5 March 2012
G&O Position Paper: Ownership
1. EXECUTIVE SUMMARY OF THE PAPER
2. BACKGROUND
2.1.1 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:
“Ownership of SOEs”
The State’s ownership interest in SOEs is represented by Government through
different institutions: Shareholder Minister/ Municipalities. Within the National
and Provincial Government spheres, this is in most cases1 represented by Policy
Ministries that also double up as Shareholder Ministers. 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: 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. Over and above these founding Acts there are other laws that
apply to public entities/ SOEs. These are collectively referred to as the SOE
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
legislative framework/s. By and large, these are the key instruments that
Government uses in establishes these SOEs and disestablishing them, and in
exercising its ownership over them.
There is currently no overarching Government SOE ownership policy and/ or
framework which form the basis for any Government institution playing an
ownership role over SOEs, doing so in a manner that is uniform across the different
Government institution playing this ownership role. The focus of this paper
therefore will be on closely examining Government’s role as an owner 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.
In examining this vexing issue, three key questions have to be answered:
2.1.1.1 Why does the State own SOEs/ public entities? Literature suggests that
theoretical justifications for SOEs include:6

Natural monopoly: due to the technical requirements of an industry.
Examples: railways, water, electricity.

Capital market failure: private sector investors may refuse to invest in
industries that have high risk and/or long gestation period.

Externalities: where private sector investors do not have the incentive to
invest in industries which benefit other industries without being paid
for the service. Examples are steel and chemicals.

Equity: profit-seeking firms in industries that provide basic goods (e.g.
telecommunications, electricity, transport) may refuse to serve less
profitable customers such as poor people or people living in remote
areas (Chang 2000).
By and large we submit that South African Government in one way or the other
uses SOEs for the same rational outlined above. In doing so however, and as will be
demonstrated herein, it is not driven based on an overreaching strategy for SOEs,
and relately, in a consistent and uniform manner. Therefore, the Government
strategy (if any) for SoEs in Western Cape is not the same as the Gauteng one, or
ones driven by each of the Ownership Ministries nationally. Likewise with the
ownership of local government/ municipal entities.
2.1.1.2 Should the State own SOEs? Despite the theoretical justifications for SOEs
and the many examples of well-performing SOEs, not many SOEs are wellrun. Why? The most popular explanation contains two elements: the
6
DPE Presentation to the PRC: G&O Seminar, 19 November 2011, Slide 6
Page 2
principal-agent problem and the free-rider problem, both based on the
assumption of self -seeking individuals.7
An SOE is, by definition, run by managers who do not own the firm. Given
the self-seeking nature of humans, the argument goes; no SOE manager
will run the firm as efficiently as an owner-manager would run his own
firm. This problem would not exist if the citizens, who are the owners
(principals) of SOEs, can perfectly monitor the SOE managers (their
agents). However, because it is inherently difficult to verify (although
managers know) whether poor enterprise performance is due to shirking
by the managers or circumstances beyond their control, monitoring by
principals will always remain imperfect, resulting in inefficient
management. This is called the principal-agent problem.8
While the principal-agent and free -rider problems are real, and can be
very important in explaining poor SOE performance, they also apply to
large private enterprises with dispersed ownership. If the private
enterprise is run by hired managers and if numerous shareholders own
small fractions of the company, the hired managers will also have an
incentive to put in sub-optimal (from the shareholders’ point of view)
levels of effort, while individual shareholders do not have enough
incentive to monitor the hired managers. In other words, the monitoring
of hired managers is a “public good”, whose provision is a problem for
both SOEs and private -sector firms. In fact, under certain circumstances, it
may be easier to monitor SOEs than to monitor private sector firms with
dispersed ownership. On the one hand, the public, comprising taxpayers
whose contributions will be squandered if SOEs are inefficiently managed,
has at least as great an incentive to discipline errant SOE managers as do
shareholders in the private sector. On the other hand, the centralized
governance structure within which SOEs operate makes it easier to
monitor them. In the SOE sector, there is often one, or, at most a few,
clearly identifiable agencies responsible for monitoring SOE performance,
e.g., relevant ministries, public holding companies, government audit
board, dedicated SOE supervisory agency, whereas dispersed shareholders
of private enterprises cannot take concerted actions unless there are
some shareholders that are large enough to unilaterally provide the
“public good” of monitoring. Indeed, we may say that governments are
set up to solve “public good problems”, of which monitoring of hired
managers (of SOEs) is an example.9
More importantly, the fact that many companies, both private and state owned, are well managed despite dispersed ownership suggests there is
more to the good management of an enterprise than giving individuals the
7
Page 14, Ha-Joon Chang: “Policy Notes: State-owned Enterprises Reform” United Nations Department for Economic& Social
Affairs(UNDESA), 2007
8
Ibid
9
Page 14&15 of the UN paper on SOE Reform
Page 3
right material incentives. Individual self-interest is not the only thing that
drives humans. People working in an enterprise are motivated not simply
by “selfish” things like their own salaries and power but also by loyalty to
the enterprise, a sense of obligation to their colleagues, commitment to
workmanship, honesty, dignity, a work ethic, and many other moral
values. When it comes to SOEs, there may be additional motives that need
to be taken into account, such as nationalism, dedication to public service,
concern for social justice, pride in working for a “leading” company, and so
on. These motives matter and we ignore them at our peril.10
If there is relatively little difference between the internal workings of SOEs
and those of private enterprises with widespread ownership, can there be
other factors that differentiate them? One obvious candidate is the socalled soft budget constraint that SOEs are typically subject to, due to their
status as public enterprises. The argument is that, being part of the
government, SOEs are able to secure additional finances if they make
losses and get rescued with public money if they are threatened with
bankruptcy. In this way, it is argued; SOEs can act as if the limits to their
budgets are malleable, or “soft”.11
The term, soft budget constraint, was coined by the famous Hungarian
economist, Janos Kornai, to explain the behaviour of socialist enterprises
under central planning, but it can be applied to SOEs in capitalist
economies too. For example, the existence of “sick enterprises” in India
that never go bankrupt is the most frequently cited example of the soft
budget constraint of SOEs. It is true that politically-generated or politicallysustained soft budget constraints encourage lax management, and
therefore need to be “hardened”. However, it should also be noted that
the soft budget constraint is not simply a consequence of the ownership
status of SOEs. If they are politically important enough, e.g., large
employers or politically sensitive industries such as armaments or
hospitals, private firms can also have soft budget constraints, although it
may be reasonable to argue that an SOE will find it easier to get political
support than a private enterprise.12
Having acknowledged the existence of soft budget constraint, it has to be
emphasized that it does not have to make the managers of SOEs lazy.
Why? If professional managers, whether they are running an SOE or a
private enterprise, know they will be severely punished for poor
management, say, have their salaries cut or even lose their jobs, they will
not have the incentive to mismanage their firms (Chang, 2000). Indeed, if
we believe in unadulterated self-seeking, what matters to the managers is
their personal welfare, and not whether their company survives thanks to
government bail-out. If they know they will be sanctioned for poor
10
Page 15 UN paper on SOE Reform
Ibid
12
Page 15&16 UN paper on SOE Reform
11
Page 4
management, the possibility of government bail-out for their firms is
unlikely to induce mismanagement.13
The excerpt extensively referred to hereinabove, is taken ipsissima verba
from the UN document as it has direct relevance to the issues that plague
SOE and the manner they are being run in this country: it raises issues that
probably explain why in South Africa SOEs fail. This issue (why
Governments own entities) also touches directly on the widespread
accusation that Government interferers in the Board and CEO
appointments: It is therefore arguable that having a closer involvement by
Government as a shareholder/ owner (in a manner that do not disregard
entity autonomy: not independence) is necessary to ensure that those
tasked with running these entities have the right public sector context of
the role that SOEs have. Recently, D&T work stream highlighted a concerns
emanating from their engagement with SOEs that executives about the
cost of compliance by SOEs, and the amount it (compliance) takes to divert
them from running entities. Whilst such a concern is valid, it points to
there being many manager running SOEs who do not understand the
context under which they operated and, as already stated in G&O’s “SOE
legislative Frameworks” discussion paper, SOEs will always operate under a
complicated legislative environment underpinned by multiplicity of Acts
and Regulations, as this is how Government ensures compliance and
adherence to its rules by those it has assigned to run these entities.
2.1.1.3 What is South Africa’s current shareholder management model? Typically
and ex facie, South African Government practices a Decentralised
shareholder management model. This concept is defined and described in
detail under the definition and exposition of the different shareholder
models under the international benchmark section further below in this
paper. Essentially in this model different Government institutions play an
ownership role. At closer look though, there is a little pocket of a
centralised model in South African Government: the Department of Public
Enterprises. There is no evidence of any Decentralised model anywhere in
the world where there is, within that model, a pocket of a centralised
model:14 Decentralised by its very nature denotes multiple ownership and
the absence of no focused owner within the multiple ones. However, by
and large South Africa practices a Decentralised, or what is referred to as a
"dispersed" ownership model: almost every Government Institution (at all
three spheres of Government) can, and most have, established SOEs/
entities. 99% of these institutions also, in addition acting as owners of their
entities, also double up as policy institutions, regulatory institutions and, in
the case of Provincial Treasuries and National Treasury, play an additional,
distinct fiscal policy and oversight role over all SOEs.
2.1.1.4 What instrument should Government use to exercise ownership: a
Government Department OR an institution detached from Government
13
14
Page 16 UN paper on SOE Reform
This therefore means that the SA model is not purely decentralised as DPE plays no other role but ownership of SOEs.
Page 5
structures? Should the Government of South Africa own SOEs? Is it
working or not? That there are challenges with the current ownership
model does not mean that there have not been successes with the SOE
ownership model currently in place.
 It is trite that SOEs are massive employers in this country, and have
expertise in different sectors that they play in.
 By and large SOEs operate independently, and free of the rigidities
associated with the public service.
 Importantly, SOEs play a massive role in the economy of the country,
from skills development, procuring from the previously-disadvantaged,
playing a socio-economic role and driving Government objectives,
playing in and servicing sectors and areas that the private sector does not
have appetite, to name but a few.
2.1.2
Actions taken by SA government with regard to the issue( ownership):
Government of South Africa is the owner of all pubic entities/SOEs. It
exercises that ownership role through Government Institutions.15 Each of
these Government institutions may, and most have, established
SOEs/Municipal Entities. As a result, there are multiple Government
institutions playing a shareholder/ownership and oversight roles on behalf
of the South African Government.
Review methodologies employed to investigate this matter point to
multiple challenges brought about by this dispersed/fragmented/multiple
shareholder management level. The current shareholder management
model impacts on other aspects of SOE governance such as: legislation,
oversight, Board and CEO appointments, Board remuneration, accounting
and reporting, an accurate record/ database of how many SOEs the
government owns throughout the three spheres, and overall management
practices by the different Government institutions over SOEs. These
challenges are chiefly in relation to lack of uniformity in ownership practise,
thus undermining the Government’s ownership role and oversight
framework.
There is no uniform way through which Government legislatively defines
what its ownership of SoEs entail. Principal legislation that Government uses
to manage SOEs uniformly (in certain areas) is, at national and provincial
level: the Public Finance Management Act (PFMA)16 and at local
government level: the Local Government Municipal Finance Management
