THE 2ND ANNUAL SERVICE DELIVERY LEARNING NETWORK MPUMALANGA Thursday, 31 April 2005

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THE 2ND ANNUAL SERVICE DELIVERY LEARNING
NETWORK - MPUMALANGAThursday, 31 April 2005

• Key Lessons in the Restructuring of State
  Enterprises in South Africa
• Adv. Malixole Gantsho
• Executive Chairman Gaming For Future Enterprises

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Outline of Presentation

• Part 1 Restructuring Framework
• Restructuring Environment and Accountability
• Background and DPE Mandate
• Approach to (Forms of) Restructuring
• Socio-Economic Impact, Benefits and Proceeds of
  Restructuring
• Restructuring of State Owned Enterprises/Assets
• Part 2 Programme of Performance Monitoring AND
  Corporate Governance
• Part 3 Shareholder Compacts Instruments

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Part 1

• RESTRUCTURING OF STATE OWNED ASSETS SA NATIONAL
  GOVERNMENT PERSPECTIVE

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The Economic Environment in 1994

• Democratic government took over in 1994 faced the
  following challenges
• Restructuring state owned assets in the context
  of political transition
• Severe disparities in income, race, gender and
  urban rural divide
• SOEs which had catered for interest of minority
  now had to cater for all South Africans.

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Economic Environment (Cont)

• SOEs were part of the States repressive
  machinery
• Had to be brought in line with the transformation
  of the State as a whole.
• SOEs were large and unwieldy, governed outside
  the confines of the Companies Act and other
  relevant legislations.

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Economic Environment (Cont)

• Pre-1994 privatisation not transparent - there
  was no stakeholder consultation
• New Government accused of lack of direction and
  coordination in restructuring.
• Opposite view of government following neo-liberal
  policies
• State also accused of lack of commitment to
  restructuring.

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State as Shareholder Model
Advice
Shareholding Ministries
Advisors, Treasury Oversight Committees
Feedback
Feedback
Monitoring Reports
Board
Information and Relationship Management
Management
State Company
Operations
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State as Shareholder Accountability Network
Parliament
Advisors
Shareholding Ministries
Treasury
Cabinet
Responsible Minister
Oversight Committees
Portfolio Committees
PE/SE Boards
NCOP NA
Public Protector, AG, Ombudsman
PE/SOE Management
Consumers, Media, Financial Institutions, Vested
Interest Groups
Official Information Act
PE/SOE Stakeholders
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SA Governments Approach to Restructuring

• The SA Government tasked the Department of Public
  Enterprises (DPE) with the responsibility for the
  development and implementation of an integrated
  and coherent approach to the of state-owned
  enterprises (SOEs) restructuring process, to
  maximize the contribution to the socio-economic
  development of South Africa.
• The Departments vision to have restructured SOE
  that promote economic growth and a better life
  for all in a globally competitive environment.
• The Departments mission to direct and manage
  the accelerated restructuring of SOEs to maximize
  shareholder value, focusing on four key economic
  sectors, which underpin economic growth
  transport, energy, defence and telecommunications
  

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Top state-owned enterprises
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The Policy of the Department

• The restructuring programme of the Department
  informed by the Policy Framework titled, An
  Accelerated Agenda Towards the Restructuring of
  State-Owned Enterprises released in August 2000.
• The Policy Framework aims to
• Set out objectives and the guiding principles for
  the restructuring process.
• Provide a more comprehensive framework to ensure
  a consistent approach to restructuring across
  Government and to address perceived market
  uncertainties about Government's restructuring
  priorities.
• Provide all stakeholders with clarity about the
  restructuring of state-owned enterprises and to
  make the process as transparent as possible while
  ensuring accountability.

