SURVEY OF STATE-OWNED ENTITIES (SOEs)

1. SURVEY OF STATE-OWNED ENTITIES (SOEs)

2. CATEGORISATION The number of employees per entity ranges from 7 to 48778 (mean: 3394; median: 145). The highest revenue of an SOE in 2009-2010 was R35,6 billion; the lowest was no revenue. Mean revenue was R1,98 billion; Median: R128,5 -m. Categories by Economic Sector: Categories by Role in the Economy: The majority of the Schedule 3a, 3b, 3c, 3d and municipal entities were established in 1997 or later, while most Schedule 1 and 2 entities were established before 1997.

3. CATEGORISATION Most entities in transport, storage and communication; electricity, gas & water; and community, social & personal services were established in 1997 or later. Most of the non-commercial entities, regulators, service delivery entities and SETAs were similarly established in 1997 or later. Common terms denoting the type of activity in which an SOE is involved include ‘supply’ or ‘provide’ (39%); ‘regulate’ or ‘coordinate’ (23%); ‘promote’ (13%); ‘develop’ or ‘improve’ (10%); ‘finance’ (9%); and ‘conserve’ or ‘maintain’ (6%). All entities in the manufacturing sector and more than half in the EGW, TCS and FBP sectors have asset bases valued in excess of R170- m. Conversely, SOEs in the FFA, mining and CSP services sectors mainly have asset bases of less than R170-m. Schedule 1, 2 and 3b SOEs are more likely than others to have asset bases in of > R170- m. Capital expenditure during 2009-2010 ranged from R20000 to R18 billion (mean: R765-m; median: R4,8-m). SOEs with highest capital expenditure are best represented amongst Schedule 2 entities; those in the EGW, FFA and manufacturing sectors; and commercial entities and research institutions.

4. CATEGORISATION Operating expenditure fell within the range R100,000 to R37 billion in 2009-2010 (mean R1,3 billion; median R66,2 million). Entities most likely to have operating expenditures exceeding R300 million per annum are Schedule 1 or 2; those in the manufacturing, EGW or TSC sectors; and commercial, constitutional entities and research institutions. The entities operate at a national (67%), provincial (18%), local (11%) or multiple levels (4%). Schedule 3c and 3d entities operate mainly at provincial level, as do municipal entities at municipal level. By sector, entities with highest representation at provincial or municipal levels are in the RFB and CSP sectors; and by role, they are largely non-commercial or service delivery entities. Twelve percent of SOEs report to municipalities; 10% to Economic Development or Tourism; 9% to Public Enterprises; and 9% to Transport. Others report to Arts & Culture (6%); Energy (5%); Higher Education (5%); Finance or Treasury (5%); Human Settlements (4%); Agriculture or Rural Development (4%); Communications (4%); Labour (4%); Water Affairs (3%); Basic Education (3%); Trade & Industry (2%); or Science & Technology (2%). Just over half of entities have a grant-based funding model (56%). Substantial proportions are funded by levies (21%), or by the sale of the SOE’s own services or products (21%). Other funding comes in the form of loans (18%); debt equity (16%); guarantees (8%); subsidiaries (8%); and/or bonds (1%). (More than a third (36%) of SOEs has more than one source of funding).

5. DEVELOPMENT & TRANSFORMATION:Priorities of the Developmental State Responding to a question about their understanding of how SOEs are defined, the most frequently utilised words are “government” or “state” (88%); “commercial” or “business” (35%); “public benefit” or “developmental” (34%); “PFMA” (11%); and “strategic” (6%). Most (92%) perceive that there is a relationship between the activities of their SOE and the Developmental State. SOEs identify government’s social priorities most frequently as education (38%), health (36%), employment creation (26%), safety and security (23%), and poverty alleviation (16%). Economic priorities are seen to be employment creation (50%) and economic growth and/or development (37%); infrastructure development (12%); skills development (11%); promotion of SMMEs (7%); industrial beneficiation (6%); land reform (4%); financial stability (4%); and promotion of competitiveness (4%).