Act (MFMA)17 and the Local Government Municipal Systems Act (Systems
Act)18 as amended. In the Acts referred to above, Government’s attempt at
15
At national and provincial levels: public entities/ SOEs in terms of the SOE Founding Acts and/ or Public Finance Management Act;
at local government level: municipal entities interm of the Municipal Finance Management Act and the Municipal Systems Act.
16
Act 1 of 1999
17
Act 56 of 2003
18
Act 44 of 2003
Page 6
defining its ownership role and the associated oversight and accountability
framework is, at best, fragmented:
2.1.2.1 There is however reference to “ownership” in some of the current
legislative frameworks, but in referring thereto, the Act concerned
pairs that terminology with the notion of “control,” thereby
introducing yet another terminology. The Act then defines
“ownership control”.19 It is unclear why the two terms are merged
and then defined as a collective, as ownership has a distinctive
meaning, and so does control. Herein, the roles of Government as a
shareholder are clearly-spelt out.
2.1.2.2 In the PFMA the term “Executive Authority” means a number of
things, including what may be interpreted to mean ownership of /
shareholding in SOEs although the relevant legislative provisions do
not expressly state thus.20 One will note that in defining what
executive authority is in relation to SOEs there is no reference to the
words “ownership”. All that the legislative provision states is that
the role played by Government Ministries on SOEs falling under
them is that of being accountable to Parliament (nationally or
provincially), thereby imputing the necessary role of SOE ownership(
and in some instances, oversight). Therefore, ownership/
shareholding is inferred (in the absence of express reference
thereto).
2.1.2.3 At local government level there is no definition of ownership or
shareholding. The MFMA however makes reference to “sole
control” which it defines, in relation to a municipal entity, to mean
“the rights and powers a municipality has over a municipal entity
which is: a private company in which effective control as defined in
section 1 of the Municipal Systems Act is vested in that municipality
alone; OR a service utility established by the municipality”.21As this
definition makes reference to the Municipal Systems Act (the
Systems Act), the latter Act does not make any reference to the
concept of ownership or shareholding either. That Act however
makes reference to “effective control” which it defines as: “in
relation to a private company means the power which a shareholder
in the private company may have to appoint or remove at least the
majority of the board directors of the private company; or to control
Section 1 of the Act states that “ownership control”: in relation to an entity, means the ability to exercise any of the following
powers to govern the financial and operating policies of the entity in order to obtain benefits from its activities: To appoint or remove
all, or the majority of, the members of that entity’s board of directors or equivalent governing body; to appoint or remove that entity’s
chief executive officer; to cast all, or the majority of, the votes at meetings of that board of directors or equivalent governing body; or
to control all, or the majority of, the voting rights at a general meeting of that entity.
20
Section 1 of the PFMA: In relation to a national public entity, “executive authority” means the Cabinet member who is accountable
to Parliament for that public entity or in whose portfolio it falls; and in relation to a provincial public entity, executive authority means
the member of the provincial Executive Council who is accountable to the provincial legislature for that public entity or in whose
portfolio it falls.
21
Section 1(1) of the MFMA
19
Page 7
at least the majority of the voting rights at a general meeting of the
private company”.22
Further, the Systems Act defines parent municipality. It states that,
“in relation to a municipal entity which is a private company in
respect of which effective control vests in a single municipality, then
that single municipality is a parent municipality; in relation to a
municipal entity which is a private company in respect of which
effective control vests in two or more municipalities collectively,
then it refers to those two municipalities; in relation to a municipal
entity which is a service utility, it means the municipality which
established the entity; or in relation to a municipal entity which is a
multi-jurisdictional service utility, it means each municipality which
is party to the agreement establishing the service utility”. This, we
submit, is a better attempt at defining what municipalities own, as
opposed to what the PFMA provides in its attempt at defining what
national and provincial entities own.
2.1.3
What should be done to address the issue( ownership)
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. As demonstrated below, the issue of ownership models have
dominated and preoccupied many jurisdictions over the recent years and
have moved forward (albeit in different directions depending on country
conditions ns circumstances) in terms of creating a suitable ownership model
for those jurisdictions.
Therefore the Honourable President’s decision to commission this SOE
review is indeed a step in the right direction. The review work undertaken
thus far23 does strongly point to an urgent need to review the current
ownership and oversight framework of our Government. Ultimately the
proposed reforms herein regarding the future ownership model should be an
enabler (as opposed to a constraint) in ensuring that SOEs operate 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.
The envisaged recommended changes to the current ownership and
oversight policy framework/model are not going to be easy. They are to be a
matter of intense national debate by the stakeholders. They will also not
happen overnight. They will have to be implemented through a phased
approach which is likely to take time and require high levels of consultation
22
Section 1(b) of the Systems Act
Literature, seminars, one-on-one engagement with SOEs, experts, OECD& Govt institutions, research projects, survey, public
submissions and policy dialogues/ round tables.
23
Page 8
and coordination. Therefore, the changes will require meticulous planning
and careful implementation underpinned by will at all levels, and
commitment.
2.1.4
How the position of other countries affect SA s position( on ownership)
Extensive comparative international benchmarks were undertaken by G&O
as part of this review. Those benchmarks point to the fact that there are
different ownership models in different countries. Some have adopted the
centralized model; others a dual model; others a centralised model, and in
some instances a hybrids one. There are many lessons that South Africa can
learn from the depth of international best-practice in ownership models, and
thus advance the current shareholder/ownership model.
2. APPROACH ADOPTED
OWNERSHIP
2.2.1
AND SUMMARY OF PAST REVIEWS (IF ANY) ON
Approach: The approach to this review was characterized by multiple review
methodologies.24 As a result, there has been a multiplicity of inputs and
insights that have manifested or have been offered. 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.
 Public Submissions: These were analysed and a report developed by the
HSRC. Those public submissions are replete with inputs on the future
ownership model.
 Policy Dialogue/ Round Table, 17/2/2012: This session was held with the
objective of testing the emerging findings, possible options and
recommendations arising from a combination of all the above-stated
24
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 9
review methodologies/ approaches.
2.2.2
Reviews: Past& Present (on ownership): There is evidence of very few past
reviews in South Africa looking specifically at SOE shareholder ownership
and management models. Some of the key ones reviewed, including the PRC
reviews, are dealt with ad seriatim hereunder:
2.2.2.1 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. 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 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 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. They
have, for instance, internally developed a paper referred to as the
Centralised Shareholder Management Concept (“CSM”).25
Key issues being raised in that document (relevant to ownership of
SOEs) are as follows:
 Every State shareholding should have a clear strategic purpose
justifying such ownership. Presently there is no existing statutory
framework to assist in determining either this strategic purpose
or whether state ownership of a particular commercial enterprise
is necessary or desirable.
 None of the existing SoEs legislative frameworks effectively
entrench Government’s strategic ownership and mandate of SoEs
to enable the State to better influence economic growth and
development
25
This is an internal 2010 DPE discussion paper that deals with the Centralised Shareholder Management Model and the Government
Shareholder Management Bill
Page 10
 Companies Act of 1973 deals with general business law and
regulation. PFMA is a financial management tool. Most SoE
enabling legislation is limited to Government ownership of such
entities but does not require vigour in defining a clear strategic
intent.
 The incorporation of SoEs, although it resulted in improved
commercial autonomy and corporate governance through the
application of the Companies Act, also resulted in the
fragmentation of the State’s shareholding portfolio and the
state’s constraint on its ability to give strategic instructions and to
consistently apply its shareholder management across its
shareholding portfolio and leveraging assets in SoEs for purposes
of an efficient and optimum growth on a developmental state.
 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.
 Par 4.13.4 Functions of Government as a shareholder need to be
listed and known across all SoEs in a uniform way.
 Par 4.15: Separation of Government shareholding from other
Government functions
 Par 6.1: Challenges with the current shareholder management
model:
o Lack of uniformity between different shareholder Ministries.
o Proliferation of legislation and guidelines on shareholder
management.
o A number of Government Departments are shareholders with
their own supervisory regime.
o No clear framework within which Government can decide
whether state investment is desirable or still necessary.
 Par 7.3 Challenges faced by SoEs:
o Multiple government roles confuse SoEs, which are unable to
what is expected from by Government as: shareholder,
regulator, and policy-maker.
o 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.
Page 11
2.2.2.2 National Treasury’s review of shareholder management models26: This
National Treasury document was shared with the PRC by their Asset
Management Unit at the Governance& Ownership seminar, 27 where
they also made a PowerPoint presentation on the subject. This
document contains details of research work by National Treasury on
the different ownership models that exists works-wide, as well as
the key attributes in relation to each.
Whilst this section of the discussion paper deals with past reviews
locally, the content of national Treasury’s review discussed herein
focuses more on international benchmarks than local issues related
to the subject matter. However, in view of the fact that it was raised
in a local SOE Reform exercise (PRC’s G&O seminar) it will be
discussed hereunder, in particular, some general ownership issues
being raised therein by National Treasury and the relevance of these
to South Africa will, in the context of national Treasury’s exposition
in their paper. In addition we detail our critical reflection on the role
of National Treasury vis-à-vis SOEs, below.
Key issues are raised in this document, namely:
 Governments, as shareholders of SOEs have two objectives why
they own these entities: (i) achievement of shareholder returns
based on commercial considerations; (ii) provision of services to
the community at large.
 Government has to, in relation to each SOE/ public entity,
identify its objectives and expected outcomes and clearly define
the mandate of SOEs.
 The challenge is to find a balance between imposing political
interference and exercising ownership functions.
 All SOEs are ultimately accountable to Parliament.
 Governments globally, with the exception of Singapore, play a
policy-making and shareholding role over SOEs, enforced through
Responsible Ministries. In Singapore Temasek Holdings does
exercise shareholding/ ownership rights on behalf or its
Government.
 The OECD recommends that Governments draw an ownership
policy that defines the overall objectives of State ownership of
SOEs.
 The Reporting Structures of oversight entities differ from country
to country. In Singapore Temasek reports to the Minister of
Finance, COMU in New Zealand report to nine Responsible
Ministers of the various SOEs there, etc.
 Care should be taken in distinguishing between shareholder
management and reporting. In most models globally SOE
26
27
National Treasury “ Review of Shareholder Management Models Applied Internationally
The seminar was held on 19&20 November 2010
Page 12
reporting is centralised, but shareholder management is not
necessarily centralised. Shareholder management models tend
to lean towards sectoral decentralization.
 In addition to the above, National Treasury gives a detailed
summary of the different shareholder management models
globally. These are not repeated herein as they are addressed by
other literature reviewed.
2.2.2.3 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.28
 The report goes on to state that the parent municipality has to
ensure that it has the capacity and the ability to perform each of
these roles as and when needed”.29
 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). This inherent tension
could become a source of frustration when the official channels
of communication between the parent municipality and the MES
as stipulated in the Systems Act, are disregarded. Also when roles
and responsibilities between the parent municipality and ME are
either unclear or encroached upon, the relationship between the
stakeholders is likely to sour.
2.2.2.4 ENS Study-DPE: Key points coming out of that study in relation to
Government’s role as shareholder/owner are as follows:


