A collection of Futuregrowth thought leadership pieces, media articles and interviews.

Governance Review: Letter to the South African National Roads Agency (SANRAL)

05 Jul 2017

Company statement

Further to Futuregrowth’s decision on 31 August 2016, to suspend lending to the six largest South African State-Owned-Entities (SOEs), we have engaged with SANRAL in order to perform a review and analysis of SANRAL’s governance structures and independence.

SANRAL and the other SOEs issue debt in South Africa’s public capital market, and thus gain funding from retail and institutional investors.  We believe that public capital market investors are entitled to meaningful standards of reporting and protection and that capital market issuers choose to face a high level of public scrutiny and commentary.

Futuregrowth’s review and discussion with SANRAL included interaction with SANRAL’s executive management team, Board and Executive Authority.  In addition to a detailed review of the Board, Board Committees and Executive Management, the process included an assessment of SANRAL’s policies, with a focus on procurement, and practical evidence of the appropriate application of policies. 

Summary and conclusions

Futuregrowth has concluded its governance review of SANRAL.   

1. SANRAL’s current governance practices appear acceptable.

  • The procurement process appears robust in that there are clear segregation of duties, tight limits-of-decision-authority, and multiple approval levels. SANRAL endeavours to manage conflicts-of-interest and has historically taken strong action in instances of non-compliance. 
  • The Board seems adequately composed, with a good mix of independent directors, and evidently a good working relationship. However, we’ve suggested the following improvements:
    • Additional Board members (increased from eight);
    • A more balanced mix of skills (we note the Board is stronger in engineering skills than in financial skills);
    • Additional permanent members on the Audit & Risk Committee (increased from three) including additional auditing skills; and
    • More staggered Board members’ terms (currently 5 of 8 directors’ terms expire on a single date, creating meaningful risk).

2. We have deep concern that the SANRAL Act has few controls to prevent a speedy degradation of governance or practices.

  • The shareholding minister has unimpeded powers to materially alter the Board of SANRAL. Notably, such power has been used adversely in the past at SANRAL. 
  • As has been seen at other SOEs under this Ministry, the SANRAL Board can be changed materially and quickly (either by ministerial fiat, or due to several directors’ terms expiring at once), possibly leading to impaired independence and oversight, as well as a lack of continuity, skill and opinion diversity on the Board.
  • The Minister also holds the right to appoint and/or replace SANRAL’s Chief Executive Officer (CEO) as well as the Chairperson of the board, powers normally in the purview of a board.
  • As the SANRAL Act contains weak protections relating to the appointment of directors, Chairperson and CEO, we have urged SANRAL to seek the establishment of a Board Nominations Committee comprised of suitably qualified and independent individuals responsible for recommending Board appointments to the Minister.
    • In our view, well-functioning Boards are able to self-assess, self-plan and manage their requisite skills set, as well as select the Chairperson and CEO – rather than have their shareholder be the arbiter for the selection and appointment of these key positions.
  • Investors have no protections against a sudden degradation of SANRAL’s governance in the existing loan documentation.
  • SANRAL and its shareholder have failed to provide us with any concrete timelines regarding an improved board appointment process or enhanced investor protections against potential material adverse changes. 

3. Investors need timely and relevant information in order to monitor and manage investment risks. SANRAL previously did not offer public reporting on a range of matters of relevance to investors in real-time on a flow basis.  SANRAL and Futuregrowth have agreed to meaningful changes in reporting, including, but not limited to:

  • Any changes in governance staff and structures (e.g. the Board and sub-committees) and changes to the mandates of sub-committees;
  • Changes in procurement policies and practices, including trends in emergency non-competitive procurement; and
  • Insight into the relationship between the company and its shareholder as embodied in the Shareholder’s Compact.
    • We note that SANRAL has now requested the agreement of the Minister of Transport to publish the Shareholder’s Compact [on an annual basis on the SANRAL website and Integrated Annual Report].
    • SANRAL has agreed that it will, in general, make timely and transparent public disclosure of matters of interest to investors, rather than relying on the delayed disclosures in its Integrated Annual Report.

