THE 2ND ANNUAL SERVICE DELIVERY LEARNING

NETWORK - MPUMALANGA

Thursday, 31 April 2005

Key Lessons in the Restructuring of State Enterprises in South Africa :

Adv. Malixole GantshoMalixole GantshoExecutive Executive Chairman: Chairman: GGaming For Future Enterprisesaming For Future Enterprises

2

Outline of Presentation

Part 1: Restructuring Framework

Restructuring Environment and AccountabilityBackground and DPE Mandate Approach to (Forms of) RestructuringSocio-Economic Impact, Benefits and Proceeds of RestructuringRestructuring of State Owned Enterprises/Assets

Part 2: Programme of Performance Monitoring AND Corporate Governance

Part 3: Shareholder Compacts Instruments

Part 1

RESTRUCTURING OF STATE OWNED ASSETS – SA

NATIONAL GOVERNMENT PERSPECTIVE

The Economic Environment in 1994

Democratic government took over in 1994 faced the following challenges:

Restructuring state owned assets in the context of political transitionSevere disparities in income, race, gender and urban rural divideSOEs which had catered for interest of minority now had to cater for all South Africans.

Economic Environment (Cont)

SOEs were part of the State’s repressive machineryHad 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.

Economic Environment (Cont)

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

State as Shareholder Model

Shareholding Ministries

Board

Management

Operations

Advisors, Treasury Oversight Committees

Feedback Monitoring Reports

Advice

Feedback

Informationand

RelationshipManagement

Stat

e C

ompa

ny

ParliamentParliament

Cabinet

Portfolio Committees

PE/SE Boards

PE/SOEManagement

Executive

Consumers, Media,Financial Institutions,Vested Interest Groups

NCOP & NA

Public Protector, AG, Ombudsman

Official Information Act

Oversight Committees

Treasury

Advisors

State as Shareholder – Accountability Network

ShareholdingMinistries

Responsible Minister

PE/SOE Stakeholders

SA Government’s 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 Department’s vision: to have restructured SOE that promote economic growth and a better life for all in a globally competitive environment.The Department’s 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

Top state-owned enterprises SOE's Total assets

(Rm)Turnover (Rm)

Net income (Rm)

Employees GDP

873,637

Eskom 74,028 24,459 1,868 35,707 2.8

Transnet 56,088 27,080 779 84080 3.1

Telkom 45,080 26,720 1,863 49128 3.058

Rand Water 3,972 2,005 135 3500 0.23

Denel 3,827 3,446 -203 11090 0.394

Post Office 2761 3130 -90 28454 0

Airports Co. 2,201 966 292 1737 0.111

SABC 1,617 2,130 -99 3245 0.244

Aventura 132 0,122 -698 1669 0.014

Alexkor 131 0,227 -33 690 0.026

Safcol 690 582 14 8,211 0

Total 190,527 90,518 3,828 227,511 9.976

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 ofstate-owned enterprises and to make the process as transparent as possible while ensuring accountability.

DPE’s Restructuring MandateAccelerate the restructuring agenda of SOEsMaximising shareholder valueRegulatory reformPromote macro-economic growth, competition and private participation in monopoly sectorsPromote wider participation in the economy and promoting empowerment restructuring (BEE)Mobilise private capital and expertise and accessing globally competitive technologyEnsure that SOEs are efficient, and promote service delivery by freeing resources for social services and infrastructure spendingMonitor and measure performance of SOEsContribute to lower public sector borrowingMitigate country risk associated with implicit contingent liabilities and also those that are explicit (guarantees)Promoting sustainable employment and through economic improvementsConsumers to benefit from lower prices and higher quality services brought by expanded competition

Forms of Restructuring

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

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 government’s wider economic and social goals.

Social and Economic Impact of Restructuring

Internal to the firm, industry or sector

Broader economic impacts

Social impacts

Enhancing efficiency and effectiveness of state enterprises

Reducing the public sector borrowing requirement

Ensuring wider participation in the SA economy

Accessing globally competitive technology

Attracting foreign direct investment and portfolio inflows

Mitigating possible negative social impacts arising from restructuring

Creating effective market structures in the sectors currently dominated by state owned enterprises

Financing growth and the requirements for industrial competitiveness

Promote sustainable employment, either directly or indirectly, through improvements in the economy

Mobilising private sector capital and expertise

Performance monitoring of SOEs

Consumer benefit –lower prices and higher quality service

Maximize Shareholder value

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 servicesRestructuring 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 aturnaround after privatization in 1998Energy 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 liberalisationfinalized - 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

Proceeds from RestructuringState Owned Enterprise (SOE) DATE % SOLD PROCEEDS N.R.F. FORM

