22 March 2012
G&O discussion Paper: Oversight
1. BACKGROUND
1.1.1
A brief introduction about the country and its history concerning the topic(ownership)
and how the issue affects SA:
This review is in pursuance of the Presidential Review Committee of State Owned
Enterprises (PRC) Legislative Review Term of Reference (ToR 4), namely: “Oversight of
SOEs by Government”
The State’s oversight role over SOEs is represented by Government through different
institutions: Government Departments (provincially and nationally) and
Municipalities. Within the National and Provincial Government spheres, this is in
most cases1 represented by Policy Ministries that also double up as Shareholder
Ministries. Therefore the scope of this review/ paper covers the three spheres of
Government both commercial enterprises and non-commercial entities.
There are currently three spheres of Government in the Republic of South Africa,
namely: national, provincial and municipal.2 It is trite that each sphere of Government
is made up of institutions of Government, notably Government Departments and
municipalities.3 All Government spheres (with the exception of local government)4
have the power to create statutes,5 and it is through these statutes that most, if not
all these institutions have established public entities/ state-owned entities (SOEs)
through which some of the programmes of these Government institutions are driven.
These statutes are referred to as Founding Acts/ legislation of these public entities/
SOEs.
Primarily, legislation is the basis for SOE oversight in South Africa.
1
An exception is the National Department of Public Enterprises, which is the only Government Institution playing a single role/
mandate in relation to SOEs: ownership of major SOEs.
2
Constitution of the Republic of South Africa, [No. 108 of 1996], G 17678, 18 December 1996
3
For example: ssection 151(1) of the South African Constitution, 1996
4
It is only national and provincial Government that has the power to create statutes for local government. See section 154(1) of of the
South African Constitution, 1996
5
For example: section 104(1)(b)of the South African Constitution, 1996
Page 1
The focus of this paper therefore will be on closely examining Government’s oversight
role over the multiple SOEs it currently owns.
It is important to, at the outset; indicate that:
 The concept of shareholding/ ownership will be used interchangeably in this paper.
 “Government” and “State” will also be used interchangeably herein.
 SOEs/ public entities will also be used interchangeably herein.
It is also important to state at the outset that Ownership and Oversight are distinct
concepts with different imports. Whilst closely related, they are not the same. How
Government exercises its ownership role does not necessarily translate into how
Government exercises its oversight role. Distinguishing these concepts and giving the
differential treatment is important so that the one is not confused with the other.
1.1.2
Actions taken by SA government with regard to the issue:
 Currently, there are numerous frameworks, mainly legislative, through which
Government exercises its oversight role over SOEs. However, due to the fact that
Government owns SOEs through what is referred to as the decentralised
ownership/ shareholder management model ( in terms of which different
Government institutions (as opposed to one Government Institution) plays an
ownership role over SOEs), these Government institutions almost invariably also
play an oversight role over these SOEs.
 Because of this multiplicity of institutions playing an oversight role over SOEs,
there is no single, overarching Government oversight framework straddling all
three spheres of Government: at best, national and provincial Departments use
the Public Finance Management Act( PFMA),6 the SOE Founding Legislation7 and,
where applicable, the Companies Act8 as a basis for exercising the oversight role;
the Municipalities use the Local Government Municipal Finance Management Act
(MFMA),9 the Municipal Systems Act(Systems Act),10 the entities’ Founding
Legislation and, where applicable, the new Companies Act as a basis for exercising
the oversight role framework over SOEs. With this plethora of legislation as a basis
for exercising oversight over SOEs, whilst there are similarities in approach in
certain respects,11 there are equally areas that are not similarities. Even where
there are uniform frameworks application is not uniform.
1.1.3
What should be done to address the issue
6
Act 1 of 1999
Almost all SOEs (with a few exceptions) are established by an Act of Parliament which will be referred to as “Founding Acts/
Legislation” herein. Examples are: South African Maritime Safety Act of 2008, SANRAL&NR Act 1998, the SACAA Act of 1998,
the RTMC Act of 1999, and NRSR Act of 2002. RAF Commission Act of 1998; the Western Cape Gambling& Racing Act of 1996;
the Water Services Act of 1997.
8
Act 71 of 2008
9
Act 56 of 2003
10
Act 44 of 2003
11
For example: PFMA for provincial and municipal entities, and the Systems Act/MFMA for municipal entities
7
Page 2
Honourable President J. Zuma’s decision to review the state-owned entities (SOEs) in
all three spheres of government is the first of its kind, timely and necessary. The
review work undertaken thus far12 does strongly point to an urgent need to review
the current oversight practices, the frameworks currently in place and refine these to
give effect to improved oversight practices that have uniform application across all
spheres of Government.
Ultimately the proposed reforms herein will result in SOEs operating optimally in
support of the developmental state. The second step will be to have a clear, coherent
and practicable implementation plan, and thirdly (and most importantly),
commitment at all levels so as to bring about the necessary reforms.
1.1.4
How the position of other countries affect SA s position
Extensive comparative international benchmarks were undertaken by G&O as part of
this review, and are dealt with herein. Those benchmarks point to the fact that
current oversight practices and frameworks can be improved based on lessons from
abroad.
2. APPROACH ADOPTED AND SUMMARY OF PAST REVIEWS
2.1.1
Approach: The approach to this review was characterized by multiple review
methodologies.13 The approaches included:
 Literature& Desktop Review: locally and internationally: There is extensive data
and literature in this regard.
 Stakeholder Engagements: These ranged from one-on one engagement with some
SOEs, municipalities, Government Departments/ Institutions locally and abroad.
 SOE Database: This entailed a compilation of data on all the public entities/ SOEs
in South Africa which is housed in an electronic Database/ Dashboard developed
by the PRC’s research partner, the HSRC.
 SOE Survey: This was administered, analysed and a report written by the HSRC.
 Commissioned research work: Nkonki Inc. were commissioned to look deeper into
the area of SOE legislative frameworks and validate, confirm, corroborate and/or
refute emerging observation arising primarily from G&O’s literature review, as well
as close the gaps that may have arisen from previous review work conducted prior
to the PRC’s commissioning by the President of the Republic of South Africa.
2.1.2 Reviews: Past& Present: There are past and present reviews in South Africa that have
looked at the issue of SOE shareholder oversight. Some of the key ones are dealt with
ad seriatim hereunder:
12
Literature, seminars, one-on-one engagement with SOEs, experts, OECD& Govt institutions, research projects, survey, public
submissions and policy dialogues/ round tables.
13
Notably: Literature Review( including international benchmark), desktop review(including international benchmark), SOE Database
Survey, Stakeholder Engagements, public submissions, Commissioned Research Papers/ Projects& a Policy Dialogue/ Round Table
session
Page 3
2.1.2.1
The Department of Public Enterprises’ (DPE) Centralised Shareholder
Management Concept (CSM): DPE is an important and key Government
shareholder representative over major SoEs/ Government Business
Enterprises in South Africa. It is the only Government Department that has a
sole mandate: Government shareholding/ ownership as well as oversight over
the SOEs accorded to it. In carrying out this mandate over key (and major)
SOEs, it, unlike its sister departments, does so without the power of any
legislation positioning it as a shareholder/ ownership Ministry.
Other Ministries and Municipalities are accorded that authority through
either SOE/ ME’s) founding legislation/ sector legislation, which would specify
that a particular Minister is their Government shareholder representative/
owner and relatedly, oversight over the SOEs concerned. Likewise with
municipalities. The PFMA does however accord DPE Minister (as Executive
Authority) some authority for receiving SOE reports, and for making certain
approvals sought by SOEs under its ownership and control.
In its quest/ drive to carrying out this focused shareholder management/
ownership and oversight mandate effectively, DPE has consistently sought to
strengthen such a mandate. It is on that basis that DPE has over the years
done extensive work (studies) in this regard, and precisioned its ownership
and oversight role. They have, for instance, internally developed a paper
referred to as the Centralised Shareholder Management Concept (“CSM”).14
This document looks at issues of ownership/ shareholder management, as
well as oversight.
Key issues being raised in that document (relevant to oversight of SOEs) are as
follows:
 There is repeated usage of the concepts of “business” and “commercial”
enterprises.
o This clearly suggests that the study was focused on DPE enterprises, all
of which are commercial. It is however our submission that
notwithstanding, these principles have application to all SOEs as they
deal with how Government should exercise monitoring/oversight over
SOEs. This is so irrespective of whether they are located, for and type,
etc.
 It states that the document deals with Government oversight and
intervention.
o As would become apparent herein, as to what constitutes oversight and
intervention is interpreted and therefore understood differently within
the different sectors of our Government and society. As already
cautioned earlier in this document, “ownership” and “oversight” are
often confused to mean the same thing when this is not the case. Also,
14
This is an internal 2010 DPE discussion paper that deals with the Centralised Shareholder Management Model and the Government
Shareholder Management Bill
Page 4
Government’s “intervention” in SOEs is often misconstrued to mean
“interference”. Whilst instances and practices of Government
interference have a basis and do occur in certain instances, it is
important to note that these two concepts are also distinct and a clear
oversight strategy as well as Government’s ownership policy will
address this issue fully. Currently neither of these instruments is in
existence, hence the confusion or blurred distinction between
ownership and oversight; intervention and interference.
 There is a legislative and constitutional injunction on state organs
(including SoEs) to cooperate with another. There are inconsistencies with
respect to the extent of such cooperation within state organs. The
principle of shared resources on reasonable commercial terms is not
established, and the implementation of such a principle should greatly
reduce costs and ensure time and efficiency gains.
o We agree fully with this argument by DPE. Whilst it is clear as to what
context this point is being made, we are to hereunder deal in detail
with how reforms in oversight practices does not imply that policy
Ministries and other Government institutions having an interest in that
SOE should either not be consulted, or not play a role in the oversight
of SOEs. Phrased differently, inter-governmental cooperation and
collaboration is key to effective SOE oversight going forward.
Currently, collaboration and cooperation, even within the context of
oversight, is non-existent. Examples are: e.g. shareholder ministries
developing SOE oversight instruments without involving sector
ministries and regulators that equally have an interests in the SOEs
concerned; National Treasury exercise another layer of oversight over
Government institutions playing similar role; etc.
Accordingly, an audit needs to be carried on how many state organs
share resources. Oversight institutions should be measured on the
extent to which they engage other stakeholders in exercising oversight
over SOEs.
 They make a point that it is worth distinguishing between the
Government’s role as policy maker, custodian of national revenue fund,
regulator and shareholder. There is a widespread trend towards clearly
distinguishing and separating Government’s different roles and interests as
owner, fiscal manager, policy maker and regulator, such as in China, New
Zealand, Australia, the UK and France.
o Relative to this issue of oversight, this point has direct relevance. As
would be demonstrated herein, one of the reasons that give rise to the
ineffectiveness of oversight practices within Government is the fact that
there are many institutions that play this role. Inevitably, each does so
in a manner that they deem prudent and this results in multiple,
dissimilar/ different, fragmented oversight practices by Government
institutions.
Page 5
o Secondly, because in South Africa there is no distinction in these
Government roles with most Government institutions playing these
roles simultaneously, the capacity of these institutions to do so is
limited as the resources are spread and stretched and straddle these
many roles. Resultantly, there will be bas by these institutions towards
what they deem key. E.g. policy-making function/ role will receive more
attention, more resources and others will suffer. This is a fact.
o Accordingly, once each role is separate, then each will receive its own
focus and relatedly, resources. Oversight will not be spread all over bit
will be streamlined and consolidated, bring about consistency in
content and application.
 The Executive Authority (EA) has been assigned a shareholding function for
SOE.
o This is correct and not quite correct: The EA does not necessarily
denote shareholding only. Take Transnet, SAA, and Denel, who have an
Executive Authority sitting outside their respective portfolios.
o The EA function does include shareholding in certain instances, but
does exclude shareholding in others. The EA means different things to
different people. The EA can be a shareholder; policy-maker, regulator,
etc.
o Accordingly, one of the key concepts that need to be “cleaned up” going
forward is what exactly “EA” denotes, and should denote going
forward.
 Deals with functions of Government as a shareholder.15
o This should be clearly interrogated to ensure that the shareholder does
not usurp the Board’s function, and secondly, clearly distinguishes the
“approval” function of Government as a shareholder and the “advisory”
role being left to the Board.
 Challenges faced by SoEs:16 Multiple government roles confuse SoEs, which
are unable to know what is expected from by Government as: shareholder,
regulator, and policy-maker; Roles and responsibilities of different
Government departments/ institutions (in relation to SoEs) are not clearly
delineated with the resultant confusion of the rights of the departments
and the reporting and accountability lines by SoEs.
2.1.2.2
DBSA’s Municipal Entities’(MEs) Report: Key issues raised in this report
regarding ownership by Government of municipal entities are as follows:
 The relationship between the parent municipality and the municipal
entities (MEs) is a multiple one which brings about complexities.17
 The report goes on to state that the parent municipality has to ensure that
15
At Par 4.13.1
At Par 7.3
17
Page 20 “Synthesis Report Final Draft: Evaluating the efficiency and effectiveness of municipalentities as a service delivery
mechanism” 29 September 2010. Those roles are: shareholder, a service deliveryauthority, client to the ME and a regulator of the ME.
16
Page 6
it has the capacity and the ability to perform each of these roles as and
when needed”.18
o This point is already made above that different roles by one owner
means they have to have adequate capacity and resources to play each
role excellently. This is not the case in South Africa and the resources
are spread and stretched within one institution to play these multiple
roles. Ultimately, some of these roles suffer, and oversight is one such
casualty.
 The report observes that case studies undertaken revealed that the
relationship between an ME and parent municipality remains a potential
source of discontent and frustration. This relationship is characterized by
an inherent tension between autonomy (which is what MEs strive for) and
control (which is what the parent municipality wants to maintain).
2.1.2.3
ENS Study-DPE: Key points coming out of that study in relation to
Government’s oversight role:
 Shareholder’s Compacts: The intention of Intention of compacts is to
articulate annual strategic objectives for the entity against which Board
performance will be measured. In practice it has been difficult to for
Government to enforce this Regulation both as regard reaching the
agreement timeously with the Boards of each applicably public entity and
as well as holding the accounting authority accountable based on the key
performance indicators set out in the compact. Thus its effectiveness as a
supervisory tool has been limited to date.
 In terms of the ordinary principles of company law, objectives sought to be
achieved through the compacts can be achieved through the proper and
legitimate use of shareholder powers without the disadvantages inherent
in having to reach agreements between the shareholder and the Board.
However the shareholder will have to be knowledgeable resourced and
have the appetite to exercise its rights in order to hold the Board to
account whether through the compact or through any other mechanism of
communicating the Government’s expected outcomes to the Board.
o What ENS reflects herein is correct, and has been confirmed by other
review methodologies employed by the work stream, notably, research
work commissioned, policy dialogues, one-on-one engagement with
stakeholders (SOEs and Government Institutions).

