led by skilled and experienced directors who make decisions that are clearly in the best
commercial interests of the SOE, its owners and key stakeholders (Finding Balance 2011:
Benchmarking the Performance of State-Owned Enterprises in Fiji, Marshall Islands, Samoa, Solomon
Islands and Toga: 24).
There is also evidence from literature that politics affects performance of SOEs. According to the
Asian Development Bank (Finding Balance 2011: 26) political interference can make it very difficult
for SOEs to meet their financial targets. Political interference occurs when SOEs are directed by
politicians to undertake activities that are not commercially viable. SOEs are not specifically
compensated for these activities and therefore their financial performance suffers.
Below are examples of political interference in the management decisions of SOEs in Fiji, RMI,
Solomon Islands and Tonga:

In Fiji: As a government commercial company, Rewa Rice Ltd is required to achieve a target
of 10% return on equity (RoE), yet government also mandated it to continue to operate the
Dreketi rice mill to support the local rice farming community, without corresponding
Community Services Obligation (CSO) payment. The mill is not commercially viable and
represents a drain on the company’s profitability.

In Tonga: The Tongan Development Bank is required to achieve a target of 10% RoE whilst
also maintaining a branch network that is not commercially sustainable and for which the
bank does not receive financial compensation. The Tonga Water Board and the Waste
Authority Limited were discouraged by their politically led board from instigating improved
collections system due to the perceived public good nature of their services.

