Department of Public Enterprises on Shareholder Oversight and Risk Management

Meeting report

Briefing by Department of Public Enterprises (DPE)
Mr Anthony Kamungoma, Chief Director: Investment Portfolio Management, DPE presented the briefing to the Committee (see attached document).

The shareholder had specific powers and responsibilities in the State-Owned Enterprises (SOE) governance system. The shareholder executive authority defined the powers and responsibilities of the shareholder regarding the board and management. The board would then cascade delegated authority and performance expectations down to the management level.

The Shareholder was primarily responsible for the appointment and the removal of directors from the board which included the appointment of executive directors (i.e. the Chief Executive Officer (CEO) and the Chief Financial Officer (CFO)), who were appointed ex-officio and approved the remuneration of directors.

The board as the custodian of the company was expected to act in the best interests of the SOE and the shareholder. The board had an oversight responsibility to review and monitor how the management conducted the company’s affairs and operations. Management and control of a company fell under the board of directors. The executive management was accountable to the board and the board was accountable to the shareholder.

In terms of shareholder expectations and governance framework, the DPE had a statutory mandate to conduct oversight over SOE’s and ensure the implementation of the Public Finance Management Act (PFMA), the National Treasury Regulations and other applicable legislation, such as company law. The DPE governance tools included the strategic intent statement, the shareholder compact, investor briefs, the corporate plan, quarterly reports and board performance evaluations and attendance records of board members.

For the strategic oversight of SOE’s, the Department had developed additional performance monitoring and evaluation systems, such as the strategic intent statements, which was a primary communication tool of the State’s expectation of the SOE strategy. Investor Briefs was another development by the Department and were issued by the Minister to the boards of SOE’s on a quarterly basis to advise performance trends and highlight the need for corrective action in the event of any deviation from the agreed key performance areas and indicators.

Performance monitoring and evaluation by the Department included the obligation to review the performance of SOE’s on a quarterly and annual basis and to conduct a corporate plan risk assessment in respect of the strategic objectives of the SOE.

In terms of risk management, the Department had developed a comprehensive risk management framework, which would improve planning processes by enabling the key focus to remain on core business and helped to ensure the continuance of service delivery, improved efficiency and general performance and improving accountability and governance as well as reducing the risk of potentially costly surprises.

Mr Kamungoma outlined the risk management process and emphasised the need for risk identification. The Department had developed the Isiduko Business Intelligence Dashboard, a reporting tool used by SOE’s to report on their performance and operations and that allowed the Department to identify trends. Another important step in the process was monitoring the ongoing management activities and evaluating the performance of the SOE.

Mr Kamungoma said that the risk profile of the SOE portfolio appeared to be improving. Three charts were presented to illustrate the inherent and residual risk rating of SOE’s in each quarter of 2010 and the first quarter of 2011.

Discussion
Mr Mlenzana, (COPE, Eastern Cape) thanked the Department for the presentation.  He asked what the Department’s perspective or understanding was of financial misconduct in SOE’s. He wanted to know if adequate strategies were in place to uncover incidents of corruption or fraud.

Mr Kamungoma said that financial management responsibilities were clearly defined in the PFMA and it included fraud, theft and corruption. The PFMA was specific in terms of what needed to be done to address such incidents. All fraud cases in all areas had to be reported. A second threshold was agreed whereby all fraud cases were reported in the annual reports of SOE’s. All fraud cases must be reported in the quarterly reports as well. The Auditor-General had investigated the performance audits of SOE’s and highlighted all areas requiring attention. If necessary the Department would intervene to ensure that the necessary action was taken.

Mr Mlenzana referred to the substantial bonuses paid to the CEO’s of SOE’s. If the Department’s risk management was not tidied up, those CEO’s could ‘get away with murder’. He was concerned that CEO’s could buy shares in the company with their bonuses and would sell out if the scale was tilted.

Mr Kamungoma replied that there was a remuneration agreement between the SOE board and executive management personnel. The Department had remuneration guidelines for directors and for non-executive directors. There were currently two ex-officio directors on the board and the guidelines also apply to those directors as well. This remuneration agreement was based on individual performance assessments as well as revenue and the asset base of the SOE. Performance incentives were agreed between the board and the CEO.  He pointed out that there were no share schemes in SOE’s. All SOE’s were 100% owned by Government. Share schemes were common in the private sector but did not apply to SOE’s.

Mr M Sibande, (ANC Mpumalanga) observed that there were many SOE’s and asked if there were systems in place to ensure that the various entities communicated with each other. He wanted to know if there was enough capacity and that there were no loopholes in the systems.

Mr Kamungoma answered that the Dashboard system mentioned in the presentation integrated all the reporting requirements of all the SOE’s. The Dashboard system was a central depository of performance information, covering financial and operational risk management. The system allowed the Department to track performance trends. SOE’s had embraced the system.  The Department would like to speed up the submission of reports by the SOE’s but the challenge was that all reports had to be signed off by the board, which tended to take a long time.

Mr Sibande said that the theory of risk management differed from the practical application. He was concerned over the manner in which ESKOM applied risk management principles. ESKOM continued to cut off the electricity supply and he wanted to know if that action formed part of the Department’s risk management. He stated that he was not a racist but it appeared that ESKOM usually cut off the electricity supply to the black townships during the election periods.

Mr Kamungoma said that he would need to confer with his colleagues at ESKOM. His understanding was that electricity policies were administered by the Department of Energy. There was a threshold applicable to households and ESKOM attempted to enforce payment for electricity through power cuts.

The Chairperson clarified that Mr Sibande was referring to the power cuts in general.