King III is not legislation but a code of principles and best practice.
Therefore application and compliance is voluntary. Although King III is
not law there is a strong relationship between good governance and
compliance with the law.

Founding Legislation: The impact of SOE Founding legislation is that it
contains additional SOE-specific restrictions on power or authority or
18
Ibid
Page 7
additional procedural requirements for transacting that would not exist
were SOEs regulated only by general legislation such as companies’
statutes or the PFMA. In addition certain founding states regulate
matters that are already regulated by company law, resulting in
regulatory duplication.
2.1.2.4
National Treasury’s Oversight Document- “Governance Oversight Role over
State-Owned Entities”: 19National Treasury plays a number of roles in
Government: It is a policy ministry and drives policies in this regard
throughout the different Government institutions. It also plays an ownership/
oversight role over some SOEs assigned to its control.20 National Treasury
developed this document presumably in pursuance of its role as a shareholder
ministry.
National Treasury is a classic Government Department where the different
Government roles are blurred. This is confusing to SOEs as they do not know
what the relationship between them and that Department should be. As
National Treasury appear to have some control, oversight and monitoring role
of one type or the other not only in relation to the SOEs it has been assigned
to oversee, but all SOEs/ public entities in all three spheres of Government
nationwide.
National Treasury is a department sui generis: it is constitutionally- tasked
with looking after fiscal matters of the country. For that reason, it should not
even be playing an oversight role over any SOE!
The sui generis nature of this Ministry positions it as a very important/ key,
focused department that actually plays a fiscal oversight role over other
Ministries and Government institutions. By seeking to (and actually doing so)
playing a policy role (played by policy ministries) and shareholder role (played
by other Ministries) it in effect reduces itself to a role of Ministries that it
should be monitoring. Is National Treasury ascends from its level to that of
these other Ministries, who then polices them (National Treasury)?
To the SOEs, National Treasury should play an objective, consistent role (if
any). It cannot have some SOEs under its control, and yet seek to exercise
oversight over others? Is it using the same roles in relation to its own SOEs?
Furthermore, we are mindful that there are many foreign jurisdictions where
National Treasury/ Department of Finance play a central role in the
management of SOEs. However what a lot of analysis miss is that in most (if
not all) these countries, there is usually no Ministry or Government institution
focusing on SOE management. In other countries (even in the absence of a
DPE-like institution) the Ministry of Trade and Industry plays such a role.
Therefore any argument that may suggest that National Treasury could play a
19
20
Dated 25 November 2005, by Higgo Du Toit: National Treasury
E.g. Land Bank, SARS, PIC, FSB, DBSA
Page 8
central role in relation to SOEs (based on international comparative
benchmarks) must be looked at holistically, and not narrowly.
Regard being had of the above arguments/ submissions, National Treasury’s
continued multiple roles militate very strongly against the separation of
Government roles. Even if the status quo in terms of Government institutions
playing a dual role (policy (sector) and shareholding), the nature and outlook
of National Treasury is such that it should not play a shareholder role, or a
Government policy role akin to that of other policy Ministries: it should be the
Government’s financial manager and it should focus solely on that role.
Having stated the above, National Treasury’s research document shared with
the PRC (discussed below) is not without value. It raises some issues that go
to the heart of what constitutes effective SOE oversight.
Below are some of the issues raised therein:
 Governance oversight over SOE’s vests in Parliament, the Executive and
the Boards of SOE’s. Parliament exercises its role through evaluating the
performance of SOE’s by interrogating their annual financial statements.
The Portfolio Committee exercises oversight over the service delivery
performance of SOE’s and, as such, reviews the non-financial information
contained in the annual reports of SOE’s and is concerned with service
delivery and enhancing economic growth.21
 The Executive Authority as owner/shareholder is concerned with
appropriate returns on investments and ensuring financial viability of
SOE’s. The relevant Executive Authority acts as shareholder, while the
Minister of Finance and the National Treasury is responsible for financial
oversight.
 Government is also the policymaker, concerned with policy
implementation of service delivery and acts as regulator. These
responsibilities vest in Cabinet as policymaker, the responsible Minister
(Executive Authority) and his Department and in some cases the Policy
Department (i.e. Shareholder Management of Eskom vests with the
Department of Public Enterprises while policy vests with the Department
of Minerals and Energy).22
 Oversight by the Executive Authority rests by and large on the prescripts
of the PFMA. The PFMA governs/gives authority to the Executive Authority
for oversight powers with particular reference to the corporate plans,
shareholder’s compacts and quarterly reports.23
21
At Page 1, Par 2
Ibid
23
Page 2
22
Page 9
 Shareholder oversight is spread between various shareholder
departments while policy departments which, in some instances are not
the shareholder department, direct policy.24
 The challenge facing members of Parliament is to improve the capacity of
the policy/parliamentary Committees to hold Departments and SOE’s to
account for their performance, using their strategic plans, budget
documents and annual reports as the basis.25
 Reforms since the enactment of the PFMA and Public Service Act require
the Minister of each Department, who might also be the Executive
Authority of a SOE, to table an annual report in the legislature within 6
months of the end of each financial year. Section 65 of the PFMA requires
the Executive Authority to table the annual reports for SOE’s for which
they are responsible by 30 September, which is six months after financial
year-end of the SOE. This implies that annual reports should be tabled by
Parliament a month after the accounting officer has received it from the
SOE.26
 Because it would be impossible for the National Assembly to exercise
proper oversight over their Executives by reviewing all performance
aspects of the 35 National Departments and ± 250 National Public Entities,
Parliamentary Committees were established to facilitate the oversight
role. This division of labour enables the committee members to become
experts in different fields, and spend more time doing the actual oversight
work.27
 Given their involvement in the legislative, budget and in-year monitoring
processes, Portfolio Committees exercise oversight of the service delivery
performance of SOE’s. Portfolio Committees fulfil the responsibility of
reviewing non-financial information contained in the annual reports of
SOE’s. These Committees should exercise oversight as to whether entities
have delivered on the service delivery commitments they made in their
corporate plans. They must also consider the SOE’s financial performance
in order to develop a holistic understanding of the SOE’s performance.
To give effect to this role, these Committees focus on the following in
considering the annual reports of SOE’s:
o The technical quality of the annual reports produced by Departments
and SOE’s;
o The economic, efficiency and effectiveness of service delivery as
measured by performance indicators presented in the annual reports;
o Evaluating management’s explanation as to why the entity’s service;
24
Ibid
Ibid
26
Page 3
27
Ibid
25
Page 10
o Delivery performance did not attain the targets set in the corporate
plans;
o Equity of service delivery; and Investigating the circumstances that led
to financial under-performance and the impact this had on service
delivery and the measures taken by management to rectify the
situation.
The National Assembly Portfolio Committees are responsible for
overseeing the relevant National Department for which they are
responsible. SOE’s report to an Executive Authority (Shareholder Ministry)
and their annual reports are submitted to both the Public Accounts
Committee and the relevant Portfolio Committee by the Executive
Authority.28
 The Auditor-General:29 The Auditor-General is a state institution
accountable to the National Assembly. In terms of Section 188 of the
Constitution, the Auditor- General must audit and report on the accounts,
financial statements and financial management of all national and
provincial departments, all municipalities and any other institution or
accounting entity required by national and provincial legislation. In this
regard the Auditor-General must submit audit reports to the relevant
legislature.
 The Executive plays various roles in its relationship with the SOEs. On one
hand, Government as an owner and shareholder is concerned with
obtaining a suitable return on investments, and ensuring the financial
viability of the SOE. On the other hand, Government as policymaker is
concerned with the policy implementation of service delivery. Finally,
Government as regulator is concerned with the industry practices of SOEs,
pricing structures, and the interests of consumers. The Executive Authority
(Responsible Minister) is the governing body that is responsible for the
effective and efficient delivery of the service delivery requirements
identified and also exercises shareholder oversight. 30
 The Executive Authority plays a constructive and proactive role in the
governance of the SOE and in the achievements of its service delivery
objectives. Oversight is concerned with the reviewing, monitoring and
overseeing of the affairs, practices, activities, behaviour and conduct of
the SOE, in order to be satisfied that the SOE’s affairs and business are
being conducted in the manner expected and in accordance with all
normal commercial, legislative and other prescribed or agreed norms. This
includes the review, monitoring and overseeing of the fact that the
management of the SOE, its strategic and business planning, its conduct of
its business operations and its reporting thereon and accounting thereof,
28
29
Page 4
Page 5
30
Ibid
Page 11
is being effectively managed by the SOE’s executive management and staff
and that the assets and goodwill are being properly protected and
preserved.31
 The Executive Authority’s corporate governance responsibility as
shareholder, involves ensuring that, from the Board of directors
