Governance of State Owned Companies

1. Governance of State Owned Companies Presentation to NCOP Select Committee on Communications and Public Enterprises 22 February 2017 Marks Building 315 Parliament CONFIDENTIAL

2. Contents • Powers and responsibilities • DPE/SOC Interface • Planning, monitoring and evaluation process • Strategic intent statement purpose • Shareholder’s Compact • Significance and materiality framework • Corporate plan • SOC Audit outcomes and observations • SOC Risk Oversight • Current Governance practice and guidelines • Continuously improving oversight • Conclusion CONFIDENTIAL

3. Evolution of DPE Mandate – Towards State-owned Companies (SOC) as Instruments of Development 2010 • 1994 – 1998: Established as the office of privatisation focused on disposal of SOC (with the intrinsic assumption that SOC had intrinsically negative development impacts.) • 1998 – 2003: Emphasise shifts to restructuring of SOC with focus on equity partnerships, initial public offerings and concessioning of specific assets to optimise shareholder value and economic efficiency. • 2003 - 2010: Develop the SOC as focused sustainable state owned business entities delivering on a specific strategic economic mandate. • 2010: Instruments of a Developmental State The future evolution of state ownership policy & shareholder governance model will be informed by the Report of the Presidential Review Committee on State Owned Entities confidential 2

4. The Shareholder has specific powers and responsibilities in the SOC governance system Presidency Performance of Minister of Public Enterprises Parliament Transparency and Accountability Shareholder Executive Authority Shareholder Management Defines powers and responsibilities of shareholder viz a viz the Board and Management Companies Act & PFMA establishes relationship Board Accounting Authority Management Agreement Board cascades delegations and performance expectations down to management Management

5. DPE/SOC Interface • Audit and Risk Committee • Social Ethics Committee

6. Intra-governmental consultations Consultations with sector depts., NT and Presidency (NPC and M&E) on SOC strategy alignment to MTSF (quarterly) Logical Planning, Monitoring & Evaluation Process Strategic Intent Statement (April) • SOC AGMs (Co Act s61) (June-September) • Reporting to Parliament PFMA Sec 65 (30 September) Performance Monitoring TR 29.3 - Quarterly Reports - Dashboard - Quarterly & annual Investor Briefs ( 4 weeks after end of quarter) Shareholder Compact TR 29.2 (Sept) SOC Corporate Plan PFMA Sec 52 (28 February) 5

7. STRATEGIC INTENT STATEMENT PURPOSE (1/2) Communicates the Ministerial expectations Confirms mandate; and Clarifies strategic objectives What is it? • Strategic intent captures the essence of transformational change; • Strategic intent has a long term perspective; and • Strategic intent sets a target that requires effort and commitment

8. STRATEGIC INTENT STATEMENT PURPOSE (2/2) • The document is a product of: • Government policies • Studies commissioned • Consultation with stakeholders • Departmental assessment of the SOC • It is a Ministerial directive – however the Board can influence the process by expressing their views on the direction of the business • The SIS is issued by the end of Q4 for the next financial year • The SIS should be reflected in the: • Shareholder compact • Corporate planning • Executive performance contracting • Assessment of SOC submissions shall be evaluated against the directive Minister Executive Management

9. Shareholder’s Compact (SHC) • Section 29 of the Treasury Regulations requires that Schedule 2, 3B, 3D Public Entities to annually conclude a SHC with its executive authority • The SHC represents the performance agreement between the executive authority and the accounting authority, with regards to performance expectations • It does not replace the corporate plan • The SHC is the primary governance tool setting out the objectives, KPAs and KPIs to be achieved by the SOC • Aims to confirm the strategic objectives to be achieved by the SOC during the reporting period 9

10. Significance and Materiality Framework (SMF) • Document informed by Section 54 (2) PFMA transactions. • Sets out the guidelines within which to submit applications. • SOC to submit applications to Minister for approval and NT for noting. • There is a need to review the quantitative and qualitative measurements with the following matters in mind: • Closer alignment of transactions to the national strategic policy direction (NGP, CO Act, IPAP); • Re-define significant, material and strategic parameters; • Shareholder to note strategic transactions that may be below the quantitative thresholds; and • Shareholder to note multiple transactions that are awarded to a single contractor where the accumulated monetary value will be over the threshold. 10