In Marshall Islands and Solomon Islands: SOEs, particularly infrastructure SOEs, are
prohibited from disconnecting defaulting customers, especially where those customers are
other SOEs and government ministries. The prohibition can also extend to private sector
customers.
Establishment of SOEs may also impact on its performance. According to the Asian Development
Bank (Finding Balance 2011: 21) problems arise when SOEs are (1) burdened with excessive or
overvalued assets, (2) are undercapitalised or (3) are set up in a way that is favourable to the
ministry or department from which its assets are being transferred rather than one based on
commercial drivers. It must be in the best interest of the new SOE, its customers and its owners ( the
government). Examples that illustrate this phenomenon that are cited in literature include Tonga
Airports Limited and Tonga Post Limited. Both were corporatised with overvalued assets. In the case
of Tonga Airports, land valued at T$10 million was placed on the balance sheet while the title to the
land was not transferable to the SOE. In the case of Tonga Post, the opening balance sheet recorded
stamps valued at T$ 10 million while the stamps had no real commercial value. In both cases, the
SOEs had to write-off the overvalued assets in their first two years of operations. The Government of
Tonga has now started to use an establishment board to set up new entities. The establishment
board negotiates the commercial value of assets that are transferred from government departments
to the balance sheet of the new SOE. It performs a due diligence, develop a business plan, negotiate
employment contracts and ensure that all proper commercial arrangements are put in place to
establish a strong performance base for new SOEs.
6.6. Auditing performance in SOEs
According to the OECD (Corporate Governance, Accountability and Transparency – a Guide for State
Ownership, 2010: 68 - 69) auditing performance provides credibility to the performance indicators
and the performance review process. It also ensures a robust basis for the accountability systems,
that is, setting objectives, reviewing performance and disclosing information. The Guideline covers
three different types of audits: (1) internal audits, (2) independent external audits and (3) state
audits. It emphasises the need to avoid duplication by clearly defining the respective roles of the
audits and explain how they complement each other.
Internal auditors can play an important role by scrutinising governance practises, reporting routines,
the implementation of risk-management policies, and internal control processes. The Guidelines
recommend that SOEs should develop efficient internal audit procedures and establish an internal
audit function that is monitored by and reports directly to the board and to the audit committee or
an equivalent company organ. They constitute the first level of review of the quality of information
concerning the extent to which the organisation has achieved its established objectives. The
guidelines further recommend that SOEs, especially the large ones, should be subject to an annual
independent external audit based on international standards. The existence of specific state control
procedures does not substitute for an independent external audit. Finally the guide also recognises
the presence of state auditors. It recommends that the co-ordinating or ownership entity should
have clearly defined relationships with the relevant bodies including the state auditors. Ownership
entities should take appropriate measures in response to audit findings.
6.7. Overview of international perspectives regarding harmonisation of
performance
Considering the above from literature, international experience indicates that performance of SOEs
is achieved in harmonised SOE environments where:
i)
clear mandates for SOEs are provided by government and ownership controllers
ii) robust good corporate governance practices are in place at ownership entity level, board
and the SOE
iii) proper establishment of SOEs is ensured
iv) political interference is avoided (as discussed in paragraph 6.5 above) Political interference
occurs when SOEs are directed by politicians to undertake activities that are not
commercially viable, and are not specifically compensated for, negatively affecting financial
performance of SOEs. [Asian Development Bank (Finding Balance 2011: 26)].
v) performance targets are set and improved
vi) actual performance of SOEs is effectively monitored
vii) audited by internal audit, independent external auditors and state auditors
There seems to be a trend, especially in Namibia, Korea, UK and India, to centrally set performance
targets, monitor and evaluate performance of SOEs. Incentives for performance to SOEs include
performance linked compensation (PLC) in countries like Malaysia and granting of management
autonomy in India. There is also a practise to link SOE performance to national objectives or
outcomes through strategies that are adopted by the SOEs.
No evidence could be found in literature of countries that link performance of different entities in a
value chain to create a horizontal harmonisation of SOE performance. There is, however, a
developing trend of aggregate reporting of performance. Aggregated reports may, as in the case of
France, include combined accounts of SOEs. They are used as key performance communication tools
and trust-building instruments. Developing them helps the ownership entities to clarify their policies
and improve internal reporting systems. They are useful for building consensus on specific issues and
sensitive policy choices. They help to make information consistent and are particularly important
when the ownership function is not centralised. Under such circumstances, aggregate reports allow
the co-ordinating entity to emerge as a competence centre and standard-setter for state ownership.
It helps to make the ownership more professional across government, provide examples of leading
SOEs’ performance and good practice as a lever or benchmark for other companies. It therefore
seems from the above that harmonised performance of SOEs can be strengthened by establishment
of a co-ordinating entity that becomes a competence centre and standard setter for state ownership
in South Africa.
7. Findings emanating from the review of harmonisation of
performance
7.1 SOE performance management: SOEs are measuring performance and link this to their
mandates and in some instances to national objectives.There is inconsistency in the
treatment of performance management by SOEs and Oversight Authority.
7.2 Harmonisation of performance in SOEs: Vertically within SOEs, their ownership entities,
cabinet and parliament, critical elements of harmonising performance exist and are in line
with international practise. Most of the SOEs are using a Balanced Scorecard to manage
performance in terms of their strategic objectives.
7.2.1 Lack of standard reporting template for the quarterly reports: There is no standard
quarterly reporting template among SOEs, as various Executive Authorities has different
reporting requirements.
7.2.2 There is no harmonisation of performance of SOEs across value chains to establish
their contribution and synchrony to the outputs of the value chains that they serve. Review
of international perspectives on how performance of SOEs can be harmonised provided the
following findings:
Centralised setting and monitoring of SOE performance enables governments of countries like India,
Korea, Namibia to consolidate their strategic leadership of SOEs – a step towards horizontal
harmonisation of performance.
7.3 Lack of integration among SOEs and their oversight: Reporting of SOEs to different
oversight departments that do not integrate value chains that they oversee in Government
has led to different approaches by entities to reporting on their performance. This makes it
difficult to oversee harmonisation of performance of entities that report to different
executive authorities whilst serving common value chains whose outputs may be critical to
achievement of key national objectives. Integrated oversight of SOEs could play a pivotal
role to direct harmonisation of performance in SOEs. In the engagements that were held
with Oversight departments of DWA, DoT and DPE they indicated that they do not meet
with other oversight departments of different ministries to co-ordinate their functioning.
For example, the Department of Transport oversight function did not have constant
meetings with the institutional oversight department from Department of Public
Enterprises, even though some of their entities operate in the same value chains, such as
rail and airlines. DWA Institutional oversight also did not have constant meeting
arrangements with the oversight function of COGTA even though they all oversee delivery
of clean portable water to the people of South Africa.
7.4 Shortfall in capacity of oversight by the departments that oversee SOEs as ownership
entities showed signs of weaknesses emanating from understaffing, lack of appropriate
competence (such as technical skills in DWA) and inadequate co-ordination with other
critical functions within the departments. An example would be Institutional Oversight and
Water Services Planning at DWA as well as Oversight and Master Planning at DoT.
7.5 Inconsistency in application of reporting systems and measures: There are systems and
measures of performance within SOEs. These are mostly based on the Balanced Scorecard.
Reporting of performance is quarterly and annually as directed by the PFMA. Levels of
quality of reporting vary from entity to entity also influenced by the oversight function of the
ownership controller. Some SOEs have computerized performance management and
performance reporting systems. These, in all cases, were not automatically linked to the
reporting systems of the oversight functions of the ownership controller.
8. Recommendations
The following recommendations are made from the results/findings of this review:
8.1 Clarification of mandates: Mandates of SOEs should be assessed for relevance, clarity and
specificity as there were entities that felt that their mandates were too broad.
8.2 Classification of SOEs: Clustering and/or classification of SOEs at the level of managing and
reviewing their performance may need to consider key national outputs of the value chains that
they serve, such as housing, infrastructure development and economic development to facilitate
harmonisation of performance of these entities.
8.3 Adopt a harmonised performance management system for SOEs (Vertical + Horizontal)
Characteristics of a vertically harmonised performance management system based on OECD
literature includes:

clear mandates for SOEs, provided by government and ownership
controllers

robust, good corporate governance practices that are in place at ownership
entity level, board and the SOE

proper establishment of SOEs is ensured

political interference is avoided

performance targets are set and improved

actual performance of SOEs is effectively monitored and

audited by internal auditors, independent external auditors and state
auditors
Characteristics of a horizontally harmonised performance management system based on literature
reviewed from the OECD, Asian Development Bank etc. include:

aggregated reporting of performance of SOEs

combined accounts for SOEs between SOEs and between SOEs and other
organs of state and

centralised review and strategic monitoring of performance of SOEs
In addition, harmonised horizontal performance of SOEs also requires:

identification and delivery of interdependencies, and

coordinated planning among SOEs and between SOEs and other spheres of
Government towards achievement of a common outcome that they share
The diagramme below depicts where SOEs’ performance can be classified at any given time to
provide a consolidated view of the extent to which their performance is harmonised. This is based
on the measurement of their performance on the above characteristics:
High
Good Performer but weak
Intergrated Value – adding
Integration (need to integrate and direct
Performer (value adding performer,well
performance to add demonstrable value to
integrated)
achievement of National Outcomes)
V
e
r
t
i
c
a
l
(ISIHLABANI)
(INHLWA)
Get Up & Perform
((poor performer,
integration below expectation)
(DEKLE)
Weak link
(operates in an integrated value
chain but SOE performs poorly)
(Igetye – getye)
Low
High
H o r i z o n t a l
Figure 6: Harmonised Performance – Achieving integrated value-adding performance of
SOEs
8.4 Harmonisation from capacity planning to performance: Clusters and /or classes that
contribute to achievement of key/strategic national outcomes by SOEs may need to be
empowered, supported and/or capacitated to direct/influence allocation of resources in SOEs to
achieve harmonised performance by SOEs in their value chains that contribute to achievement
of key national objectives.
8.5 Strengthening of Performance Oversight for SOEs: Oversight functions of the departments
that provide ownership control to the SOEs should be strengthened by providing them with skills
that enable them to hold SOEs accountable for their performance. They should have appropriate
competences for technical, financial and governance skills to enable them to oversee SOEs.
8.6 Establish a new central entity to develop standards for performance: It is recommended
that government should consider a strong role for co-ordinating entity/ies that will (1) set
performance standards, (2) coordinate effective oversight especially of SOEs that contribute
significantly to achievement of national key outcomes/objectives, (3) aggregate performance
reports and combined accounts to achieve harmonised performance along critical value chains.
It could serve to provide a consolidated view of performance of SOEs to Government. This entity
should coordinate performance of SOEs from planning to reporting performance, especially
performance that contributes to achievement of key national outcomes/objectives.
8.7 Systems and measures: Standardise performance management systems using the Balanced
Scorecard for SOEs and link these (preferably automatically) to the performance reporting
systems of the ownership controller and the coordinating entity/ies.
9. CONCLUSION
Harmonised performance of SOEs in South Africa still needs to develop. There are good
elements of performance management within SOEs reporting to their ownership entities,
cabinet and parliament. These, however, only provide a performance view of each SOE as a
stand-alone entity (vertical performance). These can still be strengthened in terms of
accountability, effective oversight and automated reporting of performance from SOE to
oversight. Auditing of performance information has started in SOEs but this review was too
early for that process to make inputs to the review.
A lot still needs to be done to co-ordinate performance of different SOEs, especially those that
contribute to achievement of key national outcomes. Inter-dependencies of various ministries
to deliver on key national outcomes still needs to cascade to SOEs and harmonised horizontal
performance of SOEs and other government delivery spheres like Local Government should
help achieve this process. Development of aggregated reports and combined accounts for SOEs,
based on their contribution to common outcomes, could provide important data and
perspectives to harmonise horizontal performance of SOEs. Centralisation of review of SOE
performance similar to countries like China, Khazakhstan, Malaysia, Korea and Namibia could
help to improve effectiveness of SOEs in delivering value to South Africa.
10. References
1. Department of Water Affairs. 2008. Guidelines for the Preparation and Evaluation of Water
Boards Policy Statements, Business Plans, Quarterly Reports, and Annual Reports, Pretoria,
Gauteng.
2. Gigaba, M. 2012. ‘How state-owned companies can better serve SA’s needs’. [online] Business
Day. Available at: < http://www.businessday.co.za/Articles/Content.aspx?id=164287 > [Accessed
07 February 2012].
3. HSRC 2011, State Owned Entities in South Africa. 2011. Pretoria. Gauteng.
4. International Labour Organisation. 2011. ‘South African New Growth Path sets ambitious target
to create 5 million jobs by 2020’. [online] International Labour Organisation. Available at: <
http://www.ilo.org/jobspact/news/WCMS_151955/lang--en/index.htm
>
[Accessed
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