Study observes that there is a nexus between the different roles
played by Government in relation to SOEs. It states that
Government’s role as Treasurer and its role as policy-maker are
important and inform its other role: ownership.30 The study goes
on to caution that the roles of Government as Treasurer and
Policy-maker should as far as possible not impact on the
governance and operations of SOEs nor on 3rd parties interacting
with SOEs, other than through a designate shareholder/ owner.31
The study states that CEO appointment should be left to the
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.
29
Ibid
30
Edward Nathan and Sonnebergs “ Department of Public Enterprises: Memorandum relating to Regulation of State-owned
Enterprises”, 2010, at Page 5
31
Page 5 of ENS Report
28
Page 13

Board. However, in recognition of the Government’s shareholder
role, it may be appropriate to require shareholder approval of
the CEO and further that the CEO should not have direct access
to the shareholder.32
The study proposes that, in considering what the appropriate
shareholder management model, due regard/consideration
must be given to the shareholder model of JSE-listed companies
which has features such as the following: shareholder appoints
directors, directors appoint the chairperson of the Board,
directors appoint the CEO, CFO and COO; management do not
bypass the Board and have direct access to the shareholder.33
2.2.2.5 Public Submissions: These were, upon receipt by the PRC, analysed
by the HSRC out of which a report was written.34 Coming out of that
report are some key issue related to Government’s ownership of
SOEs:
 Partial ownership of some SOEs by the private sector:35
According to the Democratic Alliance, “the only justification for
full public ownership of an asset is when it is providing a public
network good that would be inefficient to replicate (i.e. railways).
Even then, in such cases, associated operations that work on the
network (rolling stock) can be privatised to bring down costs.
Each SOE should be looked at separately in order to determine
which ones merit continued existence under the current model.
Where natural monopolies exist in the economy, or where there
are not incentives in place for the private sector to deliver
essential services, SOEs have an appropriate role to play in
guiding and assisting development and delivery of services over
time – and a state-run ownership model is therefore justified”.
The DA herein advocates a differentiated approach to ownership
by Government in SOEs.36
The DA states that: “Acknowledging some of the challenges the
DA believes that the following conditions should apply to
privatisation deals: (1) Ownership should accrue to the broadest
base of beneficiaries possible and should complement the goals
of Black Economic Empowerment. (2) Whenever there is a
serious danger of a private sector monopoly being created, a
proper regulatory framework must be put in place in advance. (3)
32
Page 12 of the ENS Report
Page 17 of the ENS Report
34
HSRC’s “Analysis of Public Submissions to Presidential Review Committee”, 2011
35
Page 10 of the HSRC’s “Analysis of Public Submissions to Presidential Review Committee”, Democratic Alliance(DA) public
submission
36
Page 11 of the Public Submissions Report: “The DA states that it is not advocating wholesale privatisation, but rather the injection of
private sector capital where appropriate. This can take the form of partial privatisations or increased use of public-private
partnerships”.
33
Page 14
Where a particular privatisation is likely to result in job losses,
part of the proceeds should be set aside for retraining the
employees of the enterprise concerned. (4) Empowerment of
employees should be prioritised through employee ownership
structures. Privatisation must not be implemented in isolation,
but rather be seen as part of an infrastructure reform process
that incorporates competitive restructuring and regulatory
reform. Restructuring to introduce and promote competition
should ideally occur before privatisation – to prevent merely
replacing a public monopoly with a private one. In addition,
appropriate regulation must be developed to curb the potential
abuse of monopoly power, and strong regulatory agencies are
required to prevent incumbent utilities from engaging in anticompetitive practices”.37