11. Corporate Plan 11

12. The DPE has the following governance guidelines in place: CONFIDENTIAL

13. SOC Risk Oversight: Risk Profile (1/4) 13

14. SOC RISK Oversight: Risk Profile (2/4) 14

15. SOC Risk Oversight: Continuous Enhancement Tools and Guidelines (3/3) • Comprehensive studies focusing on the following were completed during 2015/16 financial year: • Assess processes embedded within SOCs that are meant to ensure that SOC’s performance and investment plans are immediately aligned with government’s immediate objectives • Assess the risk management capabilities of all SOCs and to determine areas requiring improvement across all SOCs • Assess the feasibility of introducing risk oversight that could be uniformly applied across all SOCs • The development of comprehensive Shareholder Risk Management Reporting Framework, Supporting Tools and Guidelines is currently underway is targeted for completion by end of 2017/18 financial year

16. SOC Risk Oversight: Continuous Enhancement Tools and Guidelines (4/4) • The Framework is envisioned to inter-alia support the following: • Enhance the Shareholder’s oversight on systemic risks that may undermine SOCs’ ability to effectively contribute towards the pursuit of the country’s development objectives • Introduce uniform Shareholder-Level risk reporting practices across all SOCs in order to effectively identify and address risks that may require intra and intergovernmental collaboration • Introduce tools to be utilised to regularly assess risk management capabilities and effectiveness of risk governance structures across all SOCs

17. SOCs Audit Outcomes and Financial Performance over past 3 years IS concerning Recent review into the performance of DPE Portfolio of SOCs highlights several challenges … Observations • All SOCs (except SAX) successfully complied with the PFMA and tabled their Annual Reports • All SOCs (except SAX) held AGMs and signed SHCs Relatively low levels of operational efficiencies resulting in high wastage • Limited functional and managerial skills required in often highly complex environments • Ineffective Performance management measures • Ineffective governance mechanisms and policies to provide clear objectives and direction Eskom (financially unqualified) Denel (financially unqualified) Transnet (financially unqualified) SAX (qualified for past 2 FYs, 2016 AGM tbc) Alexkor (financially unqualified) SAFCOL (financially unqualified) The majority of the SOCs within the DPE’s portfolio require close monitoring or urgent attention The majority of the SOCs within the DPE’s portfolio require close monitoring or urgent attention 17 Source: DPE analysis

18. Audit findings can be summarised into themes that require clear response to enhance governance Audit Finding theme Intervention Desired outcomes F • Ensuring improved supply chain management and significant reduction fruitless and wasteful expenditures. • Eliminate misstatements in the financial statements to ensure that they reflect the correct companies’ positions • Improving the controls and risk management practices within the SOC • Enhanced capacity of the SOC and accountability Supply chain management to reduce irregular, fruitless and wasteful expenditure • Implementing strong consequence management to clamp down on non-compliance to procurement practices • Monthly reconcialtion to be undertaken by all SOC to ensure that capacity to execute the audits is significantly improved • Risk management practices that needs to be significantly improved to ensure that the control environment is significantly improved focusing on supply chain, expenditure management and • Skills audit to be undertaken at the Board and executive level • Contracting on compact to ensure consequence management Eskom i Transnet Preparation of Annual Financial Statements that complied to PFMA requirements ii Telkom Weaknesses of the controls to ensure compliance iii CEF iv Skills and Capacity in financial management (competencies) SOMCO

19. Audit outcomes per entity confidential

20. Observations from the Report of the AGSA, Portfolio Committee and DPE: • Address the root cause for the regression in the portfolio as follows: • DPE to implement performance management measures linking bonus payments to audit outcomes • SOC timely and proper documentation of year-end processes to prepare financial statements • DPE to continue working closely with policy Departments; • Ensure Board members collectively possess the requisite skills and capacity to provide effective leadership to the SOCs; • Fast-tracking the development of the Shareholder Management Bill • Strengthening of oversight on SOCs • Institutionalisation of PRC recommendations • Guiding frameworks for SOCs completed timeously and implemented • Punitive measures for under-performance against targets for Board, Executives. • DPE to closely monitor SA Express turnaround strategy • Whole of State policy to bring alignment and synergy in state aviation Source: DPE, AGSA 2016 Report, Portfolio Committee Report CONFIDENTIAL