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DPEs Restructuring Mandate

• Accelerate the restructuring agenda of SOEs
• Maximising shareholder value
• Regulatory reform
• Promote macro-economic growth, competition and
  private participation in monopoly sectors
• Promote wider participation in the economy and
  promoting empowerment restructuring (BEE)
• Mobilise private capital and expertise and
  accessing globally competitive technology
• Ensure that SOEs are efficient, and promote
  service delivery by freeing resources for social
  services and infrastructure spending
• Monitor and measure performance of SOEs
• Contribute to lower public sector borrowing
• Mitigate country risk associated with implicit
  contingent liabilities and also those that are
  explicit (guarantees)
• Promoting sustainable employment and through
  economic improvements
• Consumers to benefit from lower prices and higher
  quality services brought by expanded competition

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Forms of Restructuring

• Concessions (BOT)
• Strategic Equity Partner (SEP)
• Strategic Management Partner (SMP)
• Public Private Partnership (PPP)
• Privatisation (Full or Partial)
• Securitisation
• Equity Linked Products (Convertibles)
• Floatation of SOEs (Initial and Secondary)
• Turnaround Strategies

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RESTRUCTURING VS PRIVATISATION

• Frequently, restructuring and/or privatisation
  programmes are interpreted as meaning a
  withdrawal of state power, authority and
  responsibility from the provision of services,
  employment and investment.
• The Department of Public Enterprise
  restructuring programme not a simplistic
  privatisation programme. Privatisation is just
  one form or model of restructuring. The programme
  was and remains designed around a multiple array
  of strategies, or mixes of options, to ensure the
  maximisation of shareholder interests defined in
  economic, social and development terms.
• No set formula for restructuring, each state
  owned enterprise investigated on its own merits
  to meet governments wider economic and social
  goals.

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Social and Economic Impact of Restructuring
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Restructuring of State Owned Enterprises/Assets

• Through restructuring - commitment to promoting
  market-driven environment supported by private,
  public and social capital to improve
  attractiveness of SOEs to investors and to
  developing a stable social environment by
  improving key public services
• Restructuring programme has generated significant
  results
• Transport sector Transnet - debt burden
  addressed through legislation and reorganization
  of pension fund separated Portnet, into two
  business entities Port Operations and Port
  Authority Spoornet, is on its way to
  incorporation and South African Airways has had
  a turnaround after privatization in 1998
• Energy sector committed to introduction of
  private sector participation to provide
  additional generation capacity Legislation
  finalized to incorporate the utility, Eskom
  Promoting competition among generating companies
  and regional electricity distributors within
  South Africa EDI established
• Defence sector engaged BAE Systems as potential
  SEP to ensure aerospace group remains
  competitive. Ordnance divisions, as well as in
  the Airmotive industry finalized
• Telecommunications sector Process of managed
  liberalisation finalized - led by the IPO of
  Telkom SA, to build upon the success of SBC and
  Telekom Malaysia transaction
• Other non-core sectors Safcol Aventura
  Alexkor Airchefs Etc

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Proceeds from Restructuring
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SOE Borrowings
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Part 2

• PERFORMANCE MONITORING PROGRAMME FOR STATE
  ENTITIES
• AND
• CORPORATE GOVERNANCE

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Monitoring and Compliance

• In order to ensure effective monitoring of
  compliance by PE/SOEs, the boards and enterprises
  are required to submit regular (quarterly ?)
  reports on progress against or deviations from
  the corporate plans.  
• The reporting requirements already set out in the
  Legislation (eg. PFMA) and Companies Act,
  Governance Codes, Board Charters added to this
  reporting requirement to ensure effective
  monitoring by the Shareholder.

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Some Focus Areas

• In particular, the following areas are critical
  for inclusion
• in terms of a review of the extent of progress
  in
• achieving them
• promotion of citizen entrepreneurship
• diversification of the economy
• promotion of exports
• development of a competitive SMME community
• creation of sustainable employment opportunities
• promotion of the development of vertical
  integration and horizontal linkages between SMMEs
  and primary industries
• Enhancement of efficiency in the delivery of
  services

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Need for Performance Monitoring

• The survival and growth of the organization
• Ensuring stability and profitability
• Maximization of shareholder value
• Debt reduction and proper use of allocated funds
• Efficient and effective borrowing program
  contingent liability/declaration
• Managing the programme of government
• Overall efficiency and utilization of assets
• Global competitiveness
• Social and other deliveries
• To ensure that the entities deliver in terms of
  their mandates as contained in founding law and
  legislation