downwards, and also in respect of accountability of the Board upwards to
the shareholder, all the necessary and appropriate corporate governance
structures, procedures, practices and controls and safeguards, are
established, properly implemented and operate effectively in the SOE
concerned.32
 Corporate Plan and Shareholder’s Compact: The oversight role of the
Executive Authority and their Department is done in accordance with
Section 52 of the PFMA, which deals with annual budgets and corporate
plans. Section 52 provides that the board of the SOE must annually
submit: “(a) a projection of revenue, expenditure and borrowings for that
financial year in the prescribed format; and (b) a corporate plan in the
prescribed format covering the affairs of that public entity or business
enterprise for the following three financial years, and, if it has subsidiaries,
also the affairs of the subsidiaries.” In addition, Treasury Regulation 29.1
deals with corporate plans that must be submitted by SOE’s (Schedule 2
and 3B). This regulation provides that the accounting authority for a public
entity listed in Schedule 2 and 3B must annually submit a corporate plan
to their Executive Authority and the relevant Treasury. The corporate plan
must cover a period of 3 years and include:
o Strategic objectives and outcomes identified and agreed on by the
executive authority in the shareholder’s compact;
o Strategic and business initiatives as embodied in business function
strategies;
o Key performance measures and indicators for assessing the entity’s
performance in delivering the desired outcomes and objectives;
o A risk management plan;
o A fraud prevention plan;
o A materiality/significant framework, referred to in Treasury Regulation
28.3.1;
o A financial plan addressing: Projections of revenue, expenditure and
borrowings; Asset and Liability Management; Cash flow projections;
Capital expenditure programmes; and Dividend policies.
In addition to the Corporate Plan, the Executive Authority of a SOE must
annually conclude a shareholders’ compact with the SOE falling under its
control. Treasury Regulation 29.2.2 directs that: “The shareholder’s
compact must document the mandated key procedures for quarterly
31
32
Ibid
Page 6
Page 12
reporting to the Executive Authority in order to facilitate effective
performance monitoring, evaluation and corrective action.”
The shareholder’s compact represents an agreement between the
relevant Executive Authority at national or provincial government level, as
the majority shareholder and the Accounting Authority of the public
entity, with respect to performance expectations and parameters. It does
not replace the strategic, corporate and business plans but is rather
complimentary to these. It describes the relationship between the
signatories and identifies the behaviour that would be required on both
sides to support effective management and performance of the entity.
The shareholder’s compact finds its origin, on the one side, in the protocol
of corporate governance in the public sector, which is time independent.
On the other, it is anchored in the strategic, corporate and business plans
of the public entity, which are time dependent. The shareholder’s compact
results from the need to have a clear understanding of the relationship
between Government and the public entities as an extension of delivering
public service through business entities. It is a product of research and
development into corporate governance and performance agreements
between majority/sole shareholders and boards, and subsequent
discussions and debate with the parties concerned.
This document forms a framework within which entities can reach
agreement with the Executive Authority on objectives to be pursued in
reaching the vision of the organisation. It also includes guidelines for a
restructuring plan upon which the shareholder and the accounting
authority can reach agreement prior to the implementation of the annual
budget. It is crucial to note that the shareholder’s compact can derive
information required from the corporate plan that has already been
prepared by the public entity.33
 The Protocol on Corporate Governance was accepted by Cabinet in 2003
and all Public Entities have been informed that the must comply with the
principles contained therein. The Protocol is a code of conduct similar to
the King Report on Corporate Governance and has not been legislated. It
encapsulates the King II Report and aligns corporate governance principles
to the PFMA, while striving to maintain the independence of SOE’s. The
Government, as the major shareholder in SOE’s, is exposed to a wide
range of risks associated with the operations of SOE’s, including financial,
reputation, political and operational risks. It is the responsibility of each
Executive Authority to ensure that these risks are identified, reduced and
managed. SOE’s must report and account their financial and non-financial
performance to the Executive Authority, while maintaining independence
in the conduct of their duties free from day-to-day involvement by the
Executive Authority. The purpose of the Protocol is to guide this
33
Pages 8&9
Page 13
relationship. With regard to governance issues the Protocol states that:
The Government’s relationship to its SOE’s is similar to the relationship
between a holding company and its subsidiaries, features of which
include:
o A strong interest in the financial performance of the SOE;
o Reporting and accountability arrangements that facilitate an appropriate
oversight by the shareholder; and
o Remedial action by the shareholder where the SOE’s strategic direction
deviates from that preferred by the shareholder.
The relevant Executive Authority, as contemplated in the PFMA, and the
Minister of Finance represent the Government’s ownership interest in the
SOE’s. The Executive Authority acts as shareholder while the Minister of
Finance and the National Treasury is responsible for financial oversight.
The guiding principles of the Protocol are:
o The Executive Authority should exercise policy control over the SOE’s
consistent with their accountability to Parliament and the public;
o The Executive Authority should set clear objectives for SOE’s.
o Any Social Service Obligations that a SOE is to undertake should
generally be specified through a Shareholder’s Compact; and
o The directors of a SOE should ensure the development of business
strategies, policies and procedures and monitor management in the
implementation thereof.
2.1.2.5
William Gumede (Wits University, P&DM) and Christoph Braxton (PwC) Stateowned Enterprises: Governance responsibility and accountability Public
Sector Working Group: Position Paper 3 (Draft 8):
 Constitutional oversight over the performance of SOEs rests with
Parliament (being the National Assembly and the National Council of
Provinces and its portfolio committees, public accounts committees and
joint committees). The Standing Committee on Public Accounts (SCOPA)
interrogates the annual financial statements of SOEs. Portfolio
Committees reviews the non-financial information in annual reports of
SOEs, namely, the service delivery performance of SOEs. The challenge
facing members of Parliament is to improve the capacity of the
policy/parliamentary Committees to hold Departments and SOEs to
account for their performance, using their strategic plans, budget
documents and annual reports as the basis.34

Oversight: Section 92 (3) (b) of the Constitution requires Cabinet to
provide Parliament with comprehensive and regular report on the
activities under their jurisdiction. However, Parliament and its
committees lack the capacity to effectively scrutinize the strategic,
financial, budgetary and delivery plans and reports of departments and
SOEs. This means they cannot effectively monitor the performance of
34
Page 6 William Gumede (Wits University, P&DM) and Christoph Braxton (PwC) State-owned Enterprises: Governance
responsibility and accountability Public Sector Working Group: Position Paper 3 (Draft 8)
Page 14
government departments and SOEs.
Oversight over the performance of SOEs rests with Parliament, the
Executive Authority, and the SOEs’ boards. Parliament reviews the annual
reports of SOEs. The PFMA governs the standards for financial
management of SOEs and places the responsibility of implementation of
mandates of SOEs on the Accounting Authority or board, which in turn
may assign powers and duties to executive management. However, as
noted earlier in this Position Paper, various governance role players have
oversight over SOEs, and therefore these roles need to be clarified. The
perception that the responsibility to resolve poor performance of SOEs
lay with the Executive Authority potentially undermines the board’s role.
Governance role players all have a duty to address performance of SOEs,
yet effective and continuous communication amongst these role players
seems to be lacking.35

Policy-making: In some cases the line minister as shareholder, is not, as
noted earlier in this Position Paper, responsible for making the policies
governing the SOEs. Where policy directives are made by the line
minister through his/her department with which policy making rests,
these are often contradictory, unclear or inadequate. There is often no
co-ordination between the minister/department responsible for policy
making and the shareholding minister/department, when these two are
different. This undermines effective oversight, performance and even
financial sustainability and viability of SOEs.
Government sets policy for the SOEs, while at the same time regulating
the SOEs’ operations. This provides a potential governance challenge.
Regulators may “pressure firms to undertake certain policies with
outcomes to benefit politicians rather than shareholders”36. The
regulating authorities of many countries often make the mistake of
setting regulation not only in a very arbitrary manner, but in such a way
that it protects the SOEs over all other social, political or economic
goals.37

The performance of the board, its committees, individual directors and
CEO should be evaluated annually38. An independent non-executive
director should lead the processes of the assessment of the performance
of the chairman of the board. The evaluation of the CEO’s performance
should concentrate on his/her performance as a director and as CEO. It
leaves open who should conduct the assessment of the CEO. However,
the board and the shareholder (government) could do this, based on
transparent criteria. The results and action plans from these evaluations
35
Page 8
Sokol, Daniel D. 2010. Competition Policy and Comparative Corporate Governance of State-Owned Enterprises. University of
Florida Legal Studies Research Paper No. 2010-02.
37
Page 8
38
Principle 1. 23
36
Page 15
should be disclosed in the integrated report which will assist the
Executive Authority to monitor performance of the SOE.39