21. continuously Improving the Governance Framework (1/2) • Platforms of formal Engagements: • Chairpersons Forum - Chaired by the Minister, as an intervention to re-iterate shareholder expectations, to share best practice and ensure continuous improvement on Board governance • Governance Forum for Company Secretaries • DG/CEO Executive Forum • CFO Forum • DPE has monthly management meetings and quarterly review sessions with SOC • Dedicated DPE/SOC Risk Forum fully functional with participation by Chief Risk Officers of SOCs • DPE/SOC Procurement Governance Forum to be launched in 2017/18 financial year - targeted participation by SOC Chief Procurement Officers • Enhance oversight practices on SOC risk and audit matters through a forum for DPE ARC and SOC’s Risk & Audit Committees - Targeted participation by DPE ARC members and SOCs’ Audit and Risk Committee Chairpersons • SOC must report in Quarterly Reports on progress made in addressing the findings and recommendations of Auditors • Induction and on-going training of Boards, Executives and Company Secretaries • SOCs to ensure consultation with DPE during April, prior to Board’s recommendation on the payment of performance incentives and annual increases to Executives; • SOCs must submit CEO’s performance agreements within 3 months after commencement of new appointments and new financial year.

22. continuously Improving the Governance Framework (1/2) • Platforms of formal Engagements: • Chairpersons Forum - Chaired by the Minister, as an intervention to re-iterate shareholder expectations, to share best practice and ensure continuous improvement on Board governance • Governance Forum for Company Secretaries • DG/CEO Executive Forum • CFO Forum • DPE has monthly management meetings and quarterly review sessions with SOC • Dedicated DPE/SOC Risk Forum fully functional with participation by Chief Risk Officers of SOCs • DPE/SOC Procurement Governance Forum to be launched in 2017/18 financial year - targeted participation by SOC Chief Procurement Officers • Enhance oversight practices on SOC risk and audit matters through a forum for DPE ARC and SOC’s Risk & Audit Committees - Targeted participation by DPE ARC members and SOCs’ Audit and Risk Committee Chairpersons • SOC must report in Quarterly Reports on progress made in addressing the findings and recommendations of Auditors • Induction and on-going training of Boards, Executives and Company Secretaries • SOCs to ensure consultation with DPE during April, prior to Board’s recommendation on the payment of performance incentives and annual increases to Executives; • SOCs must submit CEO’s performance agreements within 3 months after commencement of new appointments and new financial year.

23. continuously Improving the Governance Framework (2/2) • In terms of SOC Reform initiatives – in November 2016 Cabinet approved the principles (premised on the recommendations of the PRC Report) that will underpin the Shareholder Oversight Policy and the timeframes for the development of the policy and subsequent overarching SOC Bill. • To, amongst other things, ensure that State investment remains relevant to support the restructuring and transformation of the economy • The policy will also provide clarity on the roles of policy ministries and the National Treasury. This also incorporates the role of the DFIs and Economic Regulators • Guide for the appointment of persons to state and state controlled entities for Government to adopt a consistent board and executive appointment methodology. • The Remuneration and Incentive Standards for Executives, Prescribed Officers and Non-Executive Directors of SOCs has been approved for implementation. The Department envisages a two year phasing in of the principles within which all PFMA Schedule 2, 3B and 3D entities will be inducted into the framework. • An appropriate state-linked benchmark for the remuneration and incentives of Executives and Prescribed Officers • An Inter-Ministerial oversight Committee on Remuneration will be established comprising of the Ministers of Public Enterprises, Finance and Public Service and Administration to oversee implementation and give guidance on, inter alia, the SOC remuneration policy, annual increases, sizing of SOCs, motivation for increases and payment of incentives • Strict adherence and no deviation from the Remuneration Standards, e.g. the failure to meet guarantee conditions will negate the payment of incentives. • The Standards will eventually become practice notes of the SOC Bill. CONFIDENTIAL

24. Conclusion • The Governance of SOCs continues to improve in an effort to develop a transparent, consistent and coherent framework that encourages sustainable performance of the SOC and long term value creation; • The Cabinet decisions have set a clear framework within which the reform must occur • Going forward the focus is on implementation of the Cabinet decisions • The next draft of the policy will be submitted to Cabinet in March 2017 for approval • It is anticipated that the Bill may be introduced in Parliament during 2018. CONFIDENTIAL

25. Thank You 25 CONFIDENTIAL