Mr Kamungoma said the administration of electricity supply was done by many entities. The supply to large users was administered by ESKOM while the supply in residential areas was administered by the municipality. He was aware of challenges in certain municipalities with the electricity infrastructure. He suggested that the issue of power cuts was dealt with on a case-by-case basis. All power was supplied by ESKOM but it was administered by other entities in different areas and there were many players involved in the process.

Mr Sibande pointed out that the Department had overall responsibility for the SOE that supplied the country with electrivity.  He wanted to know if the Department had a system in place that would allow it to detect if there was a problem with the delivery of services by a SOE in certain areas.

Mr Kamungoma answered that the submission of a report was reliant on the availability of the Dashboard system. An agreement on the availability of the system to the SOE’s was in place. Certain key SOE’s such as ESKOM and Transnet had their own infrastructure networks and the Department needed to ensure that the system was available for use.

Mr Sibande enquired about the protocols and corporate governance policies. He asked for clarification on whether Directors were required to keep the executive authority informed on risk management, progress reports and corporate plans. He asked if SAFCOR was still the responsibility of the Department. If SAFCOR was privatised, he wanted know what role was currently played by the DPE.

Mr Kamungoma referred to the explanation of the process included in the presentation.  The board of the SOE reported to the Minister, who was accountable to Parliament. The SOE’s had to submit the corporate plans one month prior to the commencement of the financial year. The Department assessed the corporate plan. SOE’s submitted quarterly reports to the executive authority, who communicated back to the board and highlighted any concerns, trends and risks.  He confirmed that the Department was still responsible for SAFCOR.  The previous decision by Cabinet to privatise the entity was withdrawn.
 
Mr O De Beer, (COPE Western Cape) said that the function of risk management was normally outsourced to consultants by SOE’s and asked if there had been any improvement in the practice of outsourcing.

Mr Kamungoma responded that the boards of SOE’s had a risk and audit committee to address matters concerning risk management. Certain SOE’s had appointed a risk manager in place.

Mr De Beer asked if risk management was part of the performance contract for managers at all levels or only applicable to CEO’s. He felt that risk management should be involved in all fields and apply to all managers.

Mr Kamungoma answered that the Department had to ensure that risk management was embedded in all management processes. Risk management was included in the performance contracts of all managers. Objectives were set for each manager at all levels and if the manager was not aware of the risk management objectives, he/she would not be able to deliver the required performance.

Mr De Beer asked if the Department had a standard organisational model in place that could be used for all SOE’s.

Mr Kamungoma asked for clarification on what was meant by a standard organisational model.

Mr De Beer explained that he meant if standard tools were used to measure the SOE’s in all nine provinces.

Mr Kamungoma replied in the affirmative.  The systems developed by the Department were applied in all the provinces. The Minister agreed the shareholder compact with each SOE, after which a corporate plan was compiled and submitted. The Department had developed guidelines for each SOE on the required content and format of reports. Other standard guidelines on minimum requirements applied to all the entities.

The Chairperson asked for more detailed information on the SOE’s operating in each province. SOE’s operated in different provinces and members did not have reports detailing activities in each province. The capital investment programme of Transnet and ESKOM was reflected at a provincial level. She asked if the provinces were still using the same model.

Mr De Beer said that Mr Kamungoma’s response was very vague and suggested that a more detailed written response was submitted to the Committee.

The Chairperson explained to the Department that the Parliamentary Select Committees required detailed information broken down per province.

Mr Kamungoma requested that Members clarified questions that required a written response from him.

Mr Mlenzana repeated his earlier question concerning the system in place to detect and track incidents of fraud and financial misconduct.

Mr Kamungoma replied that the Department did not have a special system in place to detect financial misconduct. Each SOE had an audit and risk committee in place, which reported on incidents of financial misconduct.

Mr Sibande asked what Government’s role was in policy making in the broader legislative environment.  He asked how Government enabled the boards of SOE’s to manage the businesses effectively. He asked if the boards were involved in formulating strategic impact plans or developing economic policy.

Mr Kamungoma answered that the Department was not the policy maker. The Department implemented the policies set by Government. For example, the Department of Energy was the custodian of the policy on energy that a SOE such as ESKOM had to comply with. The same principle was applicable to the Department of Transport and Transnet. The Department had oversight over SOE performance against strategic objectives. In setting objectives, the Department would consult with the policy makers in order to be clear that the objectives fell within the parameters of the applicable policy.  The board oversaw the management of the SOE. The Minister appointed the members of the board and the board was accountable to the Minister. The board delegated certain powers to management.

Mr M Jacobs, (ANC Free State) said that there were many objectives mentioned in the briefing but the Department did not know who was doing its job. SOE’s were always asking for bailouts from the National Treasury.  He asked if the Department’s structure was so ineffective that it could not detect when a SOE was experiencing problems and when it was necessary to intervene.

Mr Kamungoma agreed that this was an area of concern for the Department. The SOE’s they prepared a guideline on expected performance when the strategic intent was communicated to the entity. Certain SOE’s were currently implementing turnaround strategies, which might require additional capital investment to strengthen their balance sheets and to deliver on their mandates. The Department was encouraging SOE’s to be more capital efficient.

The Chairperson asked who was responsible for the Dashboard system and if the SOE’s were represented in the structure.

Mr Kamungoma replied that each SOE had a board of directors, which was approved by the Minister and by the Cabinet. The skills profile of the boards of SOE’s was under review.

The Chairperson asked for a response to his question on how the Isibuko Intelligent Dashboard system was structured.

Mr Kamungoma explained that the Dashboard system was a Microsoft Word-based reporting tool used by SOE’s to submit reports on their performance. The system was named Isibuko because it simulated a mirror and reflected the performance of the SOE at any given point.

The Chairperson said that the Committee needed more information on risk management.  He said that the Members were not satisfied with the responses provided to their questions.  The Committee awaited a more detailed written report from the Department.

The meeting was adjourned.