6. DEVELOPMENT & TRANSFORMATION:Priorities of the Developmental State Political priorities are identified as the protection or strengthening of our democracy (27%); political stability (10%); black economic empowerment (6%); and poverty reduction (5%). Most SOEs (79%) perceive that they are achieving the optimal balance between the social, economic and political imperatives of government. Where this is not happening, the hindrances are seen to be financial or resource constraints. Of the three imperatives, 58% of SOEs say their most significant area of contribution is economic. Forty percent of SOEs say it is in respect of social imperatives and 9% say it is political. Fifteen percent of SOEs mention more than one area as being significant.

7. DEVELOPMENT & TRANSFORMATION:Human Capital and Transformation Most (78%) of SOEs indicate that they are meeting their human capital objectives, primarily by means of skills training and development; 82% conduct skills needs assessments. Between 1% and 5% of annual budgets are allocated to training. The main areas of training are specific technical skills required in the SOE; leadership and management; time and stress management; and IT skills. Between 25% and 70% of staff receive training each year. To strike a balance between corporate profitability and making a contribution towards the developmental needs of the country is not an issue for many (55%) SOEs, as they see themselves as non-profit organisations. About half (51%) of SOEs see their role and contribution to the development and transformation agenda by means of application of their expertise within their specific sector.

8. GOVERNANCE AND OWNERSHIP:Regulatory Frameworks About half (47%) of SOEs say that they are governed by one or more Acts that relate only to their own organisation; 59% mention that they are subject to the PFMA or MFMA; 27% say they are governed by the Companies Act; 16% say they are subject to Treasury Regulations. More than half (54%) see these legislative/ regulatory frameworks as conducive to the delivery on their specific mandates. Constraints within legislative/regulatory frameworks are that SOEs lack sufficient funding to operate effectively (37%); and the requirements are time-consuming or bureaucratic (28%), thus working against effective operations. The frameworks are seen by only 64% to be sufficiently flexible to allow for the effective execution of SOE mandates, and only 40% to allow for adjustments in SOE capital structure. Preferential or favourable rates are accessible to 15% of SOEs when securing finance from state-owned finance institutions.

9. GOVERNANCE AND OWNERSHIP:Regulatory Frameworks Frameworks that inform SOE accounting and reporting processes are the PFMA (69%); GRAP (27%); IFRS (24%); Treasury Regulations (24%); GAAP (20%); Companies Act (16%); and MFMA (8%). Founding legislation of a few SOEs contains additional requirements, including King II and III; IFRAS, Skills Development Levies Act; Skills Development Act; and FA Act. 59% have to report to more than one institution. This requirement is most prevalent amongst manufacturing, EGW and construction sector entities; and research institutions; 69% report to a specific Minister or Department; 9% to a municipality; 33% report to the national or a provincial treasury; and 10% to the Auditor-General. Reporting frequency is mainly quarterly (27%), annually (20%), monthly (12%) and ad hoc (3%), but many SOEs have more than one of these reporting requirements. About one-third (36%) say that in addition to their legislated reporting requirements, they have one or more non-legislated accounting and reporting requirements. Strengths of current reporting systems are their clarity (9%); their encouragement of compliance (7%); and promotion of accountability (6%). Weaknesses (22%) that they are too time-consuming or too costly to administer.

10. GOVERNANCE AND OWNERSHIP:Boards and Executives Recruitment and appointment of Board members is guided by the relevant Act (45%) or made by the Shareholder (30%), who might be a Minister, MEC or municipal council. Compliance with recruitment and appointment guidelines is reported to be full by only 51% of SOEs; others made a range of comments indicating a lack of knowledge of the process (e.g. Minister/MEC handles process; nominations kept secret; department knows); it’s complicatedness; or a lack of involvement in the process. For 63%, a Minister or MEC has a prominent role in appointing Board members; a Minister’s approval is the minimum requirement and in some cases, a Minister recommends nominations. The role of Cabinet is important for 28%, whereby Cabinet confirms recommendations; parliament is mentioned by 14% as taking a role in Board appointments. Race, gender and disability balance in Board membership is achieved by a non-prescribed general awareness of the need for by 29%; a further 27% say this is the responsibility of the Minister/Shareholder; 15% say the composition of the Board is prescribed by the relevant Act governing the SOE; 12% says that skills and experience are the first factors considered, usually in addition to demographics; and 4% say they have no guidelines.