Public Private Partnerships: This view is advocated by Business Unity
South Africa (BUSA), which argues for “the need to consider public
private partnership as a mechanism for delivery prior to the
establishment of GBEs. BUSA contends that where competitive
private providers are active in a sector, it can be more efficient and
cost effective for the state to enter into a partnership with the
private sector to provide goods and services in the non-competitive
markets through a range of contracting mechanisms that could
include formal public-private-partnerships, management contracts
or simply by requiring (for instance through incentives and/or
regulation) private providers to support delivery of a noncommercial goods or service, or a commercial good and service to a
non-commercial market, and then subsidising the loss-making
service or part of the business. This obviates the need for the state
to enter the market as a player itself where it is competing with the
private sector for scarce skills and capital, and effectively duplicates
the systems and skills that already exist in the private sector, as well
as preventing the distortion of private markets”.38

Role of Government as Owner:
o Interference: Board and CEO appointments; There is perceived
Government interference in Board independence.39The Durban
Chamber of Commerce “argues against excessive government
interference in SOEs, stating that some Boards and senior
management are in “disarray” as a result of such interference.40
37
Page 11 of the Report
Page 12 of the Report
39
Page 20 of the Report: “A number of submissions raised concerns in terms of the appointments of boards and CEOs of SOEs,
particularly in relation to the question of political interference. BUSA and SACCI both argue that there has been too much political
interference in the operations of GBEs, particularly in the operation and appointment of boards. According to SACCI Board members
are often political appointments and these members often have little or no knowledge, expertise or interest of the industry in which the
SOE operates.
40
Page 21 of the Report
38
Page 15
Everingham (citing Transnet as an example) also addresses the
question of how the chairperson of the board should be
appointed. He argues that the board, rather than the
shareholder, the government, should have this discretion.
Section 69 of the Articles for Transnet specifies that the
chairperson of the organization should be designated by the
company in a general meeting, effectively meaning that the
government, as sole shareholder appoints the chairperson.
However King III recommends that the board should elect a nonexecutive director as chairperson annually.41
Another critical question concerns the appointment of the CEO
of the organization. Here again Everingham argues, in line with
King III, that the board should appoint the CEO, but notes that at
present the government appoints the CEO, which has been
fraught with difficulties, particularly at Transnet which was left
without a CEO for 20 months. Transnet amended its articles in
July 2010 so that the board should appoint the CEO “after
consultations with the Member” (i.e., the Minister). Reasons
offered by Everingham in support of the board appointing the
CEO are that the board requires the services of competent
executives to carry out its strategic objectives and it is likely that
it best placed, with the assistance of services such as “headhunting” companies, to identify persons with the requisite skills.
If the CEO has been appointed by the board, it is likely that they
will be far more invested in the appointment and making sure it
is a success than if an appointee has been imposed on them.
Lastly Everingham emphasizes that the government does not
need to feel disempowered by the board appointing the CEO as
the ultimate power rests with them and any “sensible” board
would not appoint a CEO who is at odds with government.
Therefore, it is recommended that the appointment of the CEO is
handled by the board but finalized after consultation with the
minister and the Cabinet informed before public announcement
as a matter or courtesy.42
2.2.2.6
HSRC Survey: By way of a background, the survey report covers
102 SOEs/ public entities. The SOE composition in the survey
covers three spheres of Government: national, provincial and
municipal. The issues covered by the survey relevant to the
ownership role by Government are that of SOE autonomy and
related to that: shareholder activism.
 Most sampled entities report that they have a high degree
(48%) or a medium degree (39%) of autonomy.43 High levels of
autonomy are most prevalent amongst Schedule 1 and
41
Page 23 of the Report. Everingham is a former member of the Transnet Board.
Page 24 of the Report
43
Page 35 “Survey of State-Owned Entities (SOEs) in South Africa Final draft of report: October 2011
42
Page 16
Schedule 2 entities. Conversely, zero autonomy occurs most
amongst municipal entities; and amongst non-commercial
entities.44
 Fourteen percent of sampled SOEs say that their shareholder
or owner interferes in the operations of the entity.45
 About two-thirds (68%) of sampled SOEs report that their
shareholder accepts the decisions of the Board.46
2.2.2.7
Nkonki Inc.: The preliminary findings include the following:
 The decentralized model invariably leads to inconsistencies
between ministries, with a lack of understanding of their roles
and responsibilities, leading to perpetual conflicts.
 There is a huge disparity in skill levels in various shareholder
representative units.
 There is a detrimental lack of capacity in oversight units
because of both work overload and severely limited
resources.
 There is too much duplication, resulting in a depleting leakage
of resources.
This report is at the interim stage and as a result the findings are
unsupported by evidence. What they raise is not new, but without
corroborating data it is of little value. This has been raised with
Nkonki Inc. The issue of what ownership model is suitable for South
Africa is a matter that requires detailed and meticulous
investigation, which is what they have been commissioned to do.
Therefore very little reliance is placed on the content of that report
at this stage.
3. AS-IS (FINDINGS)
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.
3.1 Problem Statement: “The impact of the current Ownership Model on SOEs”.
3.2 International Comparative benchmark Exercise
3.2.1 Overview- Shareholder Management/ ownership Models:
International best practice is pivotal/ key to assisting the country move
forward in terms of SOE legislative Reform. This is also a view of stakeholders
with keen interest to the work of the PRC. As would become apparent
44
Ibid
Ibid
46
Ibid
45
Page 17
hereinbelow, the exposition of international comparative/ benchmark was
necessary. It has played a big role in shaping conclusions and observations in
this area of our work.
The detailed research/ examination of the South African shareholder
management model and other models world-wide with the objective of
determining which model/ models could, given the current challenges being
experienced in relation to the current model, suit South Africa does point to
varying models world-wide, including the one South Africa practices currently.
Foreign literature and desktop reviews point to the fact that the different
shareholder management models were coined in Europe, driven by the OECD.
Before one deals with the different ownership models globally, it is important
to highlight a mixed bag of different SOE ownership models as illustrated by
the table below:47 This signifies that the models are adopted according to the
conditions and circumstances of each country.
Country
Bhutan
Brazil
Ownership Model
Single
Multiple
China
Multiple
Czech Republic
Dual
Finland
Dual
Hungary
Multiple
Iraq
Lebanon
Single
Dual
Mozambique
Dual
Norway
Multiple
Oman
Multiple
Organizational Name
Druk Holding and Investments
- Department of Coordination and
Governance
of
State-Owned
Enterprises
- Ministry of Finance
- Supervisory Ministry
- SASAC of the State Council, and
SASAC of provinces
- Ministry of Finance
- Other government departments
- Ministry of Finance
- Sector Ministries
-Prime Minister’s Office, Ownership
Steering Department
- Hungarian State Holding Company,
- Ministries,
- Other government institutions and
universities
N/A
- Ministry of Finance
- Court of Accounts and Central
Inspection
- State Shares Management Agency
(IGEPE)
- National Directorate for Treasury
- Department of Ownership, Ministry
of Trade and Industry,
- Ministry of Petroleum and Energy,
- Ministry of Transport and
Communications,
- Ministry of Health and Care Services
- Ministry of Finance
Page 7,OECD “SOE Governance Reforms: A Survey of Reform & Practices” Presented at the 2nd Meeting of the Global Network on
Privatisation and Corporate Governance of State-owned Enterprises, Paris, March 2010
47
Page 18
Pakistan
Multiple
Portugal
Single
Seychelles
Multiple
Sweden
Single
Switzerland
Dual
Turkey
Multiple
Hungary
Multiple
- Other Line Ministries
- Ministry of Finance
- Other Line Ministries
- General Directorate of Treasury and
Finance
- Ministry of Finance
- Ministry of National Development
- Other Line Ministeries
Division
for
State-Owned
Enterprises, Ministry of Enterprise,
Energy and Communications
- Federal Finance Administration/
Department responsible for a
particular SOE
- Privatization Administration
- Undersecretariat of Treasury
- Line Ministries
- Hungarian State Holding Company,
- Ministries,
- Other government institutions and
universities
Each of the three ownership models has been adopted by the responding
countries with a slight majority using the multiple ownership models.48
Accordingly there is no global “one size fits all’ when it comes to the
appropriate shareholder management model. Accordingly, whilst some of the
international benchmarks are persuasive, the determining factor regarding
the South African Government ownership model should be what
circumstances are relevant to South Africa.
3.2.2 Definition& Exposition of the Different Shareholder Management Models and
how they work: The definitions and description of the different features if the
different models are aptly captured in OECD’s sorbet of countries and their
different models, and are summarised directly from that survey below:
3.2.2.1 Decentralized Model: In this model, SOEs are under the responsibility
of branch or sector ministries. In many OECD countries, two
ministries share the ownership responsibility for SOEs. In this case of
dual responsibility, both sector ministries and a “common” ministry
are responsible for exercising ownership rights. In some cases, a
specific ministry plays a coordinating role, in addition to the main role
played by sector ministries. The coordinating Ministry organises cooperation between the various ministries and is in charge of
elaborating the overall ownership policy as well as specific guidelines.
This is the case in Finland where a specific unit within the Ministry of
Trade and Industry plays a coordinating role and has developed the
“Government decision-in-principle on the State ownership policy”. ●
In the UK, the Shareholder Executive advises sectoral shareholding
Ministers regarding other business in the Government’s portfolio
48
Page 6 of the OECD Survey Report
Page 19
whilst also being the shareholder responsible for 8 businesses. In
Germany, the Ministry of Finance elaborates guidelines for the
ownership and the privatisation policy, and authorises changes in
holdings. The German model can thus be considered as closer to a
dual model.49
3.2.2.2 Dual Model: This dual model differs from the de-centralised model
where different sector ministries are responsible for their respective
SOEs, with one ministry being “more equal than others” and ensuring
co-ordination and overall policy, such as in Germany and Finland. In
the dual model the sharing of responsibility truly concerns the
ownership function. There may be a dual responsibility about certain
specific aspects, for example, where both ministries have the right to
nominate representatives for the board of directors. This is the case in
Mexico, where representatives from both the Ministry of Finance and
Public Credit and from the sector ministries or agencies sit on the
board of majority state-owned companies. These state
representatives must represent at least 50% of the board, and the
chair of the board is from this Ministry or agency.
Dual responsibility often also includes the approval of major
transactions and strategic plans. In some cases such as New Zealand,
dual responsibility is directly reflected in the ownership, with the
sector ministry and the common ministry each owning half of the
state’s shares in SOEs. The common or central Minister is often
directly in charge of some specific ownership functions. This may be
the nomination of board members, or aggregate reporting (i.e.
reporting about the overall state-owned sector). This specific function
may nevertheless be carried out in co-ordination or in consultation
with the respective sector ministries. In this case, the common
ministry will have a co-ordination or centralisation role.
The “common” Ministry is usually the Ministry of Finance (or the
Ministry of Economy and Finance), due to the importance of the SOE
sector to the state’s overall economic and financial objectives, like the
Ministry of Finance and Administration in Australia, the Ministry of
Economy and Finance in Italy, or the Treasury in France. The Czech
Republic and Slovak Republic are more specific cases. They are also a
dual model, but where the main shareholding entities are the Holding
Companies, the NPFs (National Property Fund). Sector Ministries
continue to play a role in the governance.50 In most countries the dual
organisation results more from the power and importance of the
Ministry of Finance than from design, while the sector ministries were
traditionally in charge of the SOE in view of their role in industrial
policy. However, in a few cases this dual organisation has been
49
50
Page 45 of the OECD Survey
Page 46 OECD Survey
Page 20
carefully considered and clarified. This is particularly the case in
Australia and New Zealand. In Australia, the 1997 Governance
Arrangements for Commonwealth Government Business Enterprises
set out principles related to the arrangements for joint Shareholder
Ministers. The Ministry of Finance and Administration “generally
takes a lead role in (SOEs)’ financial matters, with the portfolio
Minister focusing on operational issues”.51
In Korea, the organisation is even more complex than the dual model,
as it involves more than two ministries. The Korean case could be
called a “trial” model, as at least three ministries are systematically
involved in exercising the ownership rights in SOEs, especially in GOCs
(government owned corporations, companies more strategic in nature
and usually more than 50% owned SOEs. The sector ministry or the
Ministry of Finance and Economy represents the state in the GSM.
The sector Ministry proposes a board chair and appoints “full-time”
(i.e. executive) board members. At the same time, the Ministry of
Budget and Planning appoints outside directors of GOCs, monitor
their performance and proposes an auditor, in consultation with the
Ministry of Finance and Economy. So there are three ministries cooperating in the exercise of shareholder rights, plus the Board of Audit
and Inspection, which audits SOEs.52
3.2.2.3 Central: The centralised model is more recent. It is characterised by a
strong centralisation of the ownership function. In this model, most
SOEs are put under the responsibility of one Ministry or Agency. In
most cases this is the Ministry of Finance (Denmark, the Netherlands,
Spain) or the Ministry of Industry (Norway and Sweden), which used
to have the most important SOEs under its responsibility in the
previous model of sector ministry organisation. In Belgium, there is a
specific ministry, the Ministry of State-Owned Enterprises and
Participations. In a few cases a specific Agency has been established,
and this Agency is more or less autonomous, usually reporting once
again to the Ministry of Finance (as in the case of France).53
Progressive ownership model reform:54 In the UK, the government has
progressively centralised the shareholder function since September
2003, with the setting up of the Shareholder Executive and the aim of
providing a more centralised and consistent approach towards the
government ownership function (Box 2.4). The Shareholder Executive
remit extends to 24 largest SOEs under central government’s
responsibility and it now has direct responsibility (rather than
advisory) for 8 companies. These are the ones under the responsibility
of the Department of Trade and Industry, plus Royal Mint,
51
Page 47 of the OECD survey
Page 48 of the OECD Survey
53
Page 49 of the OECD Survey
54
Page 52 of the OECD Survey
52
Page 21
Partnerships UK, NATS and Actis Capital LLP. In most cases reform has
still to be completed. The centralised unit is usually in charge of
establishing common standards or guidelines that will have to be
followed by other Ministries regarding the enterprises under their
responsibilities. It is also in charge of the global reporting. A
significant number of SOEs remain under the responsibility of other
Ministries but their responsibility should be transferred in the short or
medium term to the “centralising” Ministry.
The Swedish case, the ownership responsibility of 13 enterprises is
scattered among 7 ministries (Ministry of Agriculture, Ministry of
Health and Social Affairs, Ministry of Education, Ministry of Foreign
Affairs, Ministry of Culture, Ministry of Environment and Ministry of
Finance). In the remaining 8 enterprises the ownership responsibility
is placed at other divisions within the Ministry of Industry.55
In the UK, most SOEs under the shareholder responsibilities of the
central government are still under the responsibility of nine
Departments (Culture, Media and Sport; International Development;
Transport; Environment, Food and Rural Affairs; the Home Office; the
Ministry of Defence; the Office of the Deputy Prime Minister,
Department for Work and Pensions and Northern Ireland Office). As
mentioned above, the Shareholder Executive has responsibility for 8
key businesses. In France, a centralised agency for state
shareholdings, the “APE” (“Agence des Participations d’État”) has
been created at the beginning of 2004. The creation of this Agency
was decided in March 2003 by the Ministry of Finance and Economy,
following the issue of a Special Report on State Ownership. This
Report was commissioned by the Minister following poor results and
serious setbacks in the performance of some highly visible and very
large state owned companies.56
3.2.2.4 Other: There are other models globally that Governments use to
exercise ownership.57
 Holding companies:58 In this type of organisation, the ownership
of most or a specific list of SOE has been transferred to one or
several holdings which are in turn owned by the state and under
the responsibility of one Ministry. This holding organisation has
often resulted from reforms undertaken mainly in the 1970’s,
aimed at decreasing political interference in the management of
SOEs, giving more flexibility to their management vis-à-vis usual
public management rules, and finally tougher budget constraints.
55
56
Ibid
Ibid
57
Page 59 of the Report
58
Page 62 of the OECD survey
Page 22
 Ad hoc specialised consulting services:59 Some countries have set
up specialised consulting companies to advise the ownership
entity within the government. These are usually relatively small
units, but with highly qualified experts. These consulting
companies pool expertise and provide assistance to the ownership
unit within the administration, giving second opinions and
specialised advice. They may focus, for example, on performance
monitoring, board assessment and the appointment process. They
enjoy more flexibility in terms of hiring and remuneration policy,
and may be also more independent of overall government policy.
They are therefore perceived as being less easily captured by a line
agency or sector ministry. They may also focus more strictly on
shareholder value and are less suspected of pursuing other
agendas, including political ones. The boards concerned feel that
they are monitored by governance professionals.
3.2.3 Advantages: Ownership Models
3.2.3.1 Decentralised60: The main advantages and rationale for such a
