Shareholder Oversight “What Audit Committee Can Expect”
Jan 14, 2016
Shareholder Oversight “What Audit Committee Can Expect”
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Presentation outline
► Purpose of the presentation
► Significance of state ownership in the economy
► Governance performance analysis
► Governance of SOEs
► Conclusion
5th Annual Audit Committee Conference
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Purpose of the presentation
► Outline the significance of state ownership in the economy as well
as roles performed by the state
► Evolution of governance of SOEs and the need to promote good
corporate governance
► Outline the relationship between good governance and company
performance
► Emerging governance challenges within SOEs that requires
strengthened audit function
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Significance of state ownership in the economy
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Significance of SOEs
► State-owned enterprises (SOEs) are large contributors to the economy, accounting for 20 percent of capital formation.
► SOEs are expected to invest R362 billion over the medium term, contributing significantly to gross capital formation.
► According to the 2015 Budget Review, In 2013/14, the major SOEs had revenue streams of R260bn compared to government’s revenue of R810bn.
► In this same period, their total asset value stood at R903.4 with net asset value of R274.7bn.► In a Developmental State, SOEs are the main tool for state intervention in the economy.► The National Development Plan (NDP) and Medium Term Strategic Framework (MTSF) target
infrastructure investment and private-sector partnerships. SOCs are ideally positioned to support the NDP and the MTSF.
► According to the NDP, this will assist the SOEs achieve their developmental potential. ► There is also a growing realisation of the gap between the country’s aspirations for the SOEs, and
their ability, in their current state, to deliver on these aspirations.
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Relative size of the SOEs
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• Revenue streams ≈ R260 billion vs. Governments revenue ≈ R810 bil.
• Interest bearing debt ≈ R320 billion vs. Governments debt ≈ R1.4 tril.
• Infrastructure spend R110 bil. vs. Governments R104 bil.
• Total asset value ≈ R1 005 tril.
• Net asset value ≈ R374 bil.
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Impediments to the SOEs potential
• The financial and operational performance of several SOEs is weakening.• A number of SOEs are reliant on government guarantees to access funding or to borrow at
more favourable rates.• Government guarantees for SOEs, at about R461bn in 2013/14, have reached its prudency
level and are jeopardising the sustainability of public finances. • Debt-service costs, at an annual average of 10.1%, are the fastest-growing category of
government spending. • Draw-down on these guarantees, have pushed total government exposure to R225bn and are
expected to increase over the next three years. • Weak financial performance is also associated with failure to define clear strategic goals.• SOEs often juggle multiple, unclear, or conflicting financial and social objectives.• Government has a critical role in creating the right environment for the SOCs to achieve their
development potential envisaged in the NDP.
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Governance and performance analysis of SOEs
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Audit performance and profitability
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2015 review into the performance of the SOCs highlights several challenges with a centre of excellence
SOCs either require monthly monitoring and/or closer active shareholder intervention
Denel (financially unqualified)
Transnet (financially unqualified)
Eskom(financially unqualified)
Alexkor (financially unqualified)
SAFCOL (financially unqualified)
SAX (qualified for the past 2 FYs)
SOCs with strong governance tends to perform better on financial metrices
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Governance of SOEs
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Governance differences between SOES and private sector firms
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The differences in the governance of SOEs and the privately owned enterprises brings new complexities requiring innovative solutions
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The multi levels of accountability further complicates the governance
5th Annual Audit Committee ConferenceSource: Wong, 2004
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Governance of SOEs..
► The peculiar governance of SOEs bring about new challenges that
must be comprehensively addressed, these are:
► multiple and sometimes conflicting objectives
► Balancing financial sustainability and developmental imperatives
► Enhancing transparency to boost public confidence
► The boards are an important institutions to balance this complex
requirements
► The Department continue to develop systems to strengthen the
appointment of the Board of Directors
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Governance issues facing the SOCs in our portfolio
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FF
Audit Finding theme Interventions Desired outcomes
Ensuring improved supply chain management and significant reduction fruitless and wasteful expenditures.
Eliminate misstatements in the financial statements to ensure that they reflect the correct companies’ positions
Improving the controls and risk management practices within the SOC
Enhanced capacity of the SOC and accountability
Implementing strong consequence management to clamp down on non-compliance to procurement practices
Monthly reconcialtion to be undertaken by all SOC to ensure that capacity to execute the audits is significantly improved
Risk management practices that needs to be significantly improved to ensure that the control environment is significantly improved focusing on supply chain, expenditure management and
Skills audit to be undertaken at the Board and executive level
Contracting on compact to ensure consequence management
i
ii
iii
Supply chain management to reduce irregular, fruitless and wasteful expenditure
Preparation of Annual Financial Statements that complied to PFMA requirements
Weaknesses of the controls to ensure compliance
Skills and Capacity in financial management (competencies)
iv
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Concluding remarks
► The South African government continues to implement reforms
that will enhance the governance of SOEs
► The SOEs are an important instrument for the developmental
state
► The complexities require increased level of assurance to
ensure that good governance is encouraged
► The reforms implemented by government since 1994 has been
crucial to promote good governance within the SOEs
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“Poor corporate governance lies at the heart of the poor performance of SOEs throughout the world” Simon CY Wong, London School of Economic
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THANK YOU
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