4. We are encouraged that SANRAL has agreed to:

  • Implement a Politically Exposed Person (PEP) policy to cover risks associated with their large-scale rolling procurement programme. We are advised that the PEP policy will be submitted for consideration by the board by the end of 2017.
  • Implement a ‘cooling off’ period that prohibits ex-Directors and/or Managers from entering into any contract with SANRAL for at least 12 months post-employment.
  • Continue to publish the findings of their biennial 3rd party governance audits in the Integrated Annual Report.

SANRAL and its shareholder Ministry appear to be of the view that their current practices, policies, frameworks and reporting are sufficient:  We believe there is room for improvement.  While SANRAL has committed to making certain improvements to investor reporting and disclosure, investors in publicly traded securities are entitled to a higher standard of transparency and basic protections against material changes than are currently being provided.   Importantly, most information should be provided as and when it happens (e.g. by SENS notice) so that investors can make timely and informed decisions, rather than await Integrated Annual Reports which could be materially out of date.

Funding to SANRAL

  • SANRAL’s newly issued debt carries an explicit RSA Government guarantee and the entity could be viewed as merely a department of National Government. However, SANRAL presents itself as a free-standing entity, and Futuregrowth believes that consideration of governance, policies, practices and reporting are integral to funding decisions.  A Responsible Investor seeks to ensure that capital is allocated to those sectors and entities that adopt sustainable and suitable policies and practices.   Government support, therefore, does not obviate the requirement for investors to responsibly assess borrowers and allocate capital appropriately.  We note that poor practices and weak governance in SOEs will ultimately impair the national fiscus. 
  • We are now removing our self-imposed embargo on trading SANRAL debt instruments. This does not necessarily indicate the resumption of funding to SANRAL but rather that  Futuregrowth may now sell, hold or buy SANRAL debt instruments.  Meaningful future funding decisions will be guided by:
    • The continued assessment of SANRAL’s financial position and performance;
    • The continued monitoring of the robustness of SANRAL’s governance structures, policies, practices and disclosure, and
    • The satisfactory implementation of the commitments made by SANRAL as well as of certain of our recommendations to improve SANRAL’s governance and reporting standards.
  • Failing the implementation of the aforementioned governance and reporting improvements, as well as adequate protections against adverse governance changes, investors’ line-of-sight is necessarily short and thus any future advance of debt by Futuregrowth may be limited to short- to medium-term debt.

Analysis scope

Futuregrowth’s in-depth governance due diligence adopted a dual approach. We reviewed governance from the shareholder to Board level, and from the Board into the company. Our review included the following high-level areas:

  1. Understanding the relationship, nature and extent of involvement and support from the Executive Authority, which represents the shareholder (i.e. government, currently represented by the Department of Transport);
  2. Understanding the relationship, nature and extent of involvement and support from National Treasury (which has a non-voting representative on the Board);
  3. Obtaining a more in-depth understanding of the legislative/governance framework under which the institution operates; and
  4. An in-depth review of procurement policies, practices, and mandates, and the application thereof. This included a review of the key decision-making structures and processes, including how exceptions and conflicts are dealt with, the controls in place to limit circumvention of the process, decision-making authorities, and the appropriateness of nominations, appointments and removals of individuals from various decision-making structures.

A key focus of our due diligence was SANRAL’s procurement process, from inception (e.g. needs assessment) to the conclusion of contracted infrastructure work. The due diligence focused not only on assessing SANRAL’s established processes and practices but also on gathering evidence that procurement activities are made in accordance with these established processes and practices. In addition we reviewed the requirements of applicable legislation and regulations and the appropriateness of controls in place to limit circumvention of any of the above.

One of the objectives of our engagement was to obtain a deeper understanding of the Board’s independence, autonomy, decision-making rights, and commitment to fiduciary responsibility.  We also sought to confirm the shareholder’s support of these goals. 

Our due diligence extended further than a desktop review of policy documents: We evaluated the practical application of these policies and mandates and requested evidence of policies in action.