3.1.2.6
39
40
Independent oversight: The various levels of oversight, whether it is
strategic, policy or shareholder, should be clarified and codified in formal
terms of reference and memoranda of understanding to ensure clarity is
achieved where oversight lines are not “blurred”. Such terms of reference
and memoranda of understanding should be signed by all parties
concerned in the presence of the Speaker of Parliament. This aligns to
the principle of “co-operative governance” as enshrined in the
Constitution.40
Nkonki Report: The PRC (G&O) commissioned this report with the objective of
corroborating or refuting observations made arising from other review
methodologies employed by the work stream on the subject of, inter alia,
oversight practices over SOEs.
 SOE Oversight structures: The National Treasury further explains the
Governance oversight role over State Owned Entities as vesting in
Parliament, the Executive Department and the Boards of Directors of SOEs:
o Parliament exercises its role through evaluating the performance of SOEs
by interrogating their annual financial statements.
o The Executive Department as owner/shareholder is concerned with
appropriate returns on investments and ensuring the financial viability of
SOEs.
o The Board of Directors of SOEs is the governing body of the State Owned
Entity and has absolute responsibility and full accountability for the
performance of the SOE. Governance principles regarding the role and
responsibility of SOE Boards are contained in the PFMA and the Protocol
on Corporate Governance.
o (For municipal entities, the framework includes Municipal Finance
Management Act [MFMA], Structures Act and Systems Act.)
 At the same time, however, they cautioned against being micro-managed,
as this frequently leads to interference.
 Frustrations were expressed by the almost all SOEs that they rarely receive
any feedback from Government.
 Notwithstanding that, we obtained hard evidence such as emails to and
from various entities, at the National Treasury Oversight Unit, and at least
three letters signed by the Minister of Finance, two addressed to the
Chairperson of the Board and an approval addressed to the CEO
 We found that some ministers did not pro-actively manage this process,
resulting in vacancies in key positions. Vacancies invariably weaken the
oversight role of the board, threatening the stability of an entire
organisation. In one instance, five directors, including a board Chairperson,
had not been replaced after fourteen months.
Page 9
Page 11
Page 16
 National Treasury’s active role in asserting its rights of ownership over
SOEs under their control, as demonstrated above, be applied as a blueprint
for other shareholder ministries to emulate
 This could be achieved through specialised training programmes
sponsored by an institution of higher learning which should be made
compulsory to all officials performing the oversight function coordinated
at a national level. We further recommend that key positions are filled in a
timely manner by well capacitated teams.
 We have established that the priorities and objectives in the business plans
are often set by SOEs as many Government Oversight Units have little or
no capacity to provide leadership and direction
 With the exception of Western Cape Economic Development and Tourism,
had established a Public Entities Oversight Unit within their departments.
Western Cape has an acting Chief Director who assumed the oversight
responsibility.
 These officials were asked whether there was at least one formal meeting
with the SOEs prior to the finalisation of their corporate business plans.
 Director General and SOE forums.
 Of the five shareholder ministries reviewed, only the National Treasury
provided satisfactory evidence that they communicate to SOE’s after
reviewing and approving corporate plans and shareholder compacts. In
support of this statement, we noted the contents of a letter dated 6th
September, 2010,signed by the Minister of Finance and addressed to a
DBSA Chairperson, stating
 Shareholder Ministries should capacitate their oversight units.
 The reporting regime in Government is generally very complex. SOEs find
themselves accountable to the Shareholder Ministries, Provincial
Government Structures, Portfolio Committees, and other related
Ministries. This provides numerous inefficiencies to SOE’s as they have to
meet different requirements of each of these authorities on demand. In
addition to the statutory monthly and quarterly reports, entities are
frequently requested to provide the same reports on an ad hoc basis in
different formats, often requiring extensive adjustments of templates
resulting in countless hours of work. One entity mentioned an example of
an Employment and Equity Report, part of a Quarterly Report to the
shareholder and to the Department of Labour, which they have been asked
to present in many different formats by a number of institutions, such as
the Gender Commission which tracks progress or lack thereof on
transformation.
 In the case of a Municipal Owned Entity (MOE), this reporting is
compounded by similar requests from Provincial Local Government and
occasionally a request from the Premier’s Office. Provincial Legislature is
also entitled to receive any information requested, as and when they deem
necessary, as part of their oversight responsibility.
 Limitations of the Nkonki Report:
o Non-cooperation by SOEs. What could this signify?
o Exclusion of DPE in its scope
Page 17
3.1.2.7
DPE Strategic Plan: 2011-2014
 In summary, the DPE needs to leverage the SOE to contribute to the
following key national objectives:41
o The provision of competitive infrastructure services and associated
capacity to lead growth and stimulate employment creation.
o The development of industrial manufacturing capabilities as a whole as
well niched areas of advanced capabilities.
o The development of skills.
o The development of new technologies, particularly those contributing
towards employment creation and a green growth trajectory.
o The development of social and economics compacts to align
stakeholders behind the key growth objectives(Page 3)
 Providing decisive leadership and ensuring that the government
shareholder management model is implemented:
o The department provides support to the Minister in his interactions with
the state owned enterprises.
o This involves preparing for structured meetings between the Minister
and the Chairperson of each board, as well as research and briefings on
issues.
o The department’s shareholder management model measures the state
owned enterprises’ performance against delivery targets. The model
aims to achieve consistency in compliance with corporate governance
as well as the synchronization of outcomes - based planning and
performance reporting. The model is being continuously refined.
o Progress on the model to date includes:42
 Clarity on the strategic intent of each state owned enterprise and
performance focused shareholder compacts.
 The development of a logical planning and monitoring and
evaluation framework;
 The development of guidelines on board management and founding
documents.
 And the tracking of trends in financial and operational performance
through the department’s performance measuring dashboard, the
Isibuko dashboard. The dashboard facilitates the quarterly reporting
required from the state owned enterprises.
o A number of state owned enterprises suffer from operational
inefficiencies, which negatively impacts on the economy. A key
challenge for the department is to play a catalytic role in improving
efficiencies through positively influencing the Boards’ oversight
function and in turn effective management of the enterprises. This will
require a much higher level of analysis, benchmarking, target setting
and remedial action than in previous years. The department will also
continue to monitor progress on the expansion of the capacity of state
41
42
Page 3, DPE Strategic Plan: 2011-2014
Ibid
Page 18
owned enterprises, such as the capital programmes of Eskom and
Transnet, through better funding and risk management.43
o Transport Enterprises: 44
 5 strategic objectives. Mention of Policy Ministries and Regulators
on only one of these(Create an enabling environment for transport
enterprises and ensure an appropriate balance between the
enterprise interest and the consumer interest)
 On the measurement matrix itself, 45no mention of DoT as an
indicator of
o Manufacturing:46
 Mention of other Departments
 No mention of stakeholders in the matrix.47
o Energy and broadband
 Consultation mentioned: 48
 No mention in scorecard/matrix
 Effective oversight is dependent on, inter alia, closer collaboration
between shareholder \ministry and policy ministry, regulators. SOE
Oversight is a collective responsibility.
 Cost of Ownership and Oversight:
o DPE breaks it by sector:
 Energy and broadband: 49
 Legal& Governance: 50
 Manufacturing: 51
 Transport enterprises:52
3. AS-IS (Findings& Conclusions)
The findings detailed below are a product of a combination of research and investigative work
driven by this problem statement, and they are as follows.
4.1 Problem Statement: “The impact of the current Oversight practices on SOEs”.
4.2 International Comparative benchmark Exercise
Below is a detailed exposition on a comparative international examination of how issues
regarding SOE oversight are being handled. The exposition below is largely principlebased (as oppose to country-based). As is apparent below, the OECD is primarily
predicated on OECD literature, the reason being OECD has done extensive work on the
area of governance, oversight and ownership of SOEs. Where applicable country
examples will be made, albeit briefly.
43
Ibid
Page 22
45
Page 23
46
Page 19
47
Page 20 and 21
48
Page 12
49
Page 15
50
Page 18
51
Page 21
52
Page 25
44
Page 19
3.1.1 The OECD: 53
 SOE Oversight should be at 2 levels: (i) At Enterprise level- This is to ensure SOE
is financially viable & sustainable. (ii) At Industry level– So as to create space for
the private sector where optimal in the value chain.
 Oversight can be strengthened through: (i) The precisioning of the strategic
mandate & intent; Conclusion of Shareholder Compacts with SOE Boards;
establishment and usage of a Business Intelligence Dashboard for performance
reporting and analysis; Significance and materiality framework MOU; and
Standard governance documents for all SOEs.
3.1.2 The Economic Commission for Africa, Southern African Office:54
3.1.2.1 Corporate Governance; Oversight and Interference:
i. Africa’s problems have in the last forty-five years been linked to
governance issues: principally the rule or control by the State. In this
context, governance has been construed to mean political governance.
This is because economic change or transformation is dependent on the
willingness of the political elite to steer the economy in some preferred
direction.55
ii. It should, however, be pointed out that there is no economic system
which exists without government involvement and government
regulation.56
iii. Literature on corporate governance in Africa is just emerging. While
scholars in the developed economies have developed a large body of
literature on the subject, that on Africa is still very thin. The Dearth of
literature is partly due to the fact that the separation of management
and ownership of modern corporations is a fairly recent development in
large segments of Africa, as most economies were dominated by SOEs
whose ownership and management structures derived from a single
source: government.57
3.1.3 Discussion Paper: Corporate Governance in Commonwealth Authorities and
Companies- Australian National Audit Office, 1999:
 The importance of good corporate governance has been highlighted in the
private sector by the corporate excesses of the second half of the 1980s in
53
http://www.oecd.org/dataoecd/4/35/44787715.pdf )
The Economic Commission for Southern Africa”, 2007: “An overview of corporate governance and accountability in Southern
Africa”
55
Page 1
56
Ibid
57
Page 4-5, An overview of corporate governance and accountability in Southern Africa by the Economic Commission for Southern
Africa, 2007
54
Page 20
Australia and overseas and the need to meet the challenges of global
competition, technological progress and increasingly integrated financial
markets. In the public sector, recent reforms to improve efficiency and
effectiveness, such as the commercialisation, corporatisation and privatisation
of government organisations and the role of the Board in governing significant
assets, in these transformed organisations, has focused attention on the need
for various new models of corporate governance.58
 Definitions of corporate governance are many and varied. Broadly speaking,
corporate governance generally refers to the processes by which organisations
are directed, controlled and held to account. It encompasses authority,
accountability, stewardship, leadership, direction and control exercised in the
organisation. For CAC bodies, key elements of corporate governance include
the transparency of corporate structures and operations; the implementation
of effective risk management and internal control systems; the accountability of
the Board to stakeholders through, for example, clear and timely disclosure;
and responsibility to society.59
 Corporate governance is also now becoming more about formalising and
making clear and consistent the decision making processes within
organisations. An effective system of corporate governance will help facilitate
decision making and appropriate delegation of accountability and responsibility
within and outside an organisation. This should ensure that the varying
interests of stakeholders are appropriately balanced; that decisions are made in
a rational, informed and transparent fashion; and that those decisions
contribute to the overall efficiency and effectiveness of the organisation.
Despite the various attempts to define corporate governance and its elements,
there is no single model of good corporate governance. Although the general
principles are widely accepted, they are not set in concrete and must be
adjusted to reflect the specific circumstances and needs of individual
organisations. The Business Roundtable states: “Good corporate governance is
not a ‘one size fits all’ proposition, and a wide diversity of approaches to
corporate governance should be expected and is entirely appropriate. Moreover,
a corporation’s practices will evolve as it adapts to changing situations”.
The “one size fits all’ approach has also been rejected by the OECD which,
instead, has advocated the need for pluralism, flexibility and adaptability in
corporate governance. The OECD has recently reinforced this view and stated
that to remain competitive in a changing world, corporations must innovate
and adapt their corporate governance practices so that they can meet new
demands and grasp new opportunities.60
 The traditional accountability and responsibility of public sector Boards has
been, and will continue to be, made reasonably explicit in legislation such as
58
Page 1, Discussion Paper: Corporate Governance in Commonwealth Authorities and Companies- Australian National Audit Office,
1999
59
Ibid
60
Page 2
Page 21
the Financial Management and Accountability Act 1997 (FMA Act), the
Commonwealth Authorities and Companies Act 1997 (CAC Act) the AuditorGeneral Act 1997 and Public Service Act (PSA).61
 Certain aspects of the governance of CAC bodies are also subject to oversight
by such organisations as the Commonwealth Ombudsman, Privacy
Commissioner, Public Service and Merit Protection Commission, the
Administrative Appeals Tribunal and the Australian National Audit Office
(ANAO), as well as by the activities of central agencies such as the Department
of Prime Minister and Cabinet, the Treasury and the Department of Finance
and Administration.62
 Sound governance requires more than committees, guidelines and reporting
mechanisms to achieve the required results. It demands the understanding and
commitment of all those involved as well as robust control structures designed
to deliver organisational objectives.63
 Corporate governance frameworks operating in the private sector can offer a
systematic set of useful principles and methodology to support, sustain and
strengthen the mandate of Boards and CEOs in CAC bodies as well as their
accountability to their various stakeholders. However, in applying features of
the private sector models to these public bodies the nature and complexities of
the public sector need to be identified and taken into account in decisionmaking, as indicated earlier.64
 It is important to ensure that there are no conflicts between the different
pieces of governing legislation. This is normally done as a matter of course. But
where a conflict is subsequently identified, it should be brought to the
attention of the relevant Minister(s) with the objective of amending the
legislation where necessary.65
 Nevertheless, it is likely that there will always be a level of tension between
business imperatives and legislative requirements. The challenge for the Board
will be to manage these tensions in the best interests of the organisation.66
 An effective governance framework must start with the powers, roles and
responsibilities of the relevant Minister(s), Board and CEO being clearly
defined. Without such definition, clear accountability for the achievement of
objectives cannot be achieved.67
 Roles of different Oversight structures:68
61
Page 5
Page 7
63
Ibid
64
Ibid
65
Ibid
66
Ibid
67
Ibid
68
Pages 8-13
62
Page 22
3.1.3.1
Parliament: Parliament passes legislation which underpins the
operations of CAC bodies, including their functions and powers.
Parliament also has an important accountability role in reviewing the
performance of government entities.
3.1.3.2
Minister(s): Under the CAC Act, it is the responsible Minister(s), who
within the government, is/are given portfolio responsibility for a CAC
body and its legislation. The responsible Minister(s) is/are
accountable to Cabinet and Parliament for the performance of the
particular organisation. The CAC Act also prescribes certain roles and
responsibilities for the Finance Minister in relation to bodies covered.
In addition, there are also other Ministers that may have
responsibilities for broader Commonwealth policy that impacts on the
operation of a CAC body (for example, privacy and employment). The
responsible Minister(s) should exercise strategic control consistent
with their accountability to Parliament and the public.
3.1.3.3
Board: The Board is responsible for ensuring good corporate
governance, determining and approving corporate strategy and
providing guidance and oversight to senior management. It is
responsible for approving and reviewing the overall business
strategies, significant policies and structure of the organisation; has
the absolute responsibility for the performance of a CAC body in
meeting its stated objectives and obligations as a public body; and is
fully accountable for this outcome to the responsible Minister (s). The
Board must also ensure that an effective system of controls is in place
to manage, among other things, the major risks faced by the
organisation; reporting performance to stakeholders; and complying
with applicable laws and regulations. Other functions of the Board
include appointing, or recommending for appointment, the CEO and
management team and setting remuneration appropriate for
appointments; monitoring managerial performance such as ensuring
that management is monitoring the effectiveness of the internal
control system; evaluation of the CEO; evaluating its own
effectiveness; preventing conflicts of interest; and balancing
competing demands on the organisation.
 Who are the Stakeholders?69 In addition to the relationship between the
responsible Minister(s), Board and management of a CAC body, corporate
governance is also affected by the relationships among other stakeholders in
the governance system. For example, employees and other stakeholders play
an important role in contributing to the long-term success and performance
of an organisation. CAC stakeholders are many and varied. However, the
following key stakeholders can be readily identified:
69
Page 13
Page 23
o
o
o
o
o
o
o
o
o
o
o
o

