Shareholder Oversight “What Audit Committee Can Expect”

Page 2 Presentation outline ► Purpose of the presentation ► Significance of state ownership in the economy ► Governance performance analysis ► Governance of SOEs ► Conclusion 5 th Annual Audit Committee Conference

Page 3 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 5 th Annual Audit Committee Conference

Page 4 Significance of state ownership in the economy

Page 5 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. 5 th Annual Audit Committee Conference

Page 6 Relative size of the SOEs 5 th Annual Audit Committee Conference 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.

Page 7 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. 5 th Annual Audit Committee Conference

Page 8 Governance and performance analysis of SOEs

Page 9 Audit performance and profitability 5 th Annual Audit Committee Conference 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

Page 10 Governance of SOEs

Page 11 Governance differences between SOES and private sector firms 5 th Annual Audit Committee Conference The differences in the governance of SOEs and the privately owned enterprises brings new complexities requiring innovative solutions

Page 12 The multi levels of accountability further complicates the governance 5 th Annual Audit Committee Conference Source: Wong, 2004

Page 13 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 5 th Annual Audit Committee Conference

Page 14 Governance issues facing the SOCs in our portfolio 5 th Annual Audit Committee Conference F F Audit Finding themeInterventionsDesired 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

Page 15 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 5 th Annual Audit Committee Conference

Page 16 “Poor corporate governance lies at the heart of the poor performance of SOEs throughout the world” Simon CY Wong, London School of Economic 5 th Annual Audit Committee Conference

Page 17 THANK YOU

Page 18