Structures and Principles of SOE Governance on BRICS Member Countries

1. Structures and Principles of SOE Governance on BRICS Member Countries Presentation by: Ms Matsietsi Mokholo Deputy Director General, Department of Public Enterprises Republic of South Africa 18 November 2016 Restricted

2. Presentation Outline • Significance of Good Governance in SOCs • Orientation of SOE Mandates and positioning of State Ownership • Structure of the oversight function in BRICS Countries • Evolution of SOEs in South Africa • Current reform process • Conclusion Restricted

3. Significance of good governance in SOEs • The changes in the global economy induced by the aftermath of the global economic crisis has driven the pursuit of alternatives in the organisation of the national economies within the context of globalisation. • This has placed an increased responsibilities on SOEs to drive national, regional and international agendas of their respective countries. This increased responsibility requires enhancement in the oversight and governance principles. • The development of new governance structures must be informed by the following principles: • Improve transparency in the operations of SOEs • Improve public confidence in the management of State Assets that promote development and equality • Recognise the unique positioning of SOEs in the national economies i.e. balancing financial sustainability with developmental imperatives • The Growth outlook for the BRICS countries shows that a new growth model needs to be pursued that will promote stability and unlock investments into the productive and other sectors of the economy. This must ensure economic development. Restricted

4. Positioning of Government Participation in the economy 5 Restricted

5. Ownership arrangements Restricted

6. Structure of the shareholder function in BRICS countries Overarching Policy/legislation China India South Africa Brazil Russia No overarching Policy/legislation Centralised Model Decentralised Model Restricted

7. Internationally, the fragmented approach to the exercise of ownership by various jurisdictions has made way for a credible and strong shareholder policy/framework. According to the OECD, a shareholder policy has the following advantages: It helps governments to avoid the usual pitfalls of passive ownership and excessive intervention, which often follow from multiple and contradictory objectives. It serves as an effective tool for public communication and provides companies, the market and the general public with a clear understanding of the state’s objectives as an owner and its long-term commitments. International reflection on Governance Models Restricted

8. Evolution of SOCs Policy post 1994 1994 • 1994 – 1997: Government Established as the office of privatisation focused on disposal of SOC (with the intrinsic assumption that SOC had intrinsically negative development impacts.) • 1997 – 2004: 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. • 2004 - 2008: Develop the SOC as focused sustainable state owned business entities delivering on a specific strategic economic mandate. • 2008 – 2009: Abandonment of privatisation as Government Policy and repositioning of SOCs as key instruments of a developmental state • 2010: Challenges faced by SOCs prompted Government to commence with a new reform process (PRC Review) • Post 2010 it was clear that SOCs faced challenges to deliver on the Sate’s developmental requirements and that a comprehensive SOCs reform process was necessary Restricted

9. Key lessons from previous reform process • The privatisation of SOCs was largely informed by short term pressures and undermined long term growth development and ability of the State to influence the structure of the economy e.g. • Disposal of Government shares in MTN & Vodacom created monopolies that focused on profit maximisation rather than quality of services and universal access whilst ensuring financial sustainability. Government has introduced South Africa Connect to respond to these challenges • Disposal of Iscor to AMSA undermined the industrialisation programme of Government. This resulted in the creation of monopoly which did not invest in modern technology and equipment. • Privatisation of SASOL saw privatisation of State’s intellectual property for the benefit of the few • Introduction of the private as equity partners has not worked to the benefit of the State e.g. SwissAir Restricted

10. RSA current shareholder oversight framework Restricted

11. Objectives of the current reform process • Outline the Rationale for continued State ownership given the current levels of development • Foster credibility and trust in the State as an owner, both externally – in relation to the public at large, the SOCs’ customers, domestic and foreign creditors and partners – and internally in relation to Parliament and public administration, as well as SOC employees and management. • To separate Government’s role as shareholder, policymaker and regulator. • To strengthen the ownership function of the state and create a strong "institution” responsible for improving SOC corporate governance, performance and developmental contribution of the SOCs. • To improve company performance by setting explicit goals, injecting private sector business disciplines and empowering their boards and management to monitor performance and increase accountability. • To reduce fiscal risks and costs to the Government budget associated with SOCs. • To promulgate legislation to implement the shareholder policy and an overarching SOE statute. Restricted

12. Governance of SOEs must be driven by a need to improve their performance and contribution to the developmental imperatives of the State Most of the countries in the BRICS have moved towards a centralised model to ensure the optimum orientation of SOE Strategies to the overarching developmental imperatives that have shaped industrial and broader economic development goals The Governance models must improve transparency and accountability to ensure that good governance is promoted within SOEs There is an increasing trend of State and Private Sector Cooperation in improving SOE performance Conclusion Restricted