1. BACKGROUND
1.1 WHAT INFORMS THE REVIEW OF TOR/ISSUE – POLICY DEBATES AND CHALLENGES
1.1.1 A brief introduction about the country and its history concerning the topic:
This review is in pursuance of the Presidential Review Committee of State Owned Enterprises (PRC) Legislative Review Term of Reference (ToR 1), namely:
“The current SOE Legislative Framework and the Impact it has on the Management of State-Owned Entities/Enterprises.” This is also a problem statement underpinning the review of this ToR.
This legislative review is driven by the PRC’s the Governance& Ownership (G&O).
The objectives of this review are:
• To investigate whether this Legislative Framework under which SOEs currently function is adequate to enable SOEs to effectively contribute to the State’s Development objectives;
• To investigate whether the current Legislative Framework is sufficient and comprehensive to ensure that SOEs are managed effectively with reference to their Oversight, Governance, Monitoring, Accountability and Performance Management Practices or whether there are challenges / constraints / concerns with the current SOE legislative framework ;
• To determine whether the current legislative framework recognizes the distinct / unique role of Government as a shareholder;
• Benchmark South Africa’s current Legislative Framework with international best-practice, with a view to recommending effective reforms.
• Based on the challenges and opportunities identified, recommend whether there is a need to amend any of the statutes reviewed or alternatively develop a new overarching SOE Act that will guide the process for the formation of new SOEs, detailing their obligations, powers and liabilities and specific rules around SOE governance;
• To determine what the role of the PFMA, MFMA, MSA, Companies Act and SOE Founding Legislation would be in the scenario above.
The Scope of the review covers the three spheres of Government both commercial enterprises and non-commercial entities. The scope further covers the key principal provisions regulating the structure, governance and operations of SOEs, with a view to illustrating the extent of duplication, overlaps, conflicts and over-regulation(if any)which may lead to complexity of interpretation and application.
Ultimately, in conducting the review it is envisaged that the findings and related recommendations will, from an SOE legislative point of view:
• Enhance Board and management capacity;
• Enable the Government as shareholder/ owner to bring about consistent, harmonised shareholder management and corporate governance practices;
• Provide a predictable and transparent framework of accountability;
• Ensure that SOE/Entities are managed effectively;
• Each role player has the necessary authority to act decisively.
• Clear role delineation for all the role players involved.
Just briefly on the nature and structure of the South African Government currently: There are three spheres of Government: national, provincial and municipal. It is trite that each sphere of Government is made up of institutions of Government, notably Government Departments and municipalities. All Government spheres (with the exception of local government) have the power to create statutes, and it is through these statutes that most, if not all these institutions have established public entities/ state-owned entities (SOEs) through which some of the programmes of these Government institutions are driven. These statutes are referred to as Founding Acts/ legislation of these public entities/ SOEs. Over and above these founding Acts there are other laws that apply to public entities/ SOEs. These are collective referred to as the SOE legislative framework/s.
The current SOE Legislative Frameworks we are referring to include the following:
a) National & Provincial Entities: Public Finance Management Act 1 of 1999; The Companies Act No. 71 of 2008;SOE Founding Legislation
b) Local Municipal Entities: Municipal Finance Management Act No. 56 of 2003; Municipal Systems Act No. 32 of 2000; Municipal Structures Act No. 117 of 1998; Companies Act No. 71 of 2008.
c) King III Report on Corporate Governance.
1.1.2 How the issue affects SA:
There are currently about seven hundred and thirteen (713) public entities/ SOEs across all three spheres of Government. These include their subsidiaries. As alluded to above, almost every one of these SOEs (with an exception of a few) were established either by way of SOE Founding Legislation (e.g. South African Maritime Safety Act) or by sector-based legislation (e.g. Water Services Act). Therefore, based on this number of SOEs, there are equally multiple Acts currently governing SOEs. Therefore there is no single overarching SOE legislative framework in South Africa.