SABC Stations March-97 100% 510 510 SEP/BEETelkom May-97 30% 5,631 1,165 SEPSun Air November-97 100% 42 21 BEETransnet's Viamax May-98 30% 12 N/A BEEACSA June-98 20% 819 819 SEPACSA October-99 4% 173 173 BEEACSA October-99 1% 44 44 ESOPSAA July-99 20% 1,400 611 SEPTransnet's Connnex August-99 80% 15 N/A SEP/BEESASRIA February-00 N/A 7,100 7,100 RESTRUCTURING DIVIDENDM-Cell/MTN June-00 6% 2,400 2,000 BEETransnet's Production House July-00 100% 11 N/A BEETransnet's Chemical Services August-00 100% 3 N/A SOE - TSITransnet's Transwerk Perway September-00 65% 19 N/A SEPTransnet's Transmed Administrator September-00 100% 5 N/A SEPTelkom (Ucingo) November-00 3% 564 564 BEESASRIA April-01 N/A 2,400 2,000 RESTRUCTURING DIVIDENDSafcol - ECN August-01 75% 100 75 SEP/BEESafcol - KZN October-01 75% 45 SEP/BEEM-Cell / MTN January-02 20% 5,500 5,000 MONETISATIONAir Chefs June-02 100% 60 N/A SEPApron Services October-02 51% 117 N/A SEPM Cell January-03 19% 3,000.00 1,000 MONETISATIONTelkom SA March-03 25% 4,500.00 4,500 IPOTOTAL 34,470 25,582

AcronymsN.R.F = Natioanal Revenue Fund (a/c managed by the National Treasury).SEP = Strategic Equity Partner. TSI = Technology Services International, a division of Eskom Enterprises.BEE = Black Economic Empowerment. SASRIA = South African Special Risks Insurance Association.ESOP = Employee Share Ownership Programme.N/A = Proceeds were either not paid to the National Revenue Fund or no percentage stake is applicable.

SOE BorrowingsSOEs' Borrowings as a Percentage of SA's External Debt

46.0%42.3%

40.2%

35.8%

29.9% 31.4%

27.0%24.7%

21.8%20.0%

22.5%

18.4%

0%

10%

20%

30%

40%

50%

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Year

Perc

enta

ge

SOE borrow ings as % of international debt

As at end of Dec 2001

Part 2

PERFORMANCE MONITORING PROGRAMME FOR STATE

ENTITIESAND

CORPORATE GOVERNANCE

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.

Some Focus Areas

In particular, the following areas are critical for inclusionin terms of a review of the extent of progress inachieving 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

Need for Performance Monitoring

The survival and growth of the organizationEnsuring stability and profitabilityMaximization of shareholder valueDebt reduction and proper use of allocated fundsEfficient and effective borrowing program –contingent liability/declarationManaging the programme of government Overall efficiency and utilization of assetsGlobal competitiveness Social and other deliveries To ensure that the entities deliver in terms of their mandates as contained in founding law and legislation

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

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 basisEnsure efficient performance through rigorous performance monitoring and evaluation

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 frameworksDevelop and implement intervention measures within framework of relevant acceptable benchmarks, Provide inputs and insights on impact of EA Programmes and Government on the portfolio

Programme Mandate

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

Programme Mandate

Be the state’s custodian for the portfolio of PE/SEsand 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

Key Programme Challenges

Historically strained relationship between Gov and PE/SEsImpact of divestiture and PE/SE reform initiativesEntrenchment of performance monitoring and evaluation cultureBalance of business performance versus socio economic developmental objectivesDefining and separating roles and responsibilities and mandatesCorporate governance and related issues of accountability, reporting, responsibility (Corporate Vs Co-operative Governance)

Shareholder capacity to effectively monitor PE/SE performanceDealing with multiplayer boards and subsidiary anomaly.Positioning of the Programme for post privatisation / restructuring focus

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/SEsSigning 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

(1) Financial Performance Monitoring

Monitor the financial performance of PE/SEsUnderstand why their performance is the way it is

Understand specific industryCompare with benchmark of similar company in industry

Compare PE/SE performance with best practiceReport to Cabinet on Financial Performance of PE/SE’s

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 approvalsLegislative compliance (ongoing)Financial performance monitoring and reporting (ongoing)Implementation of intervention strategies (ongoing)

(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/SE’s.

Corporate Governance Performance Monitoring and Compliance (Cont)

Corporate Governance:PE/SE Board selection/appointment policy and management of conflict of interest policiesBoard 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

(3) Socio-Economic Performance Monitoring

Establish the socio-economic performance regime between Executive Authority and each PE/SEEstablish a balance between the commercial and broader socio-economic objectives of GovernmentMonitor and evaluate this socio-economic performance in PE/SEsUnderstand 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

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

Socio-economic Issues

Economic EmpowermentPE/SE boards should take initiative that would advance members of historically disadvantaged groups economically on a large scale. PE/SE’s 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 director’s annual report should disclose the PE/SE’s 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.