11. GOVERNANCE AND OWNERSHIP:Boards and Executives Specific skills most frequently present within SOE Boards are qualifications and experience in the specific sector of the SOE (59%); financial and accounting expertise (55%); legal or regulatory skills (35%); human resources skills (22%); leadership or management experience (24%); and business or commercial experience (14%). Most Boards (83%) have a prescribed minimum and/or maximum number of Directors, varying widely from a minimum of one to a maximum of forty. More than three-quarters (77%) say there is a prescribed minimum and/or maximum number of years that a Director can serve on their Board; this is most commonly three years (30%); five years (11%) or four years (4%). Most (93%) don’t prescribe a limit to number of Boards on which a Director can serve. The average minimum number of Board meetings that should be held each year is 4,2 (median 4; range 1 to 12); and for Committees is 5 (median 4; range 1 to 50). For most (75%) these numbers are prescribed.

12. GOVERNANCE AND OWNERSHIP:Boards and Executives Boards met an average of 6,4 times in 2010-2011 and 6,7 times in 2009-2010. These frequencies correspond with the prescribed minima in 30% of cases; 54% met more than the prescribed minimum; 6% met less frequently (10% had no prescription). SOE Executives are defined as the day to day senior managers, including the Chief Executive Officer, by 57% of SOEs; 12% refer to the Board or Minister as the Executive. Others said they were undefined (4%); or were either unsure (2%); or gave a range of other definitions (5%); or no response at all. In more than two-thirds of SOEs (67%), the Board and/or the Minister appoints or removes both the CEO and the executive management of the SOE. In another 32%, the Board appoints or removes the CEO and the CEO appoints or removes the executives. For 70%, appointments and removals of CEOs and executive management are done in terms of the relevant Act/s governing the SOE; and for 29%, in terms other guidelines (e.g. King III). In 68% of SOEs, some of their executives are part of the Board; in 10%, all executives are; in 21%, none are; (1% not applicable). For 57%, the relevant Act prescribes whether the SOE’s executives are part of its Board; for 43%, this is determined by King III or other guidelines.

13. GOVERNANCE AND OWNERSHIP:Boards and Executives The Human Resources Committee of the Boards of 55% of SOEs has the role of recommending and/or approving new appointments to the Board; or the CEO and other executives of the SOE. The Remuneration Committee of 35% of Boards has some form of oversight role in these appointments; as do the Governance Committees of 22%. The basis of these roles is established practice in the case of 57%; legislated for 22%; and some other basis (such as the Board Charter or the organisational constitution) for 20%. Legislation in respect of these recruitment roles is generally perceived to be an enabler (64%), with 30% seeing it as a constraint to the processes involved. Those indicating that the legislative provisions are an enabler, refer to transparency, efficiency, clarity and flexibility. Those seeing the provisions as a constraint mentioned that they are cumbersome and time-consuming, involving red-tape. Annual appraisals of the performance of Boards are conducted in 73% of SOEs; 46% say they have an established practice to deal with poor performance by their Boards. No SOEs indicated that this has ever occurred.