PFMA& MFMA: In 1999 South African Government, through National Treasury, created the Public Finance Management Act, followed by the Municipal Finance Management Act in 2003. The introduction of these Acts brought about uniformity in financial reporting, accountability across all public entities/ SOEs at national and provincial levels (PFMA) and local government level (MFMA). The PFMA and the MFMA states that in the event of any inconsistency between its provisions and the provisions of any other existing or future legislation, then the provisions of the PFMA or MFMA (whichever is applicable) applies. These Acts, by having these provisions, recognised that, prior to their coming into being, different pieces of SOE legislation, especially founding legislation, dealt with some of the issues that the new Acts sought to uniformly regulate. These two Acts have, and continue to register enormous successes in improving public entity financial governance, accountability and reporting.
Despite the demonstrated clear association of these Acts with matters of fiscal accountability and reporting, these Acts also embody/ contain non-financial and governance provisions. This is in addition to an already existing plethora of such provisions sitting in SOE founding Acts and, as would be detailed hereunder, the Companies Act. The question that then arises is whether these financial governance legislative instruments should contain non-financial provisions and, importantly, what the impact the current inclusion of these is to public entities/ SOEs.
New Companies Act: Government, through the Department of Trade& Industry, replaced the old Companies Act (1973) with the new one. Therefore SOEs that are incorporated and, in addition to their founding legislation, PFMA/MFMA, they also have the Companies Act to grapple with. Just like the old Companies Act, the current Companies Act contains provisions some of which sit in either SOE founding Acts or the PFMA/MFMA. Furthermore there are strong objections, especially from shareholder Government Departments that the new Companies Act does not give due recognition to the distinct role of Government as a shareholder (as opposed to privately-owned companies). For instance, shareholders in private Companies seek a return/ profit. This is different in the case of a state as a shareholder, and yet the Companies Act does not give recognition to such nuanced considerations. There is also a concern raised about the language used in the new Companies Act, such that interpretation is a challenge.
National Treasury’s Explanatory Memorandum to the Public Management Bill: As already indicated above, reading of DPE and National Treasury literature on SoE legislative framework does point to a consensus between the two Departments that a need exists to strengthen the SoE legislative framework. In doing so National Treasury opted to amend the PFMA, hence the PFM Bill.
The PFM Bill came about due to the realisation that, if they were to amend the existing Act, the amendments will be extensive. It was then considered prudent to instead draft a new Public Finance Management Bill as opposed to a Public Finance Management Amendment Bill (amending the existing Act). The Public Finance Management Bill was therefore planned to replace the current Public Finance Management Act.
According to the explanatory memorandum, the objects of the PFM Bill are aimed at bringing about transparency and expenditure control in each sphere of government, by introducing, amongst others, uniform treasury norms and standards as required in terms of section 216(1)(c) of the Constitution, 1996. There is a clear omission to reference to governance issues, which are very dominant in the Bill thus, in our view, totally transforming the PFMA from a financial oversight instrument to a dual Act: financial oversight and governance legislative instrument.
On including governance provisions in the Act, the explanatory memorandum states that based on weak governance arrangements in public entities, Cabinet approved a National Treasury and DPSA initiative to conduct a governance review of all entities listed in Schedules 3A and 3B to the PFMA. The recommendations of this review have a significant impact on, amongst others, the classification of public entities and government enterprises, their corporate forms and the manner in which they operate. The results of the aforementioned public entity review have been captured in the Bill.
It is worth noting that despite the scope of the review focusing only on PFMA schedule 3, the governance provisions included in the PFM Bill, including the recommended reclassification, were for all public entities/ SoEs. Some of the amendments relating to public entities and government enterprises are somewhat broader than the concept of uniform treasury norms and standards for financial management, as required in terms of section 216(1)(c) of The Constitution, 1996 (Act No. 108 of 1996 as amended). These amendments were, however, considered necessary to: (i) improve the weaknesses identified during the public entity review; and (ii) ensure that all matters relating to public entities that have financial implications or impact on financial management are addressed in a single Act of Parliament.
The explanatory memorandum states that the proposed amendments provide for the establishment and disestablishment processes and procedures for public entities and government enterprises, government oversight of public entities and government enterprises, responsibilities of executive authorities, parent and shareholder departments as well as their relationship with their governing authorities. Although at first glance it may appear that the draft Bill places substantial additional responsibilities on departments, public entities and government enterp