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 disabledEmployee Share Ownership Schemes and Community TrustsThe National Empowerment Fund Trust established to facilitate the redressing of the past imbalances

Socio-economic Issues

Ownership, Control and Management

Employment Equity

Affirmative Procurement

Employee Share Option Schemes (ESOPs)

Community Trusts

Part 3

THE SHAREHOLDER COMPACT AS PERFORMANCE

MONITORING INSTRUMENT

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.

Background (Cont.)

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

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/SE’s whilst also addressing policy issues.

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 Shareholder’s performance under the Compact.

Shareholder Compact (Cont.)

It has a potential of addressing issues and relations between government, PE/SE’s and Labour;The Shareholder Compact is now a requirement of the Legislative compliance and developing these documents for its PE/SE’s 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/SE’s and government as a shareholder.

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

Shareholder Compacts (Cont.)

To embody:Corporate Governance Codes and Board Charters in the Public SectorKing Report IIPrinciples, Legal statusCompanies Act, Legislation, RegulationsPerformance/shareholder compacts

Shareholder Compacts (Cont.)

Board Pre appointments systemsProbityConflict of interest and management ofFiduciary responsibilitiesBoard self performance review processes * To give Shareholding Ministers confidence that

the directors they have appointed are performing to expected standards and that a board’s 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 board’s skills needs.

SHAREHOLDER COMPACT FRAMEWORK

Primary relationship between signatories – whether advisory or governing capacity and nature of contact between themUndertakings by the Board and PE/SEGovernance issues ie whether it is based upon any principles/protocols, compliance with legislation, register of conflict of interests, compliance with code of ethics, fraud preventionCorporate Goals, Objectives and Key Performance IndicatorsReporting requirementsDecision-making procedures at Board level and the Shareholder’s role in decision-making

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 ieemployment equity, procurementDevelopment of other policies re strategic sourcing, share-option schemes, outsourcingObligations to deliverLiabilities – recognition of legislative and contractual liabilitiesPenalties and RewardsDispute Resolution

Shareholder Compact Framework(cont)

Framework of a shareholder compacts should include:

Strategic PlansBusiness Plansprivatisation / restructuring PlansMandates, Undertakings, Governance, Rights, obligations, responsibilities, Reporting, Decision-making, rewards, penaltiesAccompanying documents

Corporate Plans

In accordance with the requirements of the legislation:

Business PlansPrivatisation / restructuring PlansFraud Prevention and Risk Management PlansFinancial ReportsAccompanying documents e.g PE/SE specific matters

Shareholder Compact Clause Co A Co B Eco C

Clarity of the relationship between the Shareholder and the Enterprise i.t.o roles and responsibilities

Appropriate undertakings by the Board

Appropriate expectations from Shareholder

Corporate Governance arrangements

Reference to corporate goals/performance indicators as per the approved plans

Reporting arrangements

Identification of appropriate supporting documentation

Decision making mechanisms in Board

Model Summary Of Shareholder Compact Products Comparative Reporting

Shareholder Compact Clause Co A Co B Co C

Adherence to prescribed policy

Role of EA as interpreter of Government policy where required

Obligation to supply N/A N/A

Liability of the directors/board

Penalties and reward mechanisms

Third Party assessment procedures

Recognizing what is “whole of agreement”

Inclusion for approval of Strategic Plan

Model Summary Of Shareholder Compact Products Comparative Reporting

Shareholder Compact Clause Co A Co B Co C

Inclusion for approval of Business Plan

Inclusion for approval of privatisation/restructuring plan

General spirit of the agreement

Readiness of the Shareholder Compact for signature

Extent to which the Enterprise Board has been exposed to Shareholder Compact

High level involvement in development of the Compact in Enterprise

Readiness for approval of the relevant plans (Strategic, Business and privatisation/restructuring)

Change Management requirements

Model Summary Of Shareholder Compact Products Comparative Reporting

Thank You

Contact Details

Adv. Malixole M GantshoExecutive Chairman:Gaming for Future Enterprises

7 Mercia Road, Kilner Park, Pretoria, 0186P.O Box 11980, Queenswood, Pretoria, 0121

Tel: +27 12 333 4150Fax: + 27 12 348 9883

Mobile: + 27 83 566 7089

Personal E-mail: malixole@gamingforfuture.co.zaOffice E-Mail: info@gamingforfuture.co.za