3.1.4
Parliament represents citizens and passes legislation;
Minister(s) responsible to Parliament for particular CAC bodies;
Central agencies, such as the Department of Finance and Administration,
often have an interest in the performance of the CAC;
International interests treaties can impose obligations on signatories;
Citizens both the achievement of expected outcomes and financial
performance of a CAC body have an impact on the general community;
Customers commercial CAC bodies need to deliver high quality goods or
services to the customers they serve;
Employees the successful performance of the CAC impacts the job
security and professional development of the employees who work
within it;
Regulators the operation of the CAC should be in accordance with any
regulatory framework imposed;
Suppliers the long term viability of the CAC can impact the business
fortunes of those who supply it;
External review bodies such as auditors and ombudsmen effective
governance enables a more efficient and reliable accountability process;
Management by virtue of their knowledge of the organisation, they have
a vital role to play in the implementation of the strategic decisions made
by the Board and the daily running of the organisation; and
The Board itself responsible and ultimately accountable for the
performance of the CAC. The directors have a direct interest in the
success of the CAC from the point of view of organisational reputation
and their own personal, including legal responsibilities.
Essential Elements of Effective Governance:70 Effective governance in a CAC
body is supported and reinforced by key operating principles, which are
interdependent, in the following areas:
o Legislation
o Leadership;
o Management environment;
o Risk management;
o Monitoring& review; and
o Accountability.
The OECD’s Working Group on Privatisation and Corporate Governance of State
Owned Assets “Implementation Guide to Ensure Accountability and Transparency
in State Ownership- Draft Text for Public Consultation”, 2008:

“The state should act as an informed and active owner (…) ensuring that the
governance of state-owned enterprises is carried out in a transparent and
accountable manner, with the necessary degree of professionalism and
effectiveness".71
70
Page 15
Page 5, OECD Working Group on Privatisation and Corporate Governance of State Owned Assets “Implementation Guide to Ensure
Accountability and Transparency in State Ownership: Draft Text for Public Consultation”, 2008
71
Page 24

Transparency is openness to the public eye. It refers to the amount, scope,
quality, accuracy and timeliness of information which is accessible to
relevant stakeholders. By mitigating information asymmetry, thus reducing
the magnitude and consequences of the principal-agent problem,
transparency increases the capacity of outsiders to the company, such as the
owners, to monitor and evaluate the actions of managers and other insiders.
Importantly, transparency facilitates the evaluation of institutions and
makes it possible to hold them accountable with respect to their mandate
and objectives. “The most important benefits of transparency are linked (…)
to its instrumental role in enhancing the accountability of both the business
and government sector”. Being accountable is, by definition, being liable to
be called to account, answerable. Accountability is ensured by structures
and procedures that oversee and control the actions of economic and
political powers. 72