Decentralised organisation are:
3.2.3.2 Sector expertise and the capacity to implement a more active
industrial policy.
3.2.3.3 With the shift from industry specific policies to more
framework-oriented and market liberalisation policies, the
advantages of such an organisation have now vanished.
3.2.3.4 The management of state-owned assets is shifting towards an
ownership view with a focus on added value, and SOE are less
perceived as instruments of industrial policy than they used to
be.
3.2.3.2 Centralised: The main advantages and rationale for such a
centralised organisation are:61
3.2.3.2.1 For other OECD countries, recent or current reforms aim at
both clarifying responsibilities among different government
organs and functions, and at having a more unified and
consistent ownership policy.
3.2.3.2.2 First, reforms seek to clearly separate the ownership
function from other state functions, such as industrial policy
or regulation.
3.2.3.2.3 Second, centralisation of the ownership function facilitates a
greater unity and consistency of the ownership policy. In this
regard, the UK Shareholder Executive was set up with the
aim of “providing a more centralised and consistent
approach towards the government ownership function”. It
59
Page 64 of the OECD survey
Page 45 of the OECD Survey
61
Page 51 of the OECD Survey
60
Page 23
helps in implementing unified guidelines regarding
disclosure, board nomination or executive remuneration.
3.2.3.2.4 It also helps in unifying practices among Ministries in areas
such as board representation.
3.2.3.2.5 Third, centralisation has been a major force towards the
elaboration of centralised or aggregate financial reporting
on state ownership. The few countries which have a high
standard of overall and aggregate reporting on SOEs are
usually those that have already or are in the process of
centralising the ownership function, such as Sweden, France
and Norway.
3.2.3.2.6 Last but not least, the centralisation of the ownership
function allows for centralising competencies and organising
“pools” of experts in relevant matters, such as financial
reporting or board nomination. When a specific or
autonomous unit is set up, it may in addition enjoy more
freedom in hiring experts from the private sector or more
flexibility in remuneration than if they were public servants.
3.2.3.3 Dual: No advantages are documented in this survey.
3.2.4 Disadvantages
3.2.4.1 Decentralised: The main drawbacks or dangers resulting from
such an organisation are:
3.2.4.1.1 The greater difficulty in clearly separating the ownership
functions from other state functions, particularly its
regulatory role and industrial policy. Achieving such a clear
separation has been a main driving force in the evolution
towards a more centralised model of SOE management,
together with the tendency to locate regulatory duties in
special institutions.
3.2.4.1.2 The difficulty in clearly identifying who is running the SOE.
With sector Ministries in charge, the general public
perception tends to be that the Ministry is de facto running
the SOE, instead of the board.
3.2.4.1.3 The public might think that the Ministry or the government
has the power to interfere in the day-to-day operational
management of SOEs, irrespective of the real degree of such
interference.
3.2.4.1.4 Consequently, in the last thirty years a number of countries
have moved towards a more centralised model of ownership
organisation. This has been done in many cases by
reinforcing the coordinating Ministry so as to set up a dual
ownership model. In a few cases, the decision to centralise
is more radical and countries have chosen to directly
centralise the ownership function in one Ministry or entity.62
62
Ibid
Page 24
3.2.4.2
Holding Companies: This type of organisation is not frequent
and has shown its limitations. It has led to excessive
indebtedness and has not proven to be efficient either in
terms of corporate restructuring or in financial
management. Thus the holding structures remain an
exception, except in former transition countries where they
are not supposed to be permanent structures, but should
disappear with the completion of privatisation and
restructuring of industry.
3.2.5 Select Country Details
3.2.5.1 Finland: This country came to present to the PRC at the OECD
seminar held as part of the PRC’s information-gathering exercise.63 Key
features of the Finnish ownership model are as follows:
 Prior to 30/4/2007 that country’s Government Departments played an
ownership role over different SOEs. There was no
centralized/dedicated Department dealing with SOE ownership in a
specialist manner like in South Africa (DPE).
 Post 30/4/2007 the Prime Minister’s office took ownership of the
majority of SOEs in that country (40 out of the 61 SOEs). Only SOEs
with special tasks were left with Line Ministries.
 Within the Prime Minister’s office an Ownership Steering Department
was established, which comprised of a D-G, 6 senior financial
councilors responsible for developing SOE strategies, Analysts, legal
Counsel, IR specialists, etc. They operate outside the Premier’s office
in their own premises. This Steering Committee is responsible for
what may in SA terms be referred to as commercial/ business entities.
Some of these are listed in the Finnish Stock Exchange.
 The location of ownership of major SOEs was due to a concern that
the Government had: separation of ownership steering and
regulation, which was non-existent before the reforms in 2007. For
instance, the Ministry of Trade and Industry used to have a central
ownership role (was previously responsible for the majorities of major
SOEs plus a few special purpose ones). Today it is responsible for
general industrial policy, energy policy, competition policy, and
industrial innovations policy. The Ministry of Transport and
Telecommunication is playing a regulatory role for Telecoms, Railways,
Postal Services, etc. The Ministry of Finance is responsible for, inter
alia, taxation. The Prime Minister’s office is a “neutral” Ministry,
with no regulatory tasks, hence the location of these SOEs.64
 The key tasks/functions of the Ownership Steering Committee
include: to own 40 market-oriented Companies, 10 listed companies
delegated to a Holding Company, creation and continuous update of
63
Seminar took place on 6&7 December 2010 in Pretoria
Finnish presentation to the PRC: 6&7 December 2010
64
Page 25
ownership strategies, continuous follow-up and analysis of the
performance, execution of all transactions affecting the ownership,
representation at AGM’s, selected Board memberships, semi-annual
reporting to Cabinet of Ministers, annual reporting to Parliament, and
assisting other Ministries in ownership steering of Companies with
special tasks. Hence, the ownership role and oversight function have
been centralized in the Ownership Steering Committee.
 The Prime Minister is not responsible for Ownership Steering.
Another Minister, with no conflicting regulatory tasks, is to be
appointed to the Prime Minister’s Office with responsibility for
Ownership Steering. In the present Cabinet this Minister “with two
hats” is the Minister of Defence (because he has no SOEs under his
portfolio).
 The Government established a Holding Company “Solidium Oy”. The
State-owned Shares in eight listed Companies were transferred to
Solidium. Solidium remains under the administration of the
Ownership Steering Department but with its own independent Board
of Directors and Managing Director.
3.2.5.2 Brazil: 65
3.2.5.2.1 Multiple ownership structure: Ministry of Planning Ministry of
Finance Sector Ministry, Presidential Staff Office.
3.2.5.2.2 Once SOEs have legal personality, they have administrative,
budgetary and financial autonomy to achieve their social
function and fulfill their corporate purposes. This autonomy
varies according to their economic dependence: the more
financially independent they are the greater is their autonomy.
3.2.5.2.3 There is an Inter-ministerial Corporate Governance and Federal
Government Management of Participations Commission. Its
function is to: develop policies and strategies related to the State
ownership; set up criteria to evaluate and classify the SOEs; set
up criteria to Board and Fiscal Council members’ appointment;
and develop guidelines for Board and Fiscal Council
performance.
3.2.5.2.4
New Zealand: Just like in South Africa, there is no single SOE
ownership/ shareholder/ model.66 The World Bank paper notes
the division of labour between the Minister of Finance and the
“sector Ministries,” but it further highlights the role of the Crown
Company Management advisory Unit (CCMAU, now COMU)
wherein the Minister of Finance focus on financial reporting and
the “Sector Ministries (through the Advising Unit COMU) adopts
a commercially oriented perspective with a primary emphasis on
Presentation by the Department of Coordination and Governance of State-Owned Enterprises, Brazil: “Ownership policy and SOE
autonomy” at the 2nd Meeting of the OECD Global Network on Privatisation and Corporate Governance of State-Owned Enterprises
at Lucian Pontes, 2-3 March 2010
65
66
Section 2 of the Act. Shareholder means shareholding Ministers means the Minister of Finance and the responsible Minister
Page 26
ensuring that SOEs are successful companies...through the
COMU sector Ministries take the lead in monitoring performance
and have sole responsibility for board composition.”67 The paper
notes that the advantages of “dual model” include the fact that it
splits “technical” from financial or “fiscal oversight”; and the
disadvantage is that it has the “potential for the blurring of
responsibilities between the two ministers...and the possibility
that SOE management perceives itself to be ‘the servant of two
masters’, with detrimental results for morale and performance.”68
3.2.6 Overall Emerging Observations: International Benchmark Research:
3.2.6.1
Three main types of organisations dominate: the decentralised
or sector model, the dual model and the centralised model. The
most traditional is the decentralised model where state-owned
enterprises are under the responsibility of relevant sector
ministries. The dual model is, however, the most prevalent one,
where the responsibility is shared between the sector ministry
and a “central” Ministry or entity, usually the Finance Ministry or
the Treasury. Finally, a centralised model, in which the
ownership responsibility is centralised under one main ministry,
has been on the increase more recently. A few countries use
more than one model.
3.2.6.2
The evolution and reform of the organisation of the ownership
function have been significant in the last ten years, and a
number of countries are still undertaking reforms. These reforms
tend to move countries away from the decentralised model and
more towards the centralised model, although a few countries
seem to have developed a fairly stable dual model of
organisation.
3.2.6.3
Developing and issuing an ownership policy: Corporate
governance codes for SOEs (e.g. Chile) or specific legislation
(Estonia) can be said to provide elements of an ownership policy.
In Israel, SOEs are subject to a company law that establishes
profit maximisation as their overriding objective, which arguably
would make an ownership policy redundant.69
3.2.6.4
Avoiding involvement in day-to-day management and allowing
operational autonomy: Estonia has put in place specific
legislation forbidding SOE board from taking “instructions” from
67
Ibid.
Ibid, p10-11.
69
Page 23, Organisation for Economic Co-operation and Development ( OECD)’s Directorate for Financial& Enterprise Affairs –
Corporate Governance Committee- Working Party on State Ownership& Practices: “Governance Reform: An Inventory of Recent
Change”, 19-20 October 2010
68
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government. The main formal source of influence, in all
countries, is now the recurrent approval of SOE business plans by
AGMs. In Israel, specific complaint mechanisms have been
established to prevent government interference. In Chile, the
governing body of the ownership agency has been instructed not
to “duplicate the work” of SOE boards.70
3.2.6.5
SOE boards’ responsibilities and independence. All accession
countries have civil servants on SOE boards, who essentially
serve as directors for the State. However, these directors are
bound by the responsibilities (e.g. loyalty; care; diligence)
established by normal company law, and in most cases they are
obliged to observe board confidentiality. Some individual SOEs in
some accession countries continue to have ministers and other
high-level policy makers on their corporate boards.71
3.2.6.6
Holding the ownership entity accountable. The ownership
entities in all accession countries are formally accountable to
parliament and/or government. The accountability mechanisms
do, however, differ somewhat. Unsurprisingly, those countries
with a centralised State ownership function (Chile, Israel) have
greater emphasis on annual and case-by-case reporting to
Parliament. In Estonia, annual reporting by a coordinating
function informs government of the operations of SOES held by
individual ministries. In Slovenia, parliament and state auditors
have up to now probed SOEs on an individual basis, but no
coordinated accountability mechanisms was in place. As of 2011,
the new ownership agency will report annually to government
and parliament on the implementation of the government’s
Ownership Plan.72
3.2.6.7
Exercising ownership rights. Even accession countries with a
“decentralised” ownership structure do apply certain
coordination to their exercise of ownership rights through
shareholder meetings. Ownership ministries may need cabinet
approval to vote their shares (Estonia) or vote through a proxy
deposited with the coordinating ownership agency (Israel). SOE
directors may be nominated either centrally (Chile) or by
individual ministries (others), but in the latter case either vetting
procedures or eligibility criteria are usually in place.73
3.3 South African Challenges/ Problems with the current SOE legislative Framework(
subsidiaries)
70
Ibid
Page 24 of OECD’s “Governance Reform: An Inventory of Recent Change”
72
Ibid
73
Ibid
71
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The challenges noted below are a product of a combination of research and
investigative work driven by the problem statement articulated above.
3.3.4 Present& Past Reviews:
3.3.4.1 Comments/ Reflection on the DPE’s CSM Document:
 This document is biased towards the role of Government towards
commercial/ key, major SOEs, most (if not all of which, are
incorporated). This is so because of its portfolio of SOEs: they are major,
key, and mostly (if not all) incorporated/ corporatised SOEs. Accordingly
the CSM document is not necessarily a balanced exposition or a
balanced assessment of the broad spectrum of SOEs/ public entities
across all three spheres of Government. Its scope excludes many
national, provincial and municipal entities that do not operate on a
commercial basis, and which are not incorporated.
 However, to an extent that principles advocated by DPE’s CSM in the
area of SOE ownership can be generalised to the entire SOE landscape,
it is our submission that the PRC should do so. An example is on how
Boards are recruited, selected and appointed; whether Government
officials should, in addition to independent non-executive directors
appointed by Government as owner, should sit on SOE Boards; Board
and Remuneration Issues, etc.
 Whilst the CSM document refers to the old Companies Act (1973), this
is presumably because in 2010 when this CSM document was
developed, the old Companies Act was still operational. That Act
focuses on companies, and why companies primarily exist: profitmaking. SOEs that are companies play an additional role to that one
and that is what it lacks in giving effect to the context of SOEs and their
shareholders. However, and as evidenced by the extensive
deliberations on the new Companies Act (2008) that took place at the
G&O’s last Policy Dialogue/ Round Table,74 the views espoused by DPE
regarding the bias of the old Companies Act towards “general business
law and regulation”, still hold true even with the new Companies Act,
and were overwhelmingly supported at the Governance, Ownership&
Oversight Policy Dialogue/ Round Table.
 A view being expressed by DPE in the CSM document to the effect that
that “the incorporation of SoEs, although it resulted in improved
commercial autonomy and corporate governance through the
application of the Companies Act, also resulted in the fragmentation of
the State’s shareholding portfolio and the state’s constraint on its ability
to give strategic instructions and to consistently apply its shareholder
management across its shareholding portfolio and leveraging assets in
74
On 17/2/2012
Page 29
SoEs for purposes of an efficient and optimum growth on a
developmental state” is, we submit, arguable. The mere fact that the
very Companies Act distinguishes various corporate firms is recognition
that different corporate forms are suitable for different objectives for
which these Companies are being established in the first place. Likewise
the Government, in establishing entities, cannot use a “one size fits all"
corporate form to avoid conclusions akin to that of DPE that
corporatisation has “fragmented the State’s shareholding portfolio”.
The State’s fragmented shareholding portfolio is not a result of the
corporatisation of SOEs: whether there are SoEs that are incorporated
or not, already fragmentation in SOEs is prevalent in those SOEs as they
sit in three spheres of Government and also take different corporate
forms (other than being companies). In addition, multiple Government
institutions play a shareholder role in these myriad SOE corporate
forms, using different instruments such as legislative frameworks and
related instruments in expressing that ownership role, as well as
oversight and governance roles with the resultant fragmentation.
Therefore, whilst SOE corporatisation may have contributed to the
fragmentation in ownership/ shareholding, it is not the sole contributor
thereto and, importantly, there are more benefits brought about by
corporatisation, notably, most corporatised SoEs being well-run, and
attracting the best talent in the market.
It is further our observation that a view expressed herein by DPE is in
sharp contradiction to the views of a legislative eminent expert on
legislation they had commissioned to look at the impact of various SOE
legislative frameworks on the SOEs they own and control, who is on
record as stating that a solution to ownership, oversight and
governance challenges faced by SOEs, is to corporatise them all and
they be subject to the Companies Act, 2008.75 That espousal, we
submit, is totally misplaced. Different SOE corporate forms (as opposed
to others) assist Government achieve certain objectives. The proposed
classification of SoEs by National Treasury is,76 although not fullyembraced/ adopted by the PRC yet, does contain some good pointers(
and excludes others) which tend to show the differentiated SOE classes
and the purpose they serve/ intended to serve. To suggest, for instance,
that South African Social Securities Agency (SASSA) should operate on
the basis of commercial, company law principles will be to miss the
distinct role that Government plays (using SOEs as its instruments).
Lastly, a detailed exposition of comparative international benchmarks
demonstrate that there are many countries abroad having a mixed bag
of SOE corporate forms( just like South Africa) and yet operate their
SOEs effectively/ successfully.
75
76
Michael Katz’s presentation at the G&O seminar: 20 November 2010
See Pages 7-10 of D&T’s Green paper on “Common Understanding& Definition of State-owned Enterprises”
Page 30
 CSM’s statement 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” is very correct.
Our detailed exposition of foreign jurisdictions and how they deal with
the issue of shareholder management/ ownership models is primarily
driven by/ in pursuit of their quest to separate different Government
roles in relation to SOEs.
The DPE’s CSM document discussed hereinabove, demonstrates the
challenges being brought about by the current shareholder
management/ ownership model in South Africa.77 The challenges being
raised by the CSM are not only in relation to Government/ impact on
Government only, but on SOEs themselves, and adversely so.78 In
addition to those challenges, other challenges emerging though other
work streams are:

SMOE need to demonstrate from a collaboration perspective
how this poses challenges

G&O on oversight challenges

Inconsistency in performance management(SMOE)

Challenges with multiple legislative frameworks managed by
different Government Institutions

Competition and positioning between Ministries for supremacy:
GSM Bill, Remuneration Frameworks, Lack of Objectivity
We agree fully with the observation made by the CSM document
regarding the challenges associated with the current ownership
framework. This discussion paper will also demonstrate how the lack of
separation of different Government roles in this country adversely
impacts on the manner with SOEs are run by these different
Government institutions, and thereby corroborate the observations
made by the CSM documents in this regard.
3.3.4.2 Comments/ Reflection on the National Treasury’s document.
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. It also plays an ownership/ oversight role over
some SOEs assigned to its control.79 It is worth stating that national
Treasury has been highly participatory in the PRC review exercise, largely
77
See reference to par 6.1 of the CSM document under the discussion of the CSM document (par 2.2.2.1 above).
See reference to par 6.1 of the CSM document under the discussion of the CSM document (par 2.2.2.1 above).
79
E.g. Land Bank, SARS, PIC, FSB, DBSA
78
Page 31
cooperating in most respects and honouring the PRC with audience,
information and engaging in its different platforms. What was, and still
remains unclear though is in what capacity of those stated above) was
National Treasury engaging the PRC. Engaging a Department holding such
multiple roles makes it very unclear as to what "hat" they are wearing/
what capacity they are engaging the PRC: is it policy role, a shareholding
role, fiscal management role, or all four?
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 of 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.
As aptly detailed in G&O’s SOE legislative Frameworks Discussion
paper:80…“Still on the PFMA and MFMA, “National Treasury is responsible
for coordinating macroeconomic policy and promoting the national fiscal
policy framework. Its role is defined by the Constitution of the Republic of
South Africa and in the Public Finance Management Act. The National
Treasury coordinates intergovernmental financial relations, manages the
budget preparation process and exercises control over the implementation
of the annual national budget, including any adjustments budgets. The
National Treasury also performs functions assigned to it in other
legislation”81.Therefore, in being custodians of the PFMA and the MFMA, it
stands to reason that these Acts are intended to give effect to this National
Treasury role.82 The PFMA is, as described on National Treasury’s website,
“one of the most important pieces of legislation passed by the first
democratic government in South Africa. The Act promotes the objective of
good financial management in order to maximise service delivery through
the effective and efficient use of the limited resources. The key objectives of
the Act may be summarized as being to:
-
Modernise the system of financial management in the public sector;
Enable public sector managers to manage, but at the same time be
held more accountable;
Ensure the timely provision of quality information; and
Eliminate the waste and corruption in the use of public assets.”83
The MFMA on the other hand is being described by National Treasury thus:
“To fulfil this responsibility in the local government sphere, the National
Page 7, G&O’s Discussion paper on “SOE Legislative Frameworks”
http://www.treasury.gov.za/ministry/info.aspx
82
Section 2 of the MFMA states its object as “… to secure sound and sustainable management of the fiscal and financial affairs of
municipalities and municipal entities by establishing norms and standards and other requirements…”. The PFMA’s object states
that… “to secure transparency, accountability, and sound management of the revenue, expenditure, assets and liabilities of the
institutions to which this Act applies”.
83
http://www.treasury.gov.za/legislation/PFMA/default.aspx
80
81
Page 32
Treasury has developed a phased implementation strategy of financial and
technical support for local government based around the MFMA, including
conditional grants, subsidies, technical guidelines, policy advice and the
placement of international advisors with various municipalities. This
strategy takes into account the diverse capacity of municipalities for
implementing the reforms and the requirement for institutional
strengthening, building municipal capacity and improving municipal
consultation, reporting, transparency and accountability. The
implementation strategy requires close co-operation with other
departments in national and provincial spheres”.84
Despite the demonstrated clear association of these Acts with matters of
fiscal accountability and reporting, these Acts also embody/ contain nonfinancial and governance provisions.85 This, as already stated, is in addition
to an already existing plethora of such provisions sitting in SOE founding
Acts and, as would be detailed hereunder, the Companies Act. The
question that then arises is whether these financial governance legislative
instruments should contain non-financial provisions and, importantly,
what the impact the current inclusion of these is to public entities/ SOEs”.
The point the G&O’s discussion paper on SOE legislative Frameworks was
seeking to put forward was that, despite the role that is well-documented
which National Treasury was/ is meant to play, it plays other roles. We
argue that 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. Id 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 re may foreign jurisdictions where
National Treasury/ Department of Finance plays 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
84
85
http://mfma.treasury.gov.za/Pages/Default.aspx
E.g. see sections 49& 50 of the PFMA; section 93&94 of the MFMA.
Page 33
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 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 hereinabove) is not without value. It raises some
issues that go to the heart of what constitutes effective SOE ownership
model. Our comments thereto are as follows:
 National Treasury’s observation that “Governments, as shareholders of
SOEs have two objectives why they own these entities: (i) achievement
of shareholder returns based on commercial considerations; (ii)
provision of services to the community at large”, is a correct one. This is
the question that has been lingering during the review exercise: in
establishing the 662 SOEs (including subsidiaries) discovered thus far
during this review, and in the absence of an overarching SOE ownership
policy by Government, is Government clear as to why it has established
these? Even if so, was Government consistent in this regard?
The G&O’s paper on SOE subsidiaries show that not all subsidiaries exist
based on the two objectives outlined by National Treasury above.86 To
quote therefrom directly: “There are different types of public entities/
SOE subsidiaries: There is loose usage of the concept of subsidiaries.
Resultantly, what is evident is that the concept means different things to
different situations: Conventional Subsidiaries: This class of subsidiaries
is what could be referred to as classic, conventional subsidiaries.87In
other words, when one looks at these subsidiaries, their key
distinguishing attributes are the following:
- Nature: They are classic public entities either founded by legislation
or having a parent entity founded by legislation.
- Corporate Form: There is a mixed bag of corporate forms such
subsidiaries take: sometimes they take the same form as the parent
86
See Pages 16-18 of G&O Discussion Paper on SOE Subsidiaries
E.g. The North West Parks Board (not a company) has subsidiaries. One of the subsidiaries is a company, called Dirapeng (Pty) Ltd.
This subsidiary has three subsidiaries. One of the three subsidiaries called Golden Leopards Resorts also has a subsidiary, called
Manyane/ Bakgatlha. All Dirapeng’s subsidiaries are majority-owned by it, and so is Golden Leopard Resort’s subsidiary. These are
classic state-owned entities (as per the PFMA scheduling).
87
Page 34
company, sometimes a different form. For instance, the North West
Parks Board is an unincorporated statutory corporation and yet its
three subsidiaries have taken a different form to it: they all
companies.
- Operations & Revenue: The management and operations of such
subsidiaries as well as its revenue are purely Government-related
(directly or indirectly). Many public entity/ SOE subsidiaries take this
form. Their mandate has a direct relationship with Government’s
mandate, and in most instances operates in the same sector as their
parent entity and therefore established to further the object/
mandate of the parent entity and by extension, of Government.
Eskom has such subsidiaries and as indicated above, the North West
Parks and Tourism Board’s subsidiaries are all in the conservation/
tourisms sector.
Unconventional Subsidiaries: In practice, not all subsidiaries fall
under the purview of the PFMA despite the PFMA stating thus. 88
Phrased differently, some subsidiaries, despite them being referred
to as public entities/ SOEs by the PFMA, bear no resemblance to
what constitutes a public entity/ SOE. To be precise, the PFMA does
not apply to some of such entities. Development Finance Institutions
(DFIs) are public entities. Some of the DFIs89 take majority equity of
companies that they finance as a way to safeguard their investment.
None of companies listed in that IDC report have anything to do with
Government or Government business: they do not have founding
legislation, they were not established in terms of the PFMA and the
only reason why the IDC, a public entity/ SOE owns such a company,
is because they have borrowed such company money.
The risks of classifying such entities as public entities/ SOEs (as the
PFMA suggests) are many:
- In relation to 3rd parties, such companies could claim to the SOEs
in their transactions with external parties and hide behind state
ownership and thus portray a picture of being insulated from
failure because they are Government-owned and Government
can save them.
- They can even rightly insist on receiving Government help
because the PFMA lists them as SOEs. It is also very doubtful if
the SOEs having such subsidiaries actually exercise control over
them as the Companies Act suggest, e.g. appoint their Boards
and CEO, and monitor if they are run in line with Government
laws, policies and objectives.
- They can establish/ acquire majority stakes in other companies
and thus have subsidiaries themselves which, for as long as the
88
Some IDC subsidiaries are a case in point as will be detailed in the paper. It funds privately-owned companies and takes majority
equity to protect its investment, and thus automatically catapult such privately-owned companies into public entities/ SOEs as
suggested by the PFMA
89
Industrial Development Corporation is a case in point. IDC - Annual Report 2010 - Group Annual Financial Statements - Annexure
A Subsidiaries. They listed 15 and ‘Other” subsidiaries where they held either 100% or majority shareholding.
Page 35
IDC holds majority shares in those privately-owned entities, also
becomes SOEs( according to the PFMA)
- These can retrench employees with impunity without having due
regard to implications of that to Government as the owner.
Please take note that this critical exposition on unconventional
subsidiaries above is in no way intended to question/ challenge IDC
or any DFI in taking equity in companies that are not public entities/
SOEs as part of their mandate/ modus operandi(if indeed that is so).
This is intended to illustrate that the PFMA states that all those
fifteen IDC subsidiaries are schedule 2 entities of the PFMA (just like
IDC itself). This is in terms of the PFMA. This therefore means that
those entities must be treated like any other public entities. There is
no evidence that they are. The question that arises is, if the PFMA
clothes a subsidiary with the same status of their parent entities, the
implication is that they should, as public entities/ SOEs, also be
creatures of statute, procure like their parent companies, submit
reports like their parent companies and in effect operate as if they
were parent companies themselves.
It is further our submission that it could never have been the
intention of the drafters of the PFMA as well as the legislature that
the PFMA, in stating that subsidiaries of public entities also fall
under its remit, had the IDC equity-acquisition modus operandi in
mind, where SOEs can take majority equity in privately-owned
companies which then renders them SOEs in paper only, but in
practice they continue to operate as privately-owned companies with
no regard to the PFMA. Furthermore, the form, nature, operations
and circumstances under which shareholding is taken in companies
such as those listed in the IDC report do not fall under any of the
definition accorded to public entities in the PFMA”.
The differentiated legislative and practical treatment of subsidiaries
(which by law are also SOEs) demonstrate that Government (or
indirectly through its own SOEs), is not driven by these two-pronged
objectives articulated by national Treasury. This, we submit, is a clear
demonstration if what the current shareholder management model
poses: different shareholder Ministries have different objectives for
establishing SOEs. SMOE, in their presentation of a discussion paper on
collaboration,90 titled demonstrates that some SoEs were established
due to the absence of collaboration between Government Institutions
where, for instance, bias/ focus in expertise was focused in certain
provinces and, in reaction, other Provinces established entities to hone
their expertise in particular areas and not necessarily that the
establishment of those SOEs were necessary.
SMOE Discussion Paper “Alignment, collaboration and cooperation among SOEs and all spheres of Government” presented on 29
February 2012
90
Page 36
Accordingly, there is evidence that the establishment of SOEs (and
therefore ownership by Government) is not always based on consistent,
objectives across Government in its entirety and this, we submit, is a
product of the current ownership model characterised by widespread
fragmentation. There must be objectives that are consistent across
Government as to why SOEs are being established, and there must be
checks and balances to ensure that any new SOE have to undergo.91
Furthermore, according to the PRC’s research partner the HSRC, which
was tasked with searching for all SOEs in existence, they found 23 SOEs
(which were thought to exist) to either no longer being in existence,
having merged with others or even changed their names.92 These are
the SOEs that were obtained from Government Departments exercising
the ownership roles over SOEs. Accordingly, if there was a coherent
ownership policy in this country, there will be clear an objective
embodied therein as to why Government establishes SOEs, or even
disestablishes them. We further argue that the disestablishment of
SOEs underscores the fact that those SoEs may have not been
necessary in the first place (meaning the rationale for establishing them
was not carefully thought through), as evidenced by their
disestablishment. Otherwise they will not be disestablished.
 National Treasury’s document also makes an important point:
Government has to, in relation to each SOE/ public entity, identify its
objectives and expected outcomes and clearly define the mandate of
SOEs. We hereby hasten to add that, this Government must do as not
only when an entity is already in existence, but also before an entity
comes into existence. The prevalent scope-creep amongst entities, lack