This included, among other items:

  • Board and sub-committee charters/mandates, including decision-making authority levels, and quorum and voting requirements;
  • Board composition, appointment and removal process, directors’ turnover statistics, directors’ term expiry dates; and
  • Disclosure and management of Directors and Executive management conflicts of interest, the Code of Conduct, and the Fraud & Corruption Policy.

We note that our governance review did not include a review of Board and/or Executive remuneration. In addition, our governance review did not focus on the manner in which directives such as e-tolls are formulated at the Shareholder Ministry level. Instead, we focused on the overarching corporate governance principles that govern the execution of SANRAL’s mandate.

High-level governance findings and recommendations

Our due diligence revealed that the Board is currently constituted in line with applicable legislation, and apparently has a good mix of independent (five of the eight members) and non-independent (the CEO, and one representative each from National Treasury and the Department of Transport) directors. 

However with only eight members, the Board appears under-sized for the complexity of SANRAL’s operations, and lacks a balance of skills, notably financial skills.  We will seek continued comfort around the stability and composition of SANRAL’s Board of Directors and Executive Management.  

We understand that currently there is a strong and consultative relationship between the Board and the Executive Authority and a healthy relationship between the Board and National Treasury: We will, to the extent possible, continue to monitor the stability of those relationships.

The largest concern is that the Minister of Transport has the nearly unimpeded right to unilaterally appoint and/or replace all Board members, the Chairperson and the CEO of SANRAL, and this could represent a material risk to SANRAL’s governance and sustainability.

Specifically, we identified the following:

  • The terms of five of the eight non-executive directors expire in March 2018, which would have an impact on the continuity of the Board and retention of institutional memory if the majority of the Board changes. While we note that generally there has been continuity in previous Board re-appointments, there have been substantial once-off changes in the past at SANRAL and at other SOEs.
    • Recommendation: The introduction of a staggered Board term expiry profile to avoid multiple Board members’ terms expiring in the same year, with the attendant loss of skills and institutional memory.
    • Response: SANRAL has made proposals to the Minister of Transport to stagger the appointment of the Board, but this is subject to agreement with the Minister and legislative change to the SANRAL Act. We will closely monitor developments.
  • Current SANRAL management and the Board do not have any formal input into the nomination process of new Board members. Thus, all appointments are made solely by the Minister of Transport and so the degree of “independence” of Board members may be called into question.  We believe that a well-functioning Board should have a nominations committee which allows current (principally non-executive) Board members the ability to consider the requisite mix of skills, independence, and service terms.  In the case of SANRAL, such a nomination committee could provide input to the Minister around skills deficits in the current team and nominate appropriate individuals for consideration by the Minister.  Even if the appointment of Board members remains the Minister’s prerogative, we believe that a well-functioning nominations committeeislikelyto  strengthen Board members’ independence.
    • Recommendation: The implementation of a process whereby SANRAL’s Board provides formal input to the Minister regarding the nomination of new Directors via a formal nominations committee.
    • Response: The SANRAL board has discussed the matter of a nominations committee and has referred it to the Minister of Transport. We will monitor developments in this regard.
  • In line with SANRAL’s interpretation of applicable legislation, the CEO, Department of Transport representative and National Treasury representative are non-voting members but are included for the purposes of determining whether quorum requirements are met. This effectively reduces the board to a five voting member board with a voting decision-threshold of 50% (i.e. the votes of only three Directors arerequiredtotake decisions). This exacerbates the imbalance-of-skills risk noted above. In practice, SANRAL says the Board partially mitigates this risk by seeking to make decisions by consensus across all members.
    • Recommendation: The increase in the number of board members to at least 10, possibly 12, to allow for a more appropriate number of voting members.  We believe the current legislation, which requires only eight members, is inadequate.
    • Response: Legislative change is required and the Board has brought this matter to the attention of the Minister of Transport and will seek a decision from the Minister at its AGM scheduled for September 2017. Further, SANRAL has also requested that the Auditor General of South Africa raise this matter with the Board.
    • Recommendation: The appointment of additional permanent members (in addition to the advisors which have already been appointed) to the Audit and Risk and Asset-Liability Committees who have appropriate financial skills, qualifications and experience. It is our considered view that currently both of these committees lack this important skill set.
    • Response: The increase in the size of the Board (as detailed above) will be an ongoing discussion and SANRAL considers increasing the size of the Board will assist in the strengthening of the sub-committees.  We will monitor future events in this regard.
  • While the eight member board is constituted in accordance with applicable legislation, it is our opinion that the relatively small size results in an imbalance of skills and could preclude the inclusion of a broader viewpoint and input. This is particularly evident in the relatively small sub-committees as well as the under-representation of members with appropriate financial qualifications, skills and experience in both the Board and sub-committees.
  • The Shareholder’s Compact which governs the relationship between SANRAL and its Shareholding Ministry, and in which the Board’s Key Performance Indicators (KPIs) are detailed, is only available on a case-by-case basis, rather than being made publicly available. To understand the strategic direction of the business, and the accountability of the Board, annual public disclosure of the KPIs is necessary and suitable.
    • Recommendation: The entire Shareholder’s Compact and the KPIs embodied in the Shareholder’s Compact should be made publicly available on SANRAL’s website and in the Integrated Annual Report.
    • Response: SANRAL indicates that the KPIs are broadly outlined in its Integrated Annual Report, but the publication of the Shareholder’s Compact requires the consent of the Minister of Transport and SANRAL has requested that the Minister allows its publication. We will monitor developments in this regard.
  • SANRAL has heretofore had no cooling-off period during which ex-Directors and/or Managers are prohibited from doing business with the company. Such cooling-off periods are normal and suitable for companies that spend material amounts on procurement and are a key control in ensuring that conflicts of interest are appropriately managed.
    • Recommendation: A cooling-off period should be introduced by SANRAL that prohibits ex-Directors and/or Managers from entering into any contract with SANRAL for at least 12 months post-employment/Directorship. Further, any contract entered into by ex-Directors and/or Management following this cooling-off period should be disclosed in the Integrated Annual Report.
    • Response: SANRAL has agreed to implement a cooling-off period that prohibits ex-Directors and/or Managers from entering into any contract with SANRAL for at least 12 months post-employment.  SANRAL has noted that to its knowledge, such situations have not arisen in the past.  SANRAL further indicates that generally such conflicts are to be avoided in the future, and if contracts with ex-Directors or Employees occur such events would be disclosed in the Integrated Annual Report as part of related party reporting.  We will monitor developments in this regard.