Transparency is not an end in itself but a powerful tool to improve
accountability and the overall governance regime. It is a necessary but not
sufficient condition for accountability. Transparency without accountability
is meaningless and accountability requires transparency.73
 To ensure that the state as an owner is accountable, it is thus not sufficient
that individual SOEs and the ownership entity are transparent enough
regarding their objectives, performances and practices. It is also necessary
that appropriate processes are put in place and effectively implemented to
decide on objectives, review the performance and assess practices, and that
rewards and sanctions are applied accordingly. The general public and its
representative institutions, such as the Parliaments, should feel comfortable
that SOEs are run in the interest of the general public and according to agree
upon principles and framework.74
 SOEs have a complex accountability regime for a number of reasons:75
o
o
o
o
The accountability chain is complex, including SOE management, boards,
auditors, the ownership entities, the government, the Parliaments and in
fine the general public (cf. picture below).
SOEs may have an even more complex set of objectives than private
sector corporations, since there can be a mix of policy and commercial
objectives.
SOEs are often subject to both private and public sector standards.
Moreover, in the case of SOEs, shareholders can usually not “vote with
their feet” to signal non-satisfactory performance. Exit options are
limited, and voice could only be expressed through the complex
accountability chain mentioned above.
72
Ibid
Page 5
74
Ibid
75
Page 6
73
Page 25
 SOEs are often created by moving ministerial departments out of the
government structure and into a more competitive market-based setting.
However, there is a trade-off between increased autonomy and the removal
of administrative controls. Putting SOEs outside the realm of government
structure has weakened some accountability mechanisms typical to the public
sector. The resulting accountability regime might become “fuzzy”4, blurring
the lines between market and public governance. 15. The SOEs themselves
and the civil servants that are in charge of their supervision tend to operate
under overlapping regimes of both public and market accountability. The
accountability regime of SOEs is a mix of two types with “strikingly different
legal characteristics”, including mechanisms associated with both market and
public governance.76
 Defining SOE objectives and specific targets:77 Objectives documents are
fundamental for the accountability framework for SOEs. They should be
relatively short documents clarifying high-level expectations and specific
objectives agreed upon between the ownership entity and the SOE boards. In
most cases, and particularly for partially-owned SOEs, the objectives of the
company will have to be duly approved by the general shareholder meeting.
The state will have to exercise its shareholder rights but will not be more than
a significant or controlling shareholder. In case of listed SOEs, a light-handed
touch is required as there is partial market for corporate control. Market
mechanisms then apply, as well as listing regulation. This session thus
concerns mostly fully-owned SOEs.
It is crucial that the government’s expectations of the SOE are formally,
clearly and publicly communicated. These documents might be called
“Statement of Corporate Intent”, “Shareholders’ Letters” or “Letters of
agreements”, “Memorandum of Understanding”, “Business or Corporate
Plans”, etc. They will typically contain the following information:
o An implementation Guide to Ensure Accountability and Transparency in
State Ownership a business description and a mission statement;
o Elements of the corporate vision and the overall objectives of the SOE;
o A statement of accountability (including reporting obligations);
o Based on the previous elements, broad expectations on financial and
non-financial performance with related performance indicators;
o Estimation by the board of the company’s value.
In most cases objective documents and related specific targets will be
developed on a yearly basis. However, another option is to set up targets into
a two to four years frame, with control on performance still being done
yearly.
76
77
Ibid
Page 29&30
Page 26
Objective documents also increasingly include performance indicators for
non-financial and public policy objectives, including public services and other
special obligations. These are more difficult to clearly define and tend to be
under-emphasized. Instead of clear non-financial objectives with related
indicators, some objective documents only provide strategic directions. 63.
The objective documents are shared documents between the ownership
entity and the SOE board. They are based on the corporate plans, which are
purely board documents. In some cases the objective documents might be
the corporate plans themselves. Where they contain commercially-sensitive
information, a publicly available version should also be prepared that
excludes the commercial-in-confidence material. This sensitive information
could include estimation of the SOE value.
The development of an objective document/annual targets/corporate plan is
usually the main instrument for conveying objectives to the corporation. It is
generally a collaborative process with ongoing communication between the
SOE itself (its board and CEO) and the ownership entity. The Guidelines
recommend the board to be involved in this process as it is accountable for
the SOE performance and should carry out its function of strategic guidance,
subject to the objectives set by the government and the ownership entity.
It is useful to formalise the process of developing objectives documents
through either legislation, regulation and/or a protocol (cf. the New-Zealand
process in box 16). This is instrumental in clarifying the requirements in terms
of content, timeframe and respective responsibilities and powers.78
One important question which has to be decided upon in such a formal
document is who has the final word in case of disagreement.
 Negotiation of corporate objectives in New-Zealand:79 The main steps in the
business planning cycle are:
o Shareholding Ministers write to each Crown company board before the
beginning of each planning round to detail the information requirements,
the timing (milestone dates) and any special issues the company is to
address during the planning round;
o Boards are then required to: assess their business environment; reassess
their strategic direction; provide a detailed plan for the immediate year;
and provide financial projections for the following 2 to 4 years;
o Following the delivery of the boards‟ outlook and business plans to the
shareholding Ministers, advisors then prepare a report on these
documents for the shareholding Ministers‟ consideration. Draft SCIs are
delivered together with the business plans. The SOE Act, the CRI Act and
other relevant company-specific legislation require boards to deliver
their draft SCIs to shareholding Ministers at least one month before the
end of each financial year;
78
79
Page 32&33
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o
o
o
o
o
Shareholding Ministers may then, through their advisors, seek further
information;
Shareholding Ministers then consult with boards on any issues or
concerns they have with the business plans and draft SCIs. This occurs
either by letter or, more often, meetings between shareholding
Ministers, advisors and the board (referred to as the business planning
meeting);
Following the business planning meeting (if held) shareholding Ministers
write to boards outlining their understanding of the main outcomes and
issues discussed.
Boards then consider the outcomes from business planning meetings
and the shareholding Ministers‟ written comments, and if necessary,
revise their business plans and SCIs. Boards then deliver to shareholding
Ministers finalised business plans and SCIs;
Shareholding Ministers table the finalised SCIs in the Parliament.
 Developing objective documents is a complex task which requires industry
knowledge as well as strong financial modelling skills. It also requires a certain
level of operational experience to determine the key levers of performance
and the time frame in which it is reasonable to expect results. The
combination of this industry knowledge, financial capability and operational
experience should be present in SOE boards, and reflected also within the
ownership entity to allow informed and balanced dialogue on the
development of objective documents. To negotiate as an informed owner, the
ownership entity should develop appropriate knowledge of the industry,
based on research and analysis as well as the history of dialogue with and
feedback from the SOE boards. It could also seek inputs from consultants or
other experts.80
 The whole process of defining and agreeing on objectives raises also
important questions about the respective roles of the board and the
ownership entities. The fact that objectives have to be officially approved, and
that in some cases boards might not even have the final say in case of
disagreement, can be perceived by the boards, and rightly so, as an
usurpation of their authority. This could also lead to reduced accountability by
the board, especially when strategic issues are addressed. It is thus critical to
ensure an appropriate definition of respective roles in the process of defining
objectives and ensures that it will maintain appropriate board
accountability.81
 Advice on how to review and challenge SOE corporate plans in Canada Based
on 1996-2000 reviews, the review of the governance of SOEs by the Auditor
General advises the government to review and challenge the corporate plans
by asking itself a series of typical questions, as follows:82
80
Ibid
Ibid
82
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81
Page 28
o
o
o
o
o
o
o
o
Has the corporation properly interpreted its mandate?
Are the corporation’s objectives, strategies and targets appropriate and
do its performance indicators provide a strong basis for holding it in
account?
Are the trade-offs the corporation has made between its commercial
objectives and its public policy objectives reasonable?
Do its performance targets sufficiently “stretch” the corporation?
Has the plan taken government priorities into account?
Is the corporation capitalized appropriately, and are targets for dividends
and return on equity appropriate?
Has the corporation met its past performance targets?
Is there a need to assess whether the corporation’s mandate is still
relevant?
 Letters of expectations in British Columbia in the British Columbia model, the
minister responsible for the Crown Corporation, as the representative of the
government, communicates broad strategic direction and expectations as
determined by the Cabinet. This direction and formal expectations for the
Corporation are communicated annually in a “letter of expectations” that is
also signed by the Crown corporation board’s chair and made public. This
letter also identifies actions the government will take to assist the Crown
Corporation in achieving mandate and operational objectives. The minister
responsible for the corporation is the voice of the government. By playing a
role in establishing the corporation’s direction and the government’s
expectations of it, the minister is reflecting the expectations of the owners
and there is a basis for accountability for the corporation’s actions. In this
model, the minister does not take over the role of the board but
communicates formally and publicly the performance that the government
expects from the corporation. The board is responsible for governing the
corporation within that framework.83
3.1.5
83
South Africa and the Lessons learnt from the international benchmark principles
discussed above:

When developing SOE oversight framework, Government should bear in
mind the two levels that the OECD is espousing: enterprise-level oversight
bit also: the industry and the sector that the SOE operates in. Effectively, this
is recognition that oversight should be such that it does not have an adverse
effect in the SOE itself (which is what this paper (predominantly focuses on)
but also the sector and industry.

Interestingly, the OECD makes reference to most of the instruments being
applied in the South African Government: strategic mandate & intent;
Conclusion of Shareholder Compacts with SOE Boards; establishment and
usage of a Business Intelligence Dashboard. All these oversight instruments,
although in existence in some Government oversight institutions, are not
Page 36
Page 29
effective as they applied uniformly, or overseen by oversight units with the
requisite capacity and skills base.

As correctly noted by the Economic Commission for Southern Africa, there is
no economic system which exists without government involvement and
government regulation. SOEs as instruments of economic growth in South
Africa are no exception. Therefore the concerns that Government should not
play an active role in SOEs (which it owns) is misplaced.

A view expressed in the discussion paper on corporate governance in
Commonwealth Authorities and Companies by the Australian National Audit
Office discussed herein to the effect that the traditional accountability and
responsibility of public sector Boards has been, and will continue to be,
made reasonably explicit in legislation, is supported. Therefore South African
Government legislation based oversight practices are not unique to this
country. Legislation has the advantage of bringing about uniformity. The
limitation in South Africa is, as detailed on the G&O’s SOE Legislative
Frameworks discussion paper, is the multiplicity of SOE legislation as well as
the embodiment of varied and multiple oversight provisions therein.
Legislative reforms will ill bring about consolidation in this regard, but still
position legislation as a basis for future SOE oversight.

The discussion paper on corporate governance in Commonwealth
Authorities and Companies by the Australian National Audit Office also
highlights a key issue from which a lesson can be learnt ion strengthening
SOE oversight in South Africa: identifying which stakeholders are key in the
corporate governance/ oversight value chain: Parliament represents citizens
and passes legislation; Minister(s) responsible to Parliament for particular
CAC bodies; Central agencies, such as the Department of Finance and
Administration, often have an interest in the performance of the CAC;
International interests treaties can impose obligations on signatories;
Citizens both the achievement of expected outcomes and financial
performance of a CAC body have an impact on the general community;
Customers commercial CAC bodies need to deliver high quality goods or
services to the customers they serve; Employees the successful performance
of the CAC impacts the job security and professional development of the
employees who work within it; Regulators the operation of the CAC should
be in accordance with any regulatory framework imposed; Suppliers the
long term viability of the CAC can impact the business fortunes of those who
supply it; External review bodies such as auditors and ombudsmen effective
governance enables a more efficient and reliable accountability process;
Management by virtue of their knowledge of the organisation, they have a
vital role to play in the implementation of the strategic decisions made by
the Board and the daily running of the organisation; and The Board itself
responsible and ultimately accountable for the performance of the CAC.
There is therefore uniformity in knowledge of which stakeholders are key in
SOE governance. In South Africa, the roles of Parliament (already discussed
Page 30
herein), the A-G, Regulators, Other Ministries, etc. needs to be clearly
articulated in the future SOE oversight framework.