of collaboration and cooperation, is a product of misaligned SOE
objectives, and their reason for existence. If there was clear, uniformlyunderstood collaborative systems between Government institutions
playing and ownership role as well as amongst SOEs themselves, then
issues such as duplication/ scope creep will not be as rampant as they
currently are.
 The issue raised by National Treasury in its document, namely, “the
challenge to find a balance between imposing political interference and
exercising ownership functions”, is key. This issue has been raised very
sharply during the different stages of the PRC review exercise,93 and will
be reflected and discussed later herein. It is important that
Government, in exercising its ownership right, does not blur or
disregard the distinction between shareholder activism, and blatant
interference in enterprise-level matters, thereby undermining the
As is the case in Australia where SOEs to be established become “candidate SOEs” until they undergo certain processes, whereafter
their existence is published by legislative Regulations.
92
See the HSRC’s Risk& Replacement List, which lists all such SOEs
93
E.g. Stakeholder Engagements (including Policy Dialogues), public submissions, etc.
91
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autonomy that SOEs should have, so as to be able operate without
undue interference.
The distinction between the role of the shareholder and the role of the
Board needs to be defined and clear: this can only be achieved through
the existence of a clear governance framework, underpinned by
Government’s ownership policy. However, and as would become
apparent later herein, the word “Interference” is often used loosely,
even where Government rightly exercises its role as an owner of pubic
assets, or intervened where Boards of SOEs do not toe the line. It is
probably correct that Government at time act in a manner that point to
interference. One may argue, and rightly so, that its actions are justified
as there is no policy that sets out what it can/ cannot do; what amounts
to intervention/ activism as opposed to interference. Therefore as to
what constitutes political interference or otherwise will only become
clear once there is a clear ownership policy and related instruments
such as the overarching SOE Governance Framework.
 National Treasury states that “all SOEs are ultimately accountable to
Parliament. In making such an assertion it does not state what
“accountable” means: does it mean that Parliament now plays the role
of a lawmaker, oversight structure and/ or even owner of SOEs? In the
absence of National Treasury detailing what it means about SOEs being
“ultimately accountable” to Parliament, we are left to second-guess
what they mean. Accordingly, we submit that this issue needs to be
approached with great circumspection, based on the following:
o Parliament (provincially and nationally) is a lawmaker, and holds
Government Departments (not SOEs) to account. We conceded that
indirectly, SOEs account to Parliament, but through their Ministries.
o Therefore this “accountability” to Parliament needs to, at the very
least, be qualified as being indirect.
o There is currently a practice in terms which SOEs appear before
Parliamentary committees. We submit that such practice amounts
to the usurping of the role of Government Ministries.
o As rightly observed in G&O’s discussion paper on the SOE
Database:94 “In South Africa not a single Government Department
reports on its SOEs, let alone in a detailed manner demonstrated by
the APE.95 In the case of National Institutions referred to, at best
they only mention what SOEs report to them, and nothing else. The
City of Johannesburg on the other hand makes an attempt at this
consolidated reporting (albeit limited) and reports on what
municipal entities it owns, who the CEOs are and the work profile of
each”.96
o The reason why Parliament “jumps” Government institutions
94
On Page 32 off G&O’s “Database” Discussion Paper
Annual Reports of National Treasury, the Department of Public Enterprises, SALGA, COGTA and the City of Johannesburg, all
playing an ownership and/ or oversight role over SOEs, were looked at.
96
Pages 27, 28&29 of the City of Johannesburg’s 2011 Annual Report (performance report).
95
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assigned with the ownership and oversight role and deals directly
with the SOEs in its committees is what amounts to “political
interference” in our view. However that political interference is
triggered by the inability of Government Institutions assign SOEs to
manage on behalf of Government, to report comprehensively about
the SoEs under the portfolio as stated in the SOE Database paper
referred to herein. If Government Institutions assigned with
ownership and oversight role reported on SOEs as extensively as APE
in France does, then there will be no need for Parliament to usurp
the powers of the Government institutions, and dealing directly with
SOEs in the manner that they currently do.
o SOEs, irrespective of their corporate form, are distinct entities from
the Departments (separate legal persona). Parliament cannot deal
with SOEs as if they are “an extension” of the Government
Departments.
o Our argument about the undue role of Parliament is underscored by
section 65 of the PFMA,97 which enjoins the Minister of a
Department (not the SOE) to table in the National Assembly or
Provincial legislature, the annual report and financial statements of
the entities under their ownership and control within one month of
their receipt of the audited financial statements. If the Executive
Authority (Minister) fails to abide by this prescribed time frame in
tabling those annual reports, he (the Executive Authority), and NOT
the SOE, must give a written explanation why they have nit tabbed
such. This, we submit, is how SOE accountability should unfold.
o In practice though, SOEs directly send the annual reports to
Parliament, where they are received by the Parliamentary Liaison
Officers of the different Government Departments.98 As already
reasoned above, if Government Department were reporting
comprehensively on their SOE portfolio I their own annual reports,
then there will be no need for provisions such as section 65 of the
PFMA.
3.3.4.3 Comments/ Reflection on the DBSA’s Report: This Report demonstrates
that ownership challenges experiences at National and Provincial eels are
not peculiar to those spheres of Government only, but to local
Government as well.
 The issue raised in this report regarding the owner having the capacity
to own/ exercise ownership is a matter that is also apparent in the
provincial and national spheres of Government. The current ownership
practices point to lack of capacity to carry out this function. At national
and provincial level this is exacerbated by the fact that almost all the
Ministries double up as Policy Ministries as well. A classic example is
National Treasury, which listed SoEs under its schedules when those
97
98
Section 65(1)(a) and section 65(2) (a) and (b) of the PFMA
This is an ingrained practice. E.g. DPE SOEs send the annual reports directly, and so is SAMSA in the Department of Transport.
Page 39
SoEs were no longer in existence, or failed to lost entities under its
schedules when those entities were in existence.99
As stated in the G&O discussion paper on the database, “this finding
by the HSRC (of inaccurate SOE listing by National Treasury in the
PFMA) is correct. However in relation to municipal entities, National
Treasury undertook a study in 2010 on the municipal entities. That
study stated that there are sixty three municipal entities as at 30 June
2010. The HSRC’s report states a higher number.100 The difference in
these numbers could be due to one of two reasons, or both: (i) new
municipal entities could have been established between the period
after June 2010 when National Treasury published their report, and
when the HSRC subsequently undertook its own SOE data-gathering
exercise between 2010 and 2011. The limitation with local
government legislation governing municipal entities101 is that, unlike
the PFMA, it does not list public entities. The discrepancies between
National Treasury lists and the HSRC lists (in particular SOEs that were
found not to exist by the HSRC and yet listed by National Treasury in
the MFMA) were brought to the attention of National Treasury in a
formal meeting.102 (ii) It is indeed possible that National Treasury
might not be aware of new entities that have been formed at
municipal level. It became evident during the HSRC’s data-collection
exercise that National Treasury is not in control of the establishment
or disestablishment of SOEs, nor their listing/ delisting, in the PFMA.
By extension therefore, it can be implied that a possibility exists that,
in relation to municipal entities, they may be having that limitation
too”.
This, we submit is a classic example of Government as the owner not
having the capacity to own effectively.
 The tension between SOE autonomy and Shareholder interference was
extensively raised by National Treasury in its document referred to
above. Therefore this issue is common amongst all spheres of
Government. The ownership policy’s delineation and definition of what
constitutes shareholder activism as well as what SOE autonomy entails,
will address this issue and ensure common understanding of what each
of these concepts denote. In the absence of an ownership policy this
tension will persist.
3.3.4.4 Comments/ Reflection on the DPE’s ENS Report:
99
See Page 29 of G&O’s Paper on SOE Database
See footnote No. 56 above
101
The Systems Act and the MFMA
102
This meeting took place on 29 September 2011. And present at the meeting were G&O’s Dawn Marole and Rebaone Gaoraelwe,
Godwin Onuoha from the HSRC, Goolam Manack from National Treasury’s PEGU Unit, as well as his colleague responsible for
municipal entities/ MFMA.
100
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 The role of DPE in relation to SOE ownership has already been dealt
with in detail above (under the discussion of the CSM document). DPE
is the only Government Institutions South Africa that plays only one
Government role: ownership over some SOEs. Therefore the
emerging call for separation between different Government roles
does not apply to these institutions. The DPE’s Government role
profile is a direct contrast to the role played by National Treasury and
all other shareholder Ministries and Municipalities in the Government
of South Africa( policy, Regulatory, Shareholding/ Ownership and, in
National Treasury’s case: fiscal management).
 The caveat by the ENS study to the effect that “ the roles of
Government as Treasurer and Policy-maker should as far as possible
not impact on the governance and operations of SOEs nor on 3rd
parties interacting with SOEs, other than through a designate
shareholder/ owner, is based on the observation that when SOEs/
MEs receive directives from their Ownership/ Shareholder Institution,
it is unclear whether that is in pursuance of shareholder interests,
regulatory interests or in pursuance of Government policy. As such,
some of the directives impact on the SOEs ability continue as a going
concern/ are viable, as the directives might be in pursuance of an
interest that do not take into account other Government interests
intended to be achieved through SOEs.
It is accordingly our submission that, whilst we agree with the caveat
by ENS, the only way that such tension between the different roles
does not impact on SOEs, if these different Government roles are
separated and do not reside under one Ministry/ Municipality.
 The issue of CEO appointments as raised by ENS in its paper/ study is,
by law, a key ownership prerogative: Board and CEO appointments are
the responsibility of Government as a shareholder.103 This is so
irrespective of whether the Founding Act of any entity falling under
the purview of the PFMA states otherwise.104 Effectively these Acts
give effect to Government’s activist role as a shareholder/ owner.
The ENS study suggests that CEO appointment should be left to the
Board. However, in recognition of the Government’s shareholder role,
it may be appropriate to require shareholder approval of the CEO and
further that the CEO should not have direct access to the shareholder.
It is our submission that ENS’s position is somewhat contradictory as
the one who approves is the one who appoints.
Section 1 of the PFMA states that “ownership control”: in relation to an entity, means the ability to exercise any of the following
powers to govern the financial and operating policies of the entity in order to obtain benefits from its activities: To appoint or remove
all, or the majority of, the members of that entity’s board of directors or equivalent governing body; to appoint or remove that
entity’s chief executive officer; to cast all, or the majority of, the votes at meetings of that board of directors or equivalent governing
body; or to control all, or the majority of, the voting rights at a general meeting of that entity.
104
Section 3(3) of the PFMA is instructive. It states that the PFMA prevails over any other Act that has provisions that are inconsistent
with those of the PFMA.
103
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What is important though is, 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. As already alluded to in the
G&O’s discussion paper on SOE legislative frameworks,105 “On CEO
appointments and who should appoint CEOs (Minister or Board), the
Australian literature suggests that “a significant source of power for
any board is the power to appoint and remove the CEO. For several of
the authorities considered by the review where a board exists, these
powers do not rest with the board. The ability of boards in these
circumstances to influence decisions about appointment, termination
or reappointment of a CEO is dependent on the extent to which the
board is able to influence the Minister. An ability to influence the
Minister will be dependent on the level of trust and confidence
between the Minister and the CEO. In an authority where the day-today relationship with government is primarily between the CEO and
the Minister (rather than between the chairman and the Minister) the
board’s ability to influence is lessened. Conversely, the influence of the
CEO with the board and the Minister is increased, creating the
potential for a CEO to use the support of one to exert pressure on the
other”.106 In addressing this issue the Australian Government Owned
Corporations Act107 provides that: “A GOC’s chief executive officer is to
be appointed by the GOC’s board with the prior written approval of
the shareholding Ministers…”108
The view of ENS cannot be supported as the current law of the land
vests the power to appoint CEOs with the Government Ministry
responsible for an entity whose CEO is being appointed. Accordingly,
the dual role played by both the Minister and the Board brings about
the necessary balance in this regard.
3.3.4.5 Public Submissions:
3.3.4.5.1 Privatisation:
3.3.4.5.1.1 Our submission is that privatisation has the effect of diluting
the Government’s ownership of SOEs.
3.3.4.5.1.2 Secondly, there is currently no Government plans to sell off
any of its SOEs. This submission therefore is not supported.
3.3.4.5.1.3 Internationally, the issue of privatisation has been looked at
and analysed as follows:
3.3.4.5.1.3.1 Factors in favour of privatization:109
 The SOE is in a potentially competitive industry, but
competition cannot be increased without privatization for
political reasons.
Page 31 of G&O’s discussion paper on SOE legislative Frameworks
Page 6 Public Sector Governance and the Individual Officer: Guidance Paper No. 1, July 2003
107
1993( as amended)
108
Section 92 of the Act.
109
Page 18 UN paper on SOE Reform
105
106
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