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Programme Aim

• The Aim of the programme
• To serve as best vehicle to manage government
  shareholding interests through monitoring and
  evaluating the financial, socio-economic and
  non-financial performance of state owned
  enterprises and, promotion and advocacy of best
  performance management practices contributing to
  enhanced shareholder value, within an improved
  corporate governance environment

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Overview - Programme Objectives

• Safe guard of government interests portfolio in
  PE/SEs, thus serving as holding company
• Provide advice to shareholder on performance of
  its portfolio and continued involvement on a
  holistic and integrated basis
• Ensure efficient performance through rigorous
  performance monitoring and evaluation

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Overview - Programme Objectives

• Entrench a culture of and promote good corporate
  governance, probity and business ethics in terms
  of best practices
• Monitor and evaluate socio-economic performance
  and organizational health of PE/SEs within
  established frameworks
• Develop and implement intervention measures
  within framework of relevant acceptable
  benchmarks, Provide inputs and insights on impact
  of EA Programmes and Government on the portfolio

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Programme Mandate

• Monitor and interrogate the financial performance
  of PE/SEs with a view to holding PE/SE leadership
  accountable for performance
• Monitor, implement and advocate sound corporate
  governance practices ensuring improved ethics and
  probity in PE/SEs
• Manage healthy relations between shareholder and
  PE/SEs
• Monitor other socio economic indicators of PE/SEs
  including empowerment strategies

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Programme Mandate

• Be the states custodian for the portfolio of
  PE/SEs and advise Government on PE/SE performance
  and progress towards targets accordingly
• Develop databases of relevant benchmarks and
  PE/SE information to entrench a performance
  mindset in the PE/SEs
• Provide reliable, accurate and current PE/SE
  information to EA Programmes and government for
  the purposes of strategy
• formulation and decision making

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Key Programme Challenges

• Historically strained relationship between Gov
  and PE/SEs
• Impact of divestiture and PE/SE reform
  initiatives
• Entrenchment of performance monitoring and
  evaluation culture
• Balance of business performance versus socio
  economic developmental objectives
• Defining and separating roles and
  responsibilities and mandates
• Corporate governance and related issues of
  accountability, reporting, responsibility
  (Corporate Vs Co-operative Governance)
• Shareholder capacity to effectively monitor PE/SE
  performance
• Dealing with multiplayer boards and subsidiary
  anomaly.
• Positioning of the Programme for post
  privatisation / restructuring focus

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Key Programme Challenges

• Development of a post privatization model for Gov
  as best vehicle to manage its shareholder
  interests
• Development of models / systems for holistic
  performance monitoring and evaluation of PE/SEs
• Audit report on corporate governance status and
  compliance by PE/SEs
• Signing off of Shareholder Compacts with PE/SEs
• Development of relevant PE/SE Database
• Research and development (ongoing)
• Review of PE/SE Governance Arrangements - Annual
  Reporting

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(1) Financial Performance Monitoring

• Monitor the financial performance of PE/SEs
• Understand why their performance is the way it is
• Understand specific industry
• Compare with benchmark of similar company in
  industry
• Compare PE/SE performance with best practice
• Report to Cabinet on Financial Performance of
  PE/SEs

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Financial Performance Monitoring

• Financial
• Establish PE/SE financial performance and
  evaluation regime
• Tabling of financial statements, report on
  financial position and performance of PE/SEs
  (annually )
• Investments and risks analysis of PE/SEs and
  approvals
• Legislative compliance (ongoing)
• Financial performance monitoring and reporting
  (ongoing)
• Implementation of intervention strategies
  (ongoing)

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(2) Corporate Governance Performance Monitoring
and Compliance

• Compare corporate governance codes and board
  charters with Legislative requirements and best
  practice and revise as necessary.
• Manage relationships between Government and
  PE/SEs.
• Identify and define specific information needs
  and develop a database on corporate governance
  with respect to each PE/SE.
• Provide advice to shareholder and responsible
  Minister.
• Report to on the corporate governance performance
  of PE/SEs.