3.2
Interference vs. Intervention: The OECD’s Working Group on Privatisation
and Corporate Governance of State Owned Assets “Implementation Guide
to Ensure Accountability and Transparency in State Ownership- Draft Text for
Public Consultation” confirms that the issue of Government’s activist role in
SOE oversight is justified. They state that “the state should act as an
informed and active owner”. This therefore is not unique to South Africa.
South African Experience( Good and Challenges/ Problems) with the current SOE
Oversight Practices and Frameworks:
3.2.1
Government Official sitting in Boards: This, as a form of exercising
oversight: Why Should Public Servants and Ministers Be Precluded from
Serving on State-Owned Enterprise Boards:84 Because it creates conflicts
of interest. Public servants and ministers are typically very capable
administrators who are appointed to formulate and implement
government policy. There are inherent conflicts of interest in marrying this
oversight role with the management role of a state-owned enterprise
(SOE) director: Ministers who are both SOE chairs and responsible
ministers violate a basic principle of good governance: SOE ownership
functions (as exercised by the responsible or shareholding ministry) should
be kept separate from SOE management functions (as performed by the
board of directors). Senior public servants who serve on an SOE board also
violate the principle of separate ownership and management, particularly
if they have any public service responsibility for the area in which the SOE
operates. It is impossible for public servants to monitor SOEs effectively if
they report to ministers or more senior public servants who serve on the
boards of those SOEs.
3.2.2
Government’s role as policy maker, custodian of national revenue fund,
regulator and shareholder:
 SOE Oversight by Government institutions playing multiple roles
(ownership and oversight; regulatory, policy-making) is weak. This is
mainly due to split focus by the Government institutions in carrying out
these multiple roles.
 Different roles played by one Government institution means they have
to have adequate capacity and resources to play each role excellently.
This is not the case in South Africa and the resources are spread and
stretched within one institution to play these multiple roles. Ultimately,
some of these roles suffer, and oversight is one such casualty. As
84
Asian Development Bank “Finding Balance- Making State-Owned Enterprises Work in Fiji, Samoa, and Tonga, 2009”, Page
Page 31
observed by the DBSA’s municipal entities’’ report, unless the issue
oversight is well-managed, it remains a potential source of discontent
and frustration.
 This therefore gives credence to the principle of separation of different
Government roles. Such separation will be the first step towards SOE
oversight reforms and improvement. Multiple government roles
confuse SoEs, which are unable to what is expected from by
Government as: shareholder, regulator, and policy-maker; Roles and
responsibilities of different Government departments/ institutions (in
relation to SoEs) are not clearly delineated with the resultant confusion
of the rights of the departments and the reporting and accountability
lines by SoEs.
3.2.3
Role of National Treasury in current SOE Oversight:
 National Treasury plays a number of roles in Government: It is a policy
ministry and drives policies in this regard throughout the different
Government institutions, including SOEs. In addition, National Treasury
plays an ownership/ oversight role over some SOEs assigned to its
control.
 National Treasury is a classic institution where the different
Government roles are blurred, thus positioning it as a super
Department (which is very powerful).
 Although National Treasury is on record as stating that it is no longer
pursuing wholesale amendments to the PFM Bill( which Bill embodies
extensive ownership, governance and oversight provisions), its strategic
plan state otherwise.
 National Treasury’s current role described herein does, or may trigger a
perception that, as a dispenser of SOE grants, it “holds a stick” against
all SoEs, thus raising questions as to the existence of operational
autonomy of SOEs/ public entities.
 Accordingly, National Treasury is currently a “referee and a player”, and
its continued role in this regard needs to be reviewed.
3.2.4
Role of DPE as an SOE oversight Institution:
 DPE is a pocket of excellence in SOE oversight practices. This is chiefly
Page 32
because, unlike other Government institutions playing these roles, such
instruction also play other roles such as ownership, regulatory and
policy-making.
 In DPE;’s case their focus has always been ownership and oversight over
SOEs. As evidenced by the studies undertaken by that Department and
relatedly, literature on numerous subjects related to ownership and
oversight, they have precisioned this role over the years.
 This illustrated by a presentation they made at Parliament:
o
o
o
o
At the Standing Committee on Labour: Briefing by Department of
Public Enterprises on Risk Management Plans of all State-Owned
Enterprises on 2 November 2010:85 They stated that, in terms of
shareholder expectations and governance framework, the DPE had
a statutory mandate to conduct oversight over SOE’s and ensure
the implementation of the Public Finance Management Act
(PFMA), the National Treasury Regulations and other applicable
legislation, such as company law. The DPE governance tools
included the strategic intent statement, the shareholder compact,
investor briefs, the corporate plan, quarterly reports and board
performance evaluations and attendance records of board
members.
They further stated that, for the strategic oversight of SOE’s, the
Department had developed additional performance monitoring
and evaluation systems, such as the strategic intent statements,
which was a primary communication tool of the State’s
expectation of the SOE strategy. Investor Briefs was another
development by the Department and were issued by the Minister
to the boards of SOE’s on a quarterly basis to advise performance
trends and highlight the need for corrective action in the event of
any deviation from the agreed key performance areas and
indicators.
Performance monitoring and evaluation by the Department
included the obligation to review the performance of SOE’s on a
quarterly and annual basis and to conduct a corporate plan risk
assessment in respect of the strategic objectives of the SOE.
In terms of risk management, the Department had developed a
comprehensive risk management framework, which would
improve planning processes by enabling the key focus to remain on
core business and helped to ensure the continuance of service
delivery, improved efficiency and general performance and
improving accountability and governance as well as reducing the
risk of potentially costly surprises.
The detailed exposition with which this Department articulated
85
http://www.pmg.org.za/report/20101103 -shareholder-oversight-and-risk-management
Page 33
issues of oversight clearly positions it as a basis for future SOE
oversight.
3.2.5
Government Interference vs. Intervention:
 Rightly or wrongly, Government as owner of SOEs is often criticised or
interfering with the affairs of the entities/ SOEs. This review revealed
widespread concerns about what is branded Government interference.
 The criticism may have a basis due to the absence of uniform oversight
framework/ practices. Once the role of Government in exercising
oversight is refined and clearly articulated, the widespread perception of
Government’s interference will, from an oversight perspective, be
minimised.
 Government’s shareholder activism/ hand-on approach to SOE affairs is
often misconstrued to mean interference. Such a role by Government is
justified and therefore necessary. However, in order to dispel perceptions
of interference, such role must be clearly articulated and be known
(transparency).
 This view is particularly prominent in relation to the Board and CEO
appointments. The issue of CEO appointments is, by law, a key ownership
prerogative: Board and CEO appointments are the responsibility of
Government as a shareholder.86
 As is evident in foreign jurisdictions such as Australia, the Board plays a
role in the appointment of the CEO. However the Minister/ Owner
approve.
 If there was no legislation as to who appoints the Board and CEO, then
the concerns raised in the public submissions would be justified. Given
that the Board and CEO appointments are, in effect, law, the criticisms in
the public submissions appear to be influenced by what King III states in
relation the issue of CEO appointments, which is similar to what the
System Act states.
 If indeed there is such interference or the perception thereof, it is
because of the absence of a coherent, clear ownership policy. The
introduction of this will clearly outline the respective roles of
Government as a shareholder, and the SOE Boards.
 Future legislation, SOE Governance Framework will complement the
ownership policy in this regard.
3.2.6 Collaboration& Cooperation- Government Institutions:
For example, the definition section of the PFMA defines “ownership and control” to mean Government’s power to appoint the SOE
Boards and CEOs.
86
Page 34
 Key to effective SOE oversight is cooperation and collaboration between
Government Institutions with an interest in the SOEs (i.e. policy,
regulation, shareholding roles). This is currently weak in South Africa.
 Government Institutions playing a leading oversight role must be
required to have structured, documented collaboration, cooperation and
consultative arrangements with other Government Institutions having an
interest in SOEs.
 Strategic Plans of Government institutions (irrespective of role) should, in
relation to SOE plans, and just like DPE’s, contain key performance
indicators on inter-Government institution collaboration and
cooperation. Government institutions playing on oversight role over SOEs
must be measured thereon on an annual basis by Parliament.
3.2.7 Shareholder’s Compacts:
 Literature review, engagements and interviews held with Government
Institutions, Parliamentary Committees and SOEs show that
shareholder’s compacts have not been successful in the oversight of
SOEs. These, as well as codified strategic plans as a means of overseeing
SOEs does not work and need to be reviewed.
 As rightly observed by DPE-commissioned ENS, in practice it has been
difficult to for Government to enforce this Regulation both as regard
reaching the agreement timeously with the Boards of each applicably
public entity and as well as holding the accounting authority accountable
based on the key performance indicators set out in the compact.
 The question that arises is: why have shareholder’s compacts (and
relatedly strategic plans for non-business entities) failed? They have
failed because:
o By its very nature, a compact is a contract/ agreement. Because it is
an agreement, principles of contract law come into the picture:
parties have to agree to the terms sitting therein, and cannot be
forced/ concerned into agreeing with any term.
o In a contract parties are equals. The relationship between
Government as shareholder/ owner and the entities cannot be an
equal one. Because of this “equality” being brought about by this
contract, SOEs can, and most do, refuse to enter into any clause/
targets that they do not agree to, and Government cannot do
anything about it.
o SOE targets and KPIs are very complex and talk to the heart of SOE
operations. The technical nature of these is such that SOE officials
and Government officials do not come to the table as equals in
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o
terms of technical expertise and knowledge, or even sector
knowledge. As such they are swayed by the sheer knowledge of SOE
officials negotiating compacts with them. Therefore unless the
Government officials have the requisite skills base and knowledge,
then it will be difficult for Government to clearly assert its
expectations through the compact. In order for Government to
attach such expertise it has to pay well. Government remuneration
trends/ practices are such that it cannot always attract the very best
in the market, therefore SOEs will always have an upper hand when
it comes to what should sit on compacts as KPIs.
There is no evidence of Government ever have taken steps against
any SOE Board for having failed to sign the compact. This is so
because in most instances it is not the SOE that fails to sign, but
Government itself. Therefore this brings about general noncommitment to signing these as no consequences arise therefrom.
Thus its effectiveness as a supervisory tool has been limited to date. The
continued usage of these as oversight instruments need to be reviewed
given its ineffectiveness
3.2.8
Ownership vs. Oversight: There is confusion as to what constitutes
ownership and oversight. Therefore it is important that attributes of the
Government’s oversight role be clearly articulated and documented. This
will bring about uniformity in unde4rdtanding and application between
Government Institutions playing this role.
3.2.9
Role of Legislation in informing, shaping or being the basis of current and/
or future Government’s oversight over SOEs:
 The G&O discussion paper on SOE legislative Frameworks demonstrated
how the effectiveness of SOE legislative frameworks could be the
solution to weak ownership practices, irrespective of models.
Accordingly, legislation, and not necessarily the shareholder
management model, determines the effectiveness/ success or otherwise
of Government’s role as owner. Australia is a typical case in point where,
despite not having adopted a centralised shareholder management
model is effective in its ownership practices based on the effectiveness of
legislation.
 Accordingly, legislation should, going forward, be a key ingredient of
Government’s ownership policy, and should drive its ownership model,
whatever it is.
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
As correctly stated by the DPE-commissioned ENS Report SOE Founding
legislation is that it contains additional SOE-specific restrictions on power
or authority or additional procedural requirements for transacting that
would not exist were SOEs regulated only by general legislation such as
companies’ statutes or the PFMA. In addition certain founding states
regulate matters that are already regulated by company law, resulting in
regulatory duplication. For instance, the Minister of Transport in
exercising oversight over the entity, is given effect by, inter alia, Chapter 3
of the South African Maritime Safety Act which states that the entity
must submit a business plan, and a financial plan to the Minister of
Transport.87 The Airports Company Act as well requires the entity to
submit a business plan and an annual report to the Minister of
Transport.88 Likewise with the Western Cape Gambling and Racing
Board.89This is in addition to reporting requirements as contained in the
PFMA. The list of such legislative provisions in SOE Founding Acts is not
exhaustive.90
Therefore oversight measures should be stripped/ excised from SOE
Founding Acts so that there is uniformity in content and application. SOE
Found Acts should focus on policy and mandated--related issues.
3.2.10 Protocol on Corporate Governance:
 Professor Gumede and Nkonki Inc. in their reviews referred to above,
make reference to this oversight instrument developed by the
Department of Public Enterprises.91 This document is outdated: not only
has King II been replaced by King III, but the Companies Act has also once
been replaced by a new one.
 A need to have an overarching SOE Governance framework is being
discussed in G&O’s paper dealing with future SOE Governance
Frameworks, and will therefore not be dealt with in much detail herein.
 It is however important to state that there is a need for a review of this
Protocol to give effect to unique and nuanced principles governing SOEs
as King III does not adequately do so despite stating that it is applicable
to SOEs as well.
3.2.11 Board and CEO evaluations:
87
Sections 28, 29 and 30 of the SAMSA Act, 1998( as amended)
Section 7&* of the ACSA Act, 1993(as amended)
89
Section 21 of the Western Cape Gambling and Racing Act of 1996
90
E.g. See the Transport Agencies General Laws Amendment Act, 2007, which is replete with oversight provisions impacting on
numerous SOEs reporting to the Department of Transport, notably sections 5 and 6 of that Act.
91
Released in September 2002 pursuant to the release of King Code II
88
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 There is currently no legislative injunction for SOEs to conduct Board and
CEO appraisals and report same to the oversight institution relevant to
that SOE.
 This practice is therefore voluntary and not uniformly applied by SOEs:
even those that do, do so at their instance and not at the instance of the
oversight Government institution.
 It is our submission that these should be codified so that SOE Boards
know that, in addition to the compact or strat plan. Corporate plans,
annual reports and quarterly reports, Board and CEO appraisal must be
compulsory and the oversight institutions are to act thereon.
3.2.12 Lack of feedback on Oversight Instruments in place:
 The Nkonki Report documents frustrations expressed by SOEs of being
subjected to reporting and accountability measures for which they never
receive feedback from Government as a shareholder.
 Lack of feedback by Govt may be indicative of a number of possibilities:
either there is no capacity in Government Oversight Units to effectively
interrogate SOE-specific information, understand it, monitor compliance
therewith and revert back to SOEs thereon; Government Departments
use such reporting as a pre-condition to releasing SOE subsidiaries/
financial allocations; SOE reporting is simply a tick-box exercise without
any value-add to SOE performance; or a combination of all these factors.
 Indeed lack of feedback renders the SOE accounting and reporting and
oversight of SOEs insignificant of no importance. This therefore may, or
have, resulted in SOEs also reporting “for the sake of reporting”. As cited
by the Nkonki Report, National Treasury does fare better in this regard,
and give feedback to SOEs on the reports that it submits to that
Government Department.
 Future SOE oversight framework should be such that Government
Departments are held accountable on the quality of oversight and
feedback they give. Also, as suggested by Professor Gumede, the various
levels of oversight, whether it is strategic, policy or shareholder, should
be clarified and codified in formal terms of reference and memoranda of
understanding to ensure clarity is achieved.
3.2.13
Oversight Units in Government Institutions:
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3.2.14