The domestic capital market is relatively well developed,
making it easy to sell the SOE shares.
The government at the relevant level (national, state, local,
etc.) has adequate regulatory capabilities.
There are domestic firms that can value and arrange the
sale of the SOE at adequate price.
The government is considered relatively clean.
Only one or a few SOEs are going to be sold at any one time
and, if more than one, at sufficient intervals.
Organizational reforms in the SOEs are impossible for
political reasons.
The SOE in question is performing certain non-essential
functions at considerable cost to its current efficiency and
future growth, and it is not politically feasible to establish
institutions that may perform those functions better.
3.3.4.5.1.3.2 Factors against privatization110












110
The SOE is in a natural-monopoly industry.
The SOE is in a potentially competitive industry, and
competition can be increased without privatization.
The SOE is providing an essential service for which
universal access is crucial (e.g., water, electricity, urban
transport, postal service, railways).
The government at the relevant level (national, state, local,
etc.) lacks adequate regulatory capabilities.
The prospective buyers are already politically influential,
which means that the “soft budget constraint” is likely to
persist, even after privatization.
Valuation and sales of the SOE have to be arranged through
foreign firms that charge high fees.
The government is considered relatively corrupt.
The political decision-makers want to sell a lot of SOEs at
the same time or sell them at short intervals.
The economy has a severe foreign exchange shortage,
which makes large-scale privatization a convenient way
out.
The prospective buyer is a foreign SOE.
It is politically feasible to make organizational reforms in
the SOEs.
Political compromises can be struck that are necessary for
setting up new institutions to take over certain nonessential functions that the SOE has been performing at
considerable cost to its efficiency and future growth.
Ibid
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3.3.4.5.2
4
Interference in Board and CEO Appointments: The issue of the
power to appoint the Board and the CEO has been dealt with
under the views expressed by ENS above.
 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.
 It is trite that King III is predicated on the Companies Act
which only applies to some, and not all SOEs and the
corporatized entities can apply to the Minister (of Trade
and Industry) for exemption to some of the provisions of
the Act. If anything, the criticism should be that there is
inconsistency in the manner with which the Government
as owner deals with the issue of CEO appointments
(given the inconsistencies between the two Acts).
 Still on this issue: that the issue of shareholder
interference arose in the SOE survey is no surprise. It is a
matter that has arisen throughout the review process. As
already alluded herein, in the absence of an ownership
policy, as to what amounts to/ mot amount to
shareholder interference will remain a hotly-contested
issue.
CONCLUSIONS (ownership)
The conclusions detailed herein are product of a combination of sources detailed herein.
They confirm in large measure the Emerging Principle Eight (8) as captured in the PRC
Progress Report (2011), and are as follows:
4.1 Comparative International Benchmark& South Africa on Ownership/ Shareholder
Management Models
4.1.1 South African shareholder management model is nor peculiar to it: it is widely
practiced world-wide.
4.1.2 Whilst it is correct that many countries move towards a centralised model, it
must be borne in mind that South Africa is amongst the countries with highest
SOE portfolio (662 SOEs). On average, global jurisdictions own less than 100
SOEs. Accordingly, controlling and owning 100 SOEs under one Government
institutions cannot be the same as doing so in relation to more than 600
SOEs. The challenges are different in respect of both. Therefore this context
must not be lost.
4.1.3 Raising the preceding point does not necessarily signal opposition to a
centralised model as an answer to South Africa, but, if considered, the
Page 44
practical implementation thereof will require nuancing and adaption to the
circumstances peculiar to South Africa as a country.
4.1.4 Within South Africa there is already a pocket of excellence on centralised
shareholder management model: DPE. It however has its own limitations:
notably, its commercial/ major SOE bias. However it is a good starting point of
the review of the current model is to be considered.
4.1.5 There may be a need to nationalize SOE ownership with regional structures to
feed into the national one, given the sheer size of the Government’s SE asset
base.
4.2 Government’s Current Overall Role as Owner:
4.2.1 As correctly observed by DPE through its CSM Document, there is presently
no existing statutory framework to assist in determining either this strategic
purpose or whether state ownership of particular commercial enterprise is
necessary or desirable.
4.2.2 Furthermore, none of existing SoE legislative frameworks effectively entrench
Government’s strategic ownership and mandate of SoEs to enable the State to
better influence economic growth and development
4.2.3 The Companies Act does not give effect to the Government’s role as a distinct
shareholder (of SOEs).
4.2.4 As demonstrated by the provisions of the PFMA, MFMA and Systems Act dealt
with herein, Government’s attempt at defining what constitutes ownership is
not consistent across the three spheres of Government, or between these
Acts.
4.2.5 The non-existent or blurred distinction between Government’s role as policy
maker, custodian of national revenue fund, regulator and shareholder/owner
impacts adversely on the Government’s focused role as owner/ shareholder.
This manifests itself through, inter alia: inconsistencies in shareholder
management/ ownership practices currently prevalent, some effective; some
not; Proliferation of legislation and guidelines on shareholder management; A
number of Government Departments are shareholders with their own
supervisory regime. Accordingly, Separation of Government shareholding
from other Government functions.
4.2.6 Multiple government roles confuse SoEs, which are unable to what is
expected from by Government as: shareholder, regulator, and policy-maker.
4.2.7 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.
4.2.8 Government as a shareholder needs to be listed and known across all SoEs in
a uniform way.
Page 45
4.2.9 Put simply, the model is, although working, riddled with challenges that have
been extensively dealt with in this paper. The net effect of such challenges is,
in relation to Government, weak ownership role, and on SIEs, confusion and
multiple signals from different Government institutions.
4.2.10 In addition, because the ownership role is fragmented and sitting in different
institutions, there is no leveraging and consolidation of skills base and
expertise in the area of shareholder management. It is unclear as to what the
split is (in resources) between the policy function, regulatory function, and
shareholding fission in these Government institutions. As a matter of fact, it
has been observed that some Government Institutions have been dismantled
their SOE oversight units, instead of strengthening them.
4.2.11 Accordingly, calls for the separation of these different Government roles have
merit, is unavoidable, and has relevance to the Government of South Africa.
4.3 Role of Parliament vis-a-vis SOEs:
4.3.1 SOEs are accountable NOT to Parliament, but to their shareholder
Ministries/ Municipalities.
4.3.2 This role is currently blurred despite clear legislative exposition of the
accountability by SoEs being to their owners/ shareholders, and not
Parliament. The introduction of an ownership policy over SoEs will
hopefully help clarify the different roles of the institutions in relation to
SOEs, underpinned by legislation.
4.3.3 In addition, comprehensive and consolidated reporting on SOEs in the
annual reports of the Government institutions playing an ownership role
will go a long way in reducing Parliament’s reliance on SOEs for
accountability and information.
4.4 Role of National Treasury in current SOE Governance, Ownership& Oversight:
4.4.1 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.
4.4.2 National Treasury is a classic institution where the different Government
roles are blurred, thus positioning it as a super Department (which is
very powerful).
4.4.3 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.
4.4.4 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
Page 46
4.4.5
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.
4.5 Choice of Future Models: Governance, Ownership, Remuneration, etc.: It is apparent
from the papers submitted thus far recommending reforms in different areas going
forward. It is however important to note the following caveats:
4.5.1 There must not be bias (in recommending best practice reform) to SOEs in a
particular class and less attention to others and thus fall into the same trend
as DPE adopted as evidenced by its previous studies (looking solely at certain
SOEs to the exclusion of others).
4.5.2 Non-commercial public entities as well as municipal entities are SOEs and
should not be neglected by focus on major SOEs only. PRC cannot be seen to
send a message that suggests that some SOEs, because they play a more
important role to others, should receive preferential attention when it comes
to reforms.
4.5.3 Whilst there may be merit in nuancing or making differentiated proposals in
this regard, these should be underpinned by the principle that proposed
reform should impact on all the SOEs on all three spheres of Government.
4.6 Role of Legislation in informing, shaping or being the basis of current and/ or future
Government’s ownership model:
4.6.1 The G&O discussion paper on SOE legislative Frameworks demonstrated ho
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, determined 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.
4.6.2 Accordingly, legislation should, going forward, be a key ingredient of
Government’s ownership policy, and should drive its ownership model,
whatever it is.
4.7 Relationship between consolidation of State’s ownership base(of SOEs) and the
corporate form of the SOEs under State ownership:
4.7.1 Consolidation of ownership base does (through a centralised or a dual model)
not necessarily translate into one corporate type of SOEs.
4.7.2 Therefore the practices internationally where State’s ownership is focused on
commercial, corporatised entities, as well as views expressed in South Africa
Page 47
that all SOEs be corporatised loses sight of the developmental agenda of the
Government, and the role played by different SOE corporate forms and types.
4.7.3 Accordingly, a mixed bag of SoEs plays different, equally-important and
differentiated SOE roles, and as such should continue in South Africa.
Corporatisation is necessary, but not absolute.
4.8 Government (owner) Interference:
4.8.1 Review revealed widespread concerns about what is branded Government
interference (as owner).
4.8.2 This is particularly so 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.
4.8.3 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.
4.8.4 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.
4.8.5 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.
4.8.6 Future legislation, SOE Governance Framework will complement the
ownership policy in this regard.
4.9 Full or partial Dilution of State ownership( privatisation):
4.9.1 Privatisation or otherwise of SOEs is a Government policy imperative
informed by the plans and strategies of the Government.
4.9.2 Whilst privatisation was at some stage an option being explored,111 it no
longer is. There is currently no Government plans to sell off any of its
SOEs.
4.9.3 Our submission is that privatisation has the effect of diluting the
Government’s ownership of SOEs.
5
POLICY OPTIONS (ownership)
5.1 Development of one ownership policy: We submit that the establishment of
Government’s ownership policy is a MUST and should be considered.
111
The Department of Public Enterprises was established primarily to drive the Government SOE restructuring/ privatisation
programme.
Page 48
5.2 Retention of current ownership model or changing it? If changing it, to which model do
we change it? The current one poses many challenges, and has to undergo some
reforms, or be changed.
5.3 Single or Integrated Ownership Model: Given the sheer size of the SOE base, is it
practical to have one single source of SOE ownership, instead of an integrated, crossGovernment sphere ownership arrangement involving a National Ownership entity
having regional offices?
5.4 Separation of Role of Government as Owner/ Shareholder, Regulator and Policy-maker:
Should the status quo be retained or this process of separating these roles(in relation to
SOEs) be implemented in line with international trends?
5.5 Direct/ indirect role of Parliament vis-à-vis SOEs: Should Parliament have any role to
play in relation to SOREs, or deal with SoEs through their ownership institution?
5.6 Future role of National Treasury: Should role of National Treasury Role limited to
financial management and oversight or continue to play a role in SOE ownership,
oversight and governance?
5.7 Role of DPE: Should DPE be the basis for the future advancement and consolidation of
SOE ownership/ shareholder management model OR another existing Government
institution OR a new entity is established for this propose?
6
RECOMMENDATIONS (ownership)
The recommendations are as follows:
6.1 Government must develop a task team with representation from all key stakeholders,
notably: Government Departments playing an ownership role, SOEs, and other relevant
stakeholders to be identified, to develop a Government SOE ownership policy.
6.2 There must be an immediate separation of different Government roles:
6.2.1 Policy Departments must play that role only.
6.2.2 Regulatory Role should go to the Regulatory authorities.
6.2.3 Shareholding will be as recommended herein.
6.3 The current shareholder management model should be changed into a centralised
shareholder management model with close, structured and legislated collaboration
with all sector Ministries/ municipalities owning MEs, as well as National and Provincial
Treasuries.
6.3.1 That structured, legislated collaboration should, inter alia, entail an interGovernmental Governance Council (representing all spheres of Government) that
develops frameworks for Governance, oversight and Ownership of SOEs, under
the secretariat of the Ministry of Public Enterprises.
Page 49
6.4 The centralised Government ownership institution should be a Government
Department. The specifics of its role must be spelt out in the SOE ownership policy.
6.4.1 The National Department of Public Enterprises (DPE) is already Government’s
existing solid and experienced platform on focused SOE ownership, governance
and oversight. This therefore positions it as the only platform/ structure to
launch the reformed shareholder management/ ownership model.
6.4.2 Ownership role will be in relation to ALL the SOEs in all forms and types, the
determining factors being: the nature and extent of Government’s involvement
(including funding and shares) in an entity: nationally, provincially and locally,
commercial and non-commercial. This includes all SOE subsidiaries defined as
such by law.
6.4.3 SOEs will have to be categorised by the economic sector they for ease of
management and oversight by the Centralised ownership institution.
6.4.4 Due to the sheer size of the SOE base (662+) there is a need to have Regional
offices for the ownership Institution (DPE). The modalities of the working s of the
centralised Government Institution will be dealt with by the Task Team as per
recommendation 1 above.
6.4.5 The centralised Government Institution should as far as possible draw its work
force/ capacity from Government Departments (nationally and provincially) and
municipalities that currently play an SOE/ MEs ownership and oversight role in
their structures.
6.4.6 Although the centralised ownership institution should remain a Government
Department, that has to be a Department sui generis: in order to attract and
retain the best capacity, talent and SOE sector expertise, it’s remuneration
structure should be outside the public service, but aligned to that of institutions
such as SARS and major SOEs.
6.5 National Treasury should play an overarching fiscal management, monitoring and
advisory role to Government (including SOEs). National Treasury should cease to play
other roles it currently is playing (notably: ownership of SOEs).
6.6 The entire reform recommended herein should be driven by the Department of Public
Enterprises. It should be a phased approach that should not take longer than 3 years.
------
End
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&O Discussion Paper on SOE Subsidiaries
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HSRC’s Risk& Replacement List: 2011
Australian SOE Act
SMOE Discussion Paper “Alignment, collaboration and cooperation among SOEs and all spheres of
Government” presented on 29 February 2012
Industrial Development Corporation Annual Report& Group Annual Financial Statements; 2010
D&T’s Work stream’s Green paper on “Common Understanding& Definition of State-owned
Enterprises
http://mfma.treasury.gov.za/Pages/Default.aspx
http://www.treasury.gov.za/ministry/info.aspx
20. http://www.treasury.gov.za/legislation/PFMA/default.aspx
21. Organisation for Economic Co-operation and Development ( OECD)’s Directorate for Financial&
Enterprise Affairs –Corporate Governance Committee- Working Party on State Ownership&
Practices: “Governance Reform: An Inventory of Recent Change”, 19-20 October 2010
22. Presentation by the Department of Coordination and Governance of State-Owned Enterprises,
Brazil: “Ownership policy and SOE autonomy” at the 2nd Meeting of the OECD Global Network
on Privatisation and Corporate Governance of State-Owned Enterprises at Lucian Pontes, 2-3
March 2010
23. Finnish presentation to the PRC: 6&7 December 2010
24. OECD “SOE Governance Reforms: A Survey of Reform & Practices” Presented at the 2 nd Meeting of
the Global Network on Privatisation and Corporate Governance of State-owned Enterprises, Paris,
March 2010
25. HSRC: “Survey of State-Owned Entities (SOEs) in South Africa (Final Draft) of report: October 2011
26. HSRC’s “Analysis of Public Submissions to Presidential Review Committee”, 2011
27. Edward Nathan and Sonnebergs “ Department of Public Enterprises: Memorandum relating to
Regulation of State-owned Enterprises”, 2010
28. DBSA: “Synthesis Report Final Draft: Evaluating the efficiency and effectiveness of municipal
entities as a service delivery mechanism” 29 September 2010.
29. National Treasury “ Review of Shareholder Management Models Applied Internationally
30. Ha-Joon Chang: “Policy Notes: State-owned Enterprises Reform” United Nations Department for
Economic& Social Affairs(UNDESA), 2007
31. DPE Presentation to the PRC: G&O Seminar, 19 November 2011
32. Constitution of the Republic of South Africa, [No. 108 of 1996], G 17678, 18 December 1996
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