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Corporate Governance Performance Monitoring and
Compliance (Cont)

• Corporate Governance
• PE/SE Board selection/appointment policy and
  management of conflict of interest policies
• Board Remuneration policy
• Development / Review of corporate governance
  Codes and Board Charters
• Best practice probity and ethics policy
• Shareholder compacts monitoring (ongoing)
• PE/SE performance monitoring against revised
  Corporate Governance Codes (ongoing)
• Implementation of monitoring systems

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(3) Socio-Economic Performance Monitoring

• Establish the socio-economic performance regime
  between Executive Authority and each PE/SE
• Establish a balance between the commercial and
  broader socio-economic objectives of Government
• Monitor and evaluate this socio-economic
  performance in PE/SEs
• Understand why their performance is the way it is
  
• Compare PE/SE performance with best practice and
  recommend changes where there is an imperative to
  do so
• Maintain strong interface with financial
  performance division

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Socio-Economic Performance Monitoring

• Socio Economic Performance
• Identification of socio economic indicators and
  development of performance regime. (In areas such
  as EE spend as of total procurement spend
  Safety, health and environment Equity and
  transformation Service and alternative service
  delivery
• Development of database of relevant local and
  international benchmarks on leading metrics used
  in PE/SEs e.g. ROI debt equity
• Monitor and report on compliance with applicable
  regulatory and other policies / regulations
  (ongoing)
• Non-financial indicators/targets relevant to
  PE/SE organizational health for PE/SEs

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Socio-economic Issues

• Economic Empowerment
• PE/SE boards should take initiative that would
  advance members of historically disadvantaged
  groups economically on a large scale. PE/SEs
  corporate plan should, inter alia, ensure that
  the PE/SE contributes to job creation, rural
  development, urban renewal, poverty alleviation,
  empowerment of women, skills and management
  development and education.
• The directors annual report should disclose the
  PE/SEs procurement practices in so far as they
  relate to Black Economic Empowerment and whether
  the PE/SE has achieved the empowerment targets as
  agreed with the Executive Authority.

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Economic Empowerment

• To spread the benefits of restructuring the
  following strategies are stated
• Alternative service delivery.
• Ownership, training and procurement and self
  management opportunities for black people, women
  and disabled
• Employee Share Ownership Schemes and Community
  Trusts
• The National Empowerment Fund Trust established
  to facilitate the redressing of the past
  imbalances

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Socio-economic Issues

• Ownership, Control and Management
• Employment Equity
• Affirmative Procurement
• Employee Share Option Schemes (ESOPs)
• Community Trusts

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Part 3

• THE SHAREHOLDER COMPACT AS PERFORMANCE
  MONITORING INSTRUMENT

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BACKGROUND

• The Shareholder Compact represents an agreement
  between Government as the major shareholder and
  the Board of the State Owned Enterprise as
  regards performance expectations and parameters.
  It does not replace the strategic and business
  plans, but is rather complimentary to these. It
  describes the relationship between the
  signatories and identifies the behaviour that
  would be required on both sides to support
  effective management and performance.

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Background (Cont.)

• It is an instrument of Corporate Governance and
  performance monitoring (stewardship and
  custodianship).
• The Shareholder Compact model
• Process relating to conclusion of Shareholder
  Compacts and Approval processes

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SHAREHOLDER COMPACT

• It is a Performance Agreement between Shareholder
  and the Board which sets performance targets
  standards and how these targets will be met and
  it regulates their relations,
• It is complimentary to the legislation and does
  not derogate or absolve directors from their
  duties there under,
• It addresses business issues as depicted in the
  business plans strategic documents of the
  PE/SEs whilst also addressing policy issues.

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Shareholder Compact (Cont.)