Nkonki Inc. reports of a recent development in the Department of
Transport in terms of which the SPOE oversight Unit in that
Department was dismantled and the functionaries therein posted in
various sector units in that Department.

Nkonki Inc. further reports at the differential approach to the
staffing of such oversight structures on oversight departments,
where in some instances only one official is tasked with the exercise
of SOE oversight.

It is our submission is that a Government institution playing multiple
roles (including oversight) means its resources have to be split to
give effect to these different roles.

The question that arises is whether there is a fair spread of
resources and staffing of the different units giving effect to these
roles. Clearly, a policy Ministry having one official exercising an
oversight role over SOEs is indicative of how misunderstood the
importance of this function is. These are the issues that Government
needs to monitor in Government Institutions (i.e. whether there is
sufficient capacity/ resources allotted to SOE oversight).

Until such time that oversight is taken seriously and those tasked
with supporting Executive Authorities in that function are
adequately trained and resourced, oversight over SOEs will suffer.
This therefore gives credence to the separation of these different
Government roles going forward, so as to ensure that the oversight
function received a focused, well-resourced and capacitated
attention.
Cost of SOE Oversight:
 This is the one matter that is under-stated. The DPE’s strategic plan
breaks down the costs of SOE oversight per each of its units. This
reveals that effective SOE oversight comes at a cost. None of the
other SOE strategic plans embody information on the cost of
exercising SOE oversight.
 Examples of costs of SOE oversight are: Oversight Government
Institutions needs to attract, recruit and retain talented, highlyqualified functionaries who could analyse and advise the respective
Executive Authorities, engage SOEs effectively in exercising oversight
Page 39
function. Such expertise do not come cheap; these are the same
individuals whom SOEs could recruit at far better salaries and levels of
seniority than Government can. Secondly, ongoing training and
capacity-building on SOE sectors is crucial so that the functionaries
can be able to analyse sector-specific information that SOEs present
to them.
 DPE for instance has established sector- based units so as to have
focused SOE oversight per sector/ function,92 such as Energy and
broadband, 93Legal& Governance, 94 Manufacturing, 95 and Transport
enterprises.96
3.2.15
Oversight over subsidiaries: Government or SOE: There is dearth of
literature on how best to exercise oversight over SOE subsidiaries. There
is very little(if at all) reporting by SOEs on tea fairs of the subsidiaries that
they own
It is our submission that the development of future oversight framework
should take into account the governance and oversight of SOE
subsidiaries in line with a detailed exposition of issues related to SOE
subsidiaries as per the G&O paper on this subject.
3.2.16
4
Lack of oversight over unlisted Government Institutions not falling within
the purview of SOE Legislative Frameworks (e.g. Universities, Sports
Bodies, etc.): There are institutions that are either partially or fullyowned by Government; and/or partially or fully funded by Government
and yet not being under the remit of SOE legislative frameworks, as well
as oversight by Government. These are not even listed in any SOE
legislation. It is pour submission that future SOE oversight framework
must also extend to these.
Policy Options
4.1 Should Government’s oversight role be separated from other Government roles (such
as policy-making and regulation)?
4.2 Should the current Oversight Instruments be retained in their current form OR should
they be changed?
92
See SOE Strategic Plan which lists different oversight units within that Department:
Page 15
94
Page 18
95
Page 21
96
Page 25
93
Page 40
4.3 Should there be a stand-alone oversight framework covering all three spheres of
Government OR should it be subsumed into the SOE Governance Framework?
4.4 Should SOE oversight be centralised or should the status quo remain?
4.5 Should National Treasury continue to play a non-financial role over SOEs OR should its
oversight role be limited to fiscal management and compliance oversight over SOEs?
4.6 Should SOE oversight be codified OR not?
4.7 Should the oversight framework cover entities owned by Government but not under
the purview of SOE legislation?
4.8 Should Government, as a way of exercising its oversight role over SOEs, deploy
Government officials to sit on SOE Boards.
4.9 Should the SOE oversight framework cover subsidiaries of SOEs OR oversight of
subsidiaries should be left to SOEs?
4.10 Should the future SOE oversight framework also include how oversight Government
institutions are held to account on their oversight of SOEs OR not?
5
Recommendations
5.1 Government’s primary SOE oversight role, currently residing with the majority of
Government Institutions which also play other roles, should be separated from policymaking and regulatory Government Institutions. However these Government
Institutions (playing a policy or regulatory role) must be consulted in the exercise of
SOE oversight.
5.2 National Treasury must not play any on-financial oversight role over any SOE, in line
with the principle of separation of Government roles. The role of National Treasury in
relation to oversight of SoEs should be strictly in relation to fiscal and financial matters
affecting SOEs, but in consultation with other Government Institutions playing other
roles and with an interest in SOE performance.
5.3 There must be an SOE oversight framework developed, which should become part of
the future SOE Governance framework (possibly the revamp and update of the Protocol
on Corporate Governance). This oversight framework must clearly outline the roles of
the different stakeholders: primary and secondary, in the SOE oversight.
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5.4 The future SOE Governance(oversight) framework must not allow the sitting of
Government officials on SIE Boards as that is laden with multiple governance problems,
including but not limited to: perceived Government interference in enterprise-level
matters.
5.5 In line with PRC recommendations on the future centralised seat of SOE ownership and
governance, SOE oversight should also be centralised. Possible oversight Government
institution is the Department of Public Enterprises. In exercising this role it should do so
with due regard to principles of collaboration and consultation with other Government
Institutions having an interest in SOE performance.
5.6 All entities owned by Government, including those currently not falling under the
purview of SOE legislative frameworks, should in future also be subject to the same
oversight measures as other SOEs.
5.7 The future SOE oversight framework should explicitly and in detail cover subsidiaries of
SOEs. There should be transparency in the operations of subsidiaries, and how they are
being run by parent SOEs.
5.8 The future SOE oversight framework should explicitly in in great detail include the
measurement of the effectiveness and otherwise of the oversight by Government of
SOEs.
5.9 The future SOE oversight framework should be underpinned and/ given effect to by
legislation.
5.10 Shareholder’s Compacts as an instrument for SOE oversight have failed and should be
done away with. On an annual basis Government should communicate in writing its
strategic intent and expected delivery by each of its SOEs therein. This should be
underpinned by consultation (not negotiation or contracting).
-End-
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REFERENCES
Public Finance Management Act, 1999
Municipal Systems Act, 2003
Municipal Finance Management Act 2003
SAMSA Act, 1998(as amended)
ACSA Act, 1993(as amended)
Western Cape Gambling and Racing Act of 1996
Transport Agencies General Laws Amendment Act, 2007
Constitution of the Republic of South Africa, [No. 108 of 1996], G 17678, 18 December 1996
http://www.pmg.org.za/report/20101103-shareholder-oversight-and-risk-management
http://www.oecd.org/dataoecd/4/35/44787715.pdf )
www.worldstatesmen.org/South_African_homelands.html
Asian Development Bank “Finding Balance- Making State-Owned Enterprises Work in Fiji, Samoa,
and Tonga, 2009
OECD Working Group on Privatisation and Corporate Governance of State Owned Assets
“Implementation Guide to Ensure Accountability and Transparency in State Ownership: Draft
Text for Public Consultation”, 2008
An overview of corporate governance and accountability in Southern Africa by the Economic
Commission for Southern Africa, 2007
Discussion Paper: Corporate Governance in Commonwealth Authorities and CompaniesAustralian National Audit Office, 1999
DPE Strategic Plan: 2011-2014
William Gumede (Wits University, P&DM) and Christoph Braxton (PwC) State-owned Enterprises:
Governance responsibility and accountability Public Sector Working Group: Position Paper 3
(Draft 8)
National Treasury “Governance Oversight Role over State-Owned Entities” by Higgo Du Toit:
Dated 25 November 2005,
DBSA: “Synthesis Report Final Draft: Evaluating the efficiency and effectiveness of municipal
entities as a service delivery mechanism” 29 September 2010
Department of Public Enterprises’ (DPE) Centralised Shareholder Management Concept (CSM),
2010
Edward Nathan and Sonnebergs “legislative Review Project” 2010
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