14. GOVERNANCE AND OWNERSHIP:Boards and Executives Most entities report that they have a high (48%) or a medium degree (39%) of autonomy. High levels of autonomy are most prevalent in Schedule 1 and Schedule 2 entities; those in the FFA sector; constitutional entities, DFIs and commercial entities. Zero autonomy occurs most amongst municipal entities and non-commercial entities. About half (51%) of SOEs, Boards include government officials. This practice is much more prevalent in Schedule 3 than in Schedule 1 or 2 or municipal entities. It is also most prevalent in SOEs in the mining, EGW and CSP Services sectors; research institutions and regulators. The roles of the Chairperson and CEO are reported to be separate in almost all (96%) SOEs. However, in more than 10% of Schedule 3b, municipal and EGW entities, this separation of roles does not occur. In 13% of SOEs, employees represented on the Board by an employee-nominated Director. This arrangement is mainly (70% of the 13% of SOEs) mandated through a statute.

15. GOVERNANCE AND OWNERSHIP:Shareholders Shareholder’s rights are spelled out in a shareholder’s manual/compact in 61% of SOEs. Shareholder’s responsibilities most commonly are to provide for structured/ transparent Board nomination, appointment and removal procedures (74%); recommend policy for Board remuneration (69%); ensure effective tracking of performance (67%); provide for a performance management and monitoring tool (62%); call, attend and vote at general meetings (48%); and interact with external auditors (40%). More than three-quarters (79%) have a single shareholder. Ten percent have from 2 to 8 shareholders; 8% do not have shareholders and one SOE has 80000 shareholders. In 9%, there is information to which the owners/shareholders of an SOE, have no access. Meetings with shareholder representatives occur between one and four times per year. In three-quarters of the SOEs that have minority shareholders, these shareholders participate prior to the reaching of fundamental corporate decisions.

16. GOVERNANCE AND OWNERSHIP:Remuneration Policies Most (92%) of SOEs indicate that they have well defined remuneration policies in use. Deviations are most common in Schedule 1 and Schedule 3c entities and in the mining sector. In almost all (99%) of SOEs where they are in use, the policy is applied consistently across all levels. More than two-thirds (68%) benchmark their remuneration policies against other SOEs. SOEs where such benchmarking does not occur are most likely to be Schedule 1,3c, 3d or municipal entities. Information about remuneration levels is accessible to all employees, including organised labour, at 70% of entities. Accessibility is lower amongst Schedule 2 entities; those in the manufacturing or construction sectors; and amongst non-commercial entities and DFIs. For 74%, remuneration policy is uniquely developed for the individual SOE concerned; for 29%, it is prescribed by the shareholder; and for 25%, the policy is structured in some other way.

17. GOVERNANCE AND OWNERSHIP:Remuneration Policies Where remuneration information is available, the differential between the top ten and bottom ten paid employees ranges from about 1:7 to 1:70. Asked about public perceptions and SOE reactions thereto, most SOEs justified their remuneration levels. About two-fifths (44%) have guidelines to set Board remuneration; for others it is determined by legislation/regulations (16%); or other determinants (16%). Only 39% of SOEs are of the view that their Board remuneration is high enough to ensure that their Board members devote sufficient time to their duties. Schedule 2 entities have the highest level (60%) of confidence that Board remuneration is sufficient to motivate results, whereas this is the view of only 17% of Section 3b entities.

18. GOVERNANCE AND OWNERSHIP:Entity Performance and Cooperation For 85%, the performance criteria for Board and senior management are fully aligned with the SOE’s strategic plan, objectives and targets. Willingness and openness to examine business optimisation and shared services in order to improve service delivery is high for 44%, medium for 29% and low for 27% of SOEs. This willingness is most common (>60%) amongst Schedule 1, 3c and municipal entities; non-commercial entities; and in the construction sector. About one third (35%) of shareholder representatives of SOEs facilitate cooperation and collaboration amongst SOEs; in 23%, facilitation is moderate; in 42%, cooperation is hindered. This is most likely (>60%) in municipal entities and in the mining and FFA sectors. Factors thought to be potentially conducive to a culture of collaboration amongst SOEs include meetings /forums (25%); joint ventures or common projects (23%); shared vision about role of SOEs (19%); shared resources, facilities and service providers (16%); communication (15%); and sharing of skills and experience (13%).