Procurement findings and recommendations

SANRAL’s procurement policies appear adequate, with low (rand value) levels of delegated decision authorities, robust protocols, conflicts-of-interest policy, and documentation.  SANRAL appears to take strong corrective actions when there are breaches of its procurement policies.  However, there have been recent reports concerning the historical treatment of certain procurement contracts, which has led to a change in the manner of awarding contracts to ensure compliance with the appropriate legislation.

It was noted that in the 2016 financial year, SANRAL reportedly incurred R1.2bn of irregular expenditure relating to procurement activities. This relates to multi-year contracts previously awarded under a National Treasury approved interpretation of “lowest acceptable bid”, which allowed for preferential procurement from emerging firms which provided sustainable pricing and could deliver on contracts, and was used for approximately 16 years.  In response to the Auditor General’s (AG’s) recommendation, SANRAL has changed its practice to align better with the Preferential Procurement Policy Framework Act which uses a differently weighted scorecard to balance between bid price versus sustainably priced emerging contractors.   Based on discussions with management, our understanding is that this R1.2bn is overstated as it refers to the annual expenditure and that the full contract is regarded as irregular.  As old contracts conclude, such irregular expenditure is expected to reduce significantly in the next year or two..

We further note that a Supply Chain Management (SCM) employee who was involved in the Bid Evaluation of certain tenders, failed to disclose that he is a director in a company, where one other director is also a director of a tendering entity.  According to SANRAL’s policies, this employee should have disclosed his interests and recused himself from the Bid Evaluation Committee, which is responsible for making recommendations to the Board Contracts Committee. This issue was identified by the AG as a result of the analysis it performs on conflicts of interests.  We understand that SANRAL has since laid charges against the employee as well as the company in which the employee holds a directorship and continues to conduct CIPC checks on all SCM employees in addition to regularly conducting governance roadshows. We will continue to monitor the effective application of SANRAL’s processes to prevent, detect and manage such conflicts.

We note with concern that SANRAL has heretofore not had a Politically Exposed Persons (PEP) policy in place to govern the risks related to contracting with PEPs.  Transactions with PEPs carry the risk of undue influence which can be mitigated by appropriate disclosure, recusal, policies and processes.

  • Recommendation: A PEP policy should be introduced to govern the risks relating to contracting with PEPs.
  • Response: SANRAL has agreed to draft a PEP policy to cover any future risks associated with their large-scale rolling procurement programme. The PEP policy will be submitted for consideration by the Board in 2017.  We will closely monitor the progress of this item.  SANRAL has noted that, to its knowledge, it has not had any dealings with PEPs in the past.

Reporting and documentation changes

Governance is a dynamic process, the monitoring of which requires ongoing vigilance and engagement with management and shareholders.  As a borrower in the public capital markets, SANRAL has a responsibility to provide complete, relevant, timely and transparent information so that investors can exercise oversight and make informed investment decisions.  Accordingly, we have recommended to the Board and management additional regular, timeous, and public reporting on key matters. These include regular public disclosure of Board composition, key board documents, charters and procurement spend information.  The implementation of much of this additional reporting is at the discretion of SANRAL management and the Board, while other information is in the purview of Ministerial approval.  While the Board have indicated their willingness to share some information on a case-by-case basis, we believe that such reporting should be standardised and made regularly available to all investors.

Reporting changes that Futuregrowth recommended to SANRAL Board and Management

At a minimum, investors should reasonably expect timely and suitable reporting of:

  • Changes in membership of the Board, Board subcommittees, or Executive Management, as well as regular disclosure of the size,compositionand skills-sets of the Board and subcommittees. Further, when reporting changes of Directors, SANRAL should provide useful and comprehensive summaries of the appointees’ relevant competencies and experience.
    • Method of reporting: Immediately via SENS (or similar), SANRAL website, and in the Integrated Annual Report.
    • Response: SANRAL has agreed to report changes to the Board, subcommittees and/or Executive Management via SENS (or similar) in real-time, and to provide detailed information about the competencies and experience of the Board members. Further, SANRAL will provide additional reporting on the composition and skills-sets of the Board and subcommittees on their website (in a timely manner) and in their Integrated Annual Report.   Futuregrowth considers this undertaking to be satisfactory.
  • Board and subcommittee charters and terms-of-reference, and timely reporting of changes thereto.
    • Method of reporting: Immediately via SENS (or similar), SANRAL website, and in the Integrated Annual Report.
    • Response: SANRAL has agreed to report on changes to charters, terms-of-reference and limits-of-authority of the Board and subcommittees on their website (in a timely manner) and in their Integrated Annual Report. Futuregrowth considers this undertaking to be adequate.
  • Public disclosure of the Politically Exposed Persons (PEP) Policy (when introduced) and once implemented, regular public disclosure of any contracts concluded with PEPs and their related parties, including detail on how these conflicts were managed.
    • Method of reporting: Immediately via SENS (or similar), SANRAL website.
    • Response: SANRAL has committed to make such reports on their website (in a timely manner) and in their Integrated Annual Report. SANRAL feels that real-time market reporting on SENS (or similar) is unnecessary.  Futuregrowth considers this undertaking to be adequate.
  • Performance monitoring of the Board against the KPIs in the Shareholder’s Compact.
    • Method of reporting: SENS (or similar), SANRAL website and annually in the Integrated Annual Report.
    • Response: SANRAL reports high-level KPIs embodied in the Shareholder’s Compact, as well as the Board’s performance, in their Integrated Annual Report. Futuregrowth and SANRAL have agreed that SANRAL will continue to show the KPIs, but will additionally note any year-on-year changes in the KPIs in the Integrated Annual Report.  Futuregrowth considers this undertaking to be adequate.
  • Disclosure of Financial Key Performance Indicators in the Shareholder’s Compact, and changes thereto.
    • Method of reporting: Immediately via SENS (or similar), SANRAL website, and in the Integrated Annual Report.
    • Response: While SANRAL reports high-level KPIs in the Shareholder’s Compact in their Integrated Annual Report, this excludes any disclosure of meaningful financial KPIs (and changes thereto). SANRAL indicates that there are no Financial KPIs in the Shareholder’s Compact, which Futuregrowth finds to be very unusual: That being the case, we consider the high-level KPI reporting to be adequate.  Should Financial KPIs be introduced, however, Futuregrowth would expect SANRAL to disclose these. 
  • Futuregrowth has suggested that SANRAL report on the trend in the number and value of emergency non-competitive procurement contracts, and any other contracts which have deviated from standard procurement process, as a percentage of total procurement spend disclosed. Further, contracts in which a contract amount has increased by the lower of 20% of the contract value or R20m as a result of scope extensions require National Treasury approval.
    • Method of reporting: SENS (or similar), SANRAL website and annually in the Integrated Annual Report.
    • Response: While SANRAL previously reported the deviations in their Integrated Annual Report, they have now agreed to also report the trends in such deviations as well.  Futuregrowth and SANRAL have agreed that the annual report is sufficient and SENS (or similar) reporting on this item is not necessary.
  • Changes to Loan Documentation:  Given the lack of independent oversight and controls relating to composition (and changes to) the Board of Directors, we believe that SANRAL should amend its loan documentation (e.g. DMTN, bi-lateral loan agreements) to include a Mandatory Prepayment Event at noteholders’ election in the event that specific key Board members and/or a large proportion of Board members resign at the same time or are removed before expiry of their term.
  • Response: SANRAL has suggested this matter be raised with the Minister of Transport and National Treasury. Futuregrowth considers that funding agreements (and their stakeholder approvals) are principally in the purview of each entity, and SANRAL’s response is inadequate and evasive, and leaves investors at the mercy of ministerial fiat.

External Governance Review: SANRAL currently conducts a biennial third-party governance review, and we recommend that the findings of this review be published in the Integrated Annual Report and on the SANRAL website.

  • Response: SANRAL has previously disclosed the findings of such third-party governance reviews and has agreed to reinstate the enhanced disclosure of the findings of their biennial third-party governance review in their Integrated Annual Report. Futuregrowth considers this satisfactory.

General Disclosures:  Futuregrowth considers that -- as with any issuer in public capital markets -- SANRAL should err on the side of making public (in a timely and transparent manner) any relevant and material information that will assist investors in their assessment, oversight, and decision making.  While SANRAL and other SOEs might disclose a range of information in their Integrated Annual Report, Futuregrowth notes that these reports are sometimes released as much as nine months after financial year-ends and thus the information can be materially out of date.

  • Response: SANRAL has agreed to use its discretion to publish material information via SENS (or similar) or its website in a timely and transparent manner. Futuregrowth considers this undertaking satisfactory, and will monitor SANRAL’s actions in this regard.


Futuregrowth recognises that the implementation of a number of our recommendations must be done by SANRAL in consultation with both the Department of Transport and National Treasury.  While we note that SANRAL has agreed to progress the recommendations herein for improvements in governance and reporting with the Minister of Transport, there are no specific deadlines for the implementation of many of our recommendations and we will continue to monitor the suitable execution of these recommendations.  Further, many of the agreed changes to reporting (as regards both content and timeliness) are yet to be implemented.  While we are encouraged by SANRAL’s willingness to engage with our recommendations, the appropriate and timely execution of these agreements and recommendations will continue to guide future funding discussions.

Our recommendations aim to support the continued improvement of SANRAL’s governance policies and practices, and enhance reporting and disclosure.  As a regular borrower in the public capital markets, we believe that SANRAL has a responsibility to provide relevant, timely and transparent information. 

Futuregrowth remains committed to working with the various government departments in the spirit of enhanced transparency and to work as SANRAL’s partner in the development of South Africa’s road network. Futuregrowth appreciates SANRAL’s engagement throughout this process.


Read the SANRAL Press Release: Governance Review.