• It captures gatekeeper clauses ie. employment
  equity, dividend, tax, borrowings, privatisation
  / restructuring matters etc.
• The mandate of the PE/SE is defined in the
  Shareholder Compact
• The Shareholder makes undertakings to support the
  board, and it is in terms of these undertakings
  that the Board measures the Shareholders
  performance under the Compact.

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Shareholder Compact (Cont.)

• It has a potential of addressing issues and
  relations between government, PE/SEs and Labour
• The Shareholder Compact is now a requirement of
  the Legislative compliance and developing these
  documents for its PE/SEs is imperative.
• Cabinet has approved the shareholder compacts for
  Denel, Transnet and Eskom as well as the
  shareholder compact model as a vehicle for
  management of relations between the PE/SEs and
  government as a shareholder.

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Shareholder Compact (Cont.)

• Framework of a shareholder compact
• Recognition and clarification of the different
  governance roles and responsibilities of the
  shareholders and management
• Mechanisms to be adopted for the alignment of
  these divergent interests
• Key performance corporate objectives and the
  periods and methods for their attainment
• Clarification of disclosure obligations to ensure
  transparency and accountability
• Adoption of means to insure against risk and
  fraud in the management of the entity
• Compliance with existing legislation

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Shareholder Compacts (Cont.)

• To embody
• Corporate Governance Codes and Board Charters in
  the Public Sector
• King Report II
• Principles, Legal status
• Companies Act, Legislation, Regulations
• Performance/shareholder compacts

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Shareholder Compacts (Cont.)

• Board Pre appointments systems
• Probity
• Conflict of interest and management of
• Fiduciary responsibilities
• Board self performance review processes
• To give Shareholding Ministers confidence that
  the directors they have appointed are performing
  to expected standards and that a boards skills
  needs are being met.
• To provide chairmen with a formal means of
  advising Shareholding Ministers with an
  assessment of the adequacy of the appointment
  regime in the context of meeting a boards
  skills needs.

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SHAREHOLDER COMPACT FRAMEWORK

• Primary relationship between signatories
  whether advisory or governing capacity and nature
  of contact between them
• Undertakings by the Board and PE/SE
• Governance issues ie whether it is based upon any
  principles/protocols, compliance with
  legislation, register of conflict of interests,
  compliance with code of ethics, fraud prevention
• Corporate Goals, Objectives and Key Performance
  Indicators
• Reporting requirements
• Decision-making procedures at Board level and the
  Shareholders role in decision-making

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Shareholder Compact Framework (cont)

• Corporate policies in respect expectations ie who
  carries responsibility for ensuring integration
  at government level
• The primary reporting relationship of the PE/SE
  to government (through whom)
• Implementation of legislative requirements ie
  employment equity, procurement
• Development of other policies re strategic
  sourcing, share-option schemes, outsourcing
• Obligations to deliver
• Liabilities recognition of legislative and
  contractual liabilities
• Penalties and Rewards
• Dispute Resolution

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Shareholder Compact Framework (cont)

• Framework of a shareholder compacts should
  include
• Strategic Plans
• Business Plans
• privatisation / restructuring Plans
• Mandates, Undertakings, Governance, Rights,
  obligations, responsibilities, Reporting,
  Decision-making, rewards, penalties
• Accompanying documents

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Corporate Plans

• In accordance with the requirements of the
  legislation
• Business Plans
• Privatisation / restructuring Plans
• Fraud Prevention and Risk Management Plans
• Financial Reports
• Accompanying documents e.g PE/SE specific matters

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Model Summary Of Shareholder Compact
Products Comparative Reporting
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Model Summary Of Shareholder Compact Products
Comparative Reporting
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Model Summary Of Shareholder Compact Products
Comparative Reporting
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Thank You
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Contact Details

• Adv. Malixole M Gantsho
• Executive ChairmanGaming for Future Enterprises
• 7 Mercia Road, Kilner Park, Pretoria, 0186
• P.O Box 11980, Queenswood, Pretoria, 0121
• Tel [phone]
• Fax [phone]
• Mobile [phone]
• Personal E-mail malixole_at_gamingforfuture.co.za
• Office E-Mail info_at_gamingforfuture.co.za