Minister of Public Enterprises Budget Speech & responses by IFP & ACDP & DA
11 Jul 2019
Minister of Public Enterprises, Pravin Gordhan, gave his Budget Vote Speech on the 11th July 2019
Honourable House Chair
Cabinet Colleagues and Deputy Ministers
Boards of State Owned Enterprises
Executives of State Owned Enterprises
Fellow South Africans
In a few days’ time we will be celebrating Mandela Day. It is also appropriate to acknowledge the 55years anniversary of the Rivonia Trial. This trial and those that faced the might of the apartheid state, reflected the political moral and social courage of our leaders. The Rivonia trial is emblematic of the resistance to an evil system and demonstrated unrelenting courage to oppose injustice, racial oppression and economic exploitation. This should remind all South Africans and Honorable Members of what it means to be bold in the face of adversity and uncompromising in fighting any form of malfeasance and corruption.
I have the honour to present the Budget Vote for the Department of Public Enterprises for the 2019/20 financial year.
State Owned Enterprises constitute a key part of our national life and our national assets. They are central to our developmental and economic agenda. The reform of State-Owned Enterprises is part of a broader agenda of structural reforms in our country.
The Department provides strategic direction to the SOEs so that their businesses are aligned with the national growth strategies arising out of the National Development Plan and other guiding policies of Government.
1. Over the last eighteen months:
- We have attended to many crises at our SOEs;
- We have also increasingly understood the deep damage that has been visited upon these institutions; and
- The far reaching consequences of state capture for the economy at large.
2. The consequences of the damage to SOEs is felt in particular by the millions of the poor people of our country in the form of unemployment, poverty and inequality. This has had a negative impact on Government’s ability to deploy SOEs in addressing our developmental objectives.
The Quantitative Damage
3. The Department collected about 3000 forensic reports relating to SOEs. So far, an estimated R600 million has been identified as collectable. The Department is collaborating with the law enforcement authorities to ensure that criminal actions are reported and that civil recoveries are undertaken.
4. The Investigating Directorate in the NPA will fast-track investigations including from the evidence presented to the Zondo Commission. The SIU Special Tribunal will adjudicate upon any civil dispute brought before it by a Special Investigating Unit or any interested party.
5. In June this year, a full bench of the Gauteng High Court, set aside a multi-million Rand contract unlawfully entered into between Eskom and Trillian, a Gupta linked entity. The court was scathing about collusion between former Eskom officials and the directors of Trillian and has ordered the company to repay almost R600 million of fees it illegally received from Eskom.
6. Previously, McKinsey, another consultancy, repaid close to R1billion to Eskom from the same contract.
7. Similarly, Transnet has instituted legal claims to recover large amounts from the beneficiaries of the 1 064 locomotives acquisition tender, and related transactions. The Special Investigations Unit (SIU) is investigating another 30 Transnet contracts, including property and IT contracts, the largest of which was worth more than R7 billion.
8. Recently, the Deputy Director of Public Prosecutions, Hermione Cronje said that “The cost of state capture hovers around R1.5 trillion over the second term of the Jacob Zuma administration”.
The Qualitative Damage
9. We must be frank: after a decade of mismanagement, negligible board and executive fiduciary accountability for poor performance, malfeasance that enabled state capture, and rampant corruption at our biggest SOEs, many are in deep financial difficulties and will be unable to trade their way out of their difficulties.
10. The flight of management and technical skills has negatively impacted our SOEs, it has also impacted staff morale and work culture, especially from those who did not want to partake in corrupt activities.
Recovery and Recapture
11. In the last eighteen months, we have begun the process of restoring good governance, skills management and effective operations at the SOEs. Financial sustainability of the SOEs requires a lot more work. Several state-owned companies face negative cash flows and are financing operations from debt, which has become increasingly difficult to raise.
12. On 23 May 2018, Cabinet approved a new permanent board for Transnet. Of the 12 new directors ten are black, six are female.
13. A new and capable Board for Denel, with diverse skills - ranging from engineering, finance, legal, business and stakeholder management - was appointed in April 2018.
14. The Denel Group CEO resigned in May 2018 after an investigation by the new Board and before disciplinary proceedings could be instituted. A new CEO for Denel was appointed in December 2018
15. In November 2018 the Denel Group CFO was dismissed with immediate effect after being found guilty of all disciplinary charges relating to irregular expenditure and failing to act in the best interests of the company.
16. For SA Express, a new Board of Directors was appointed in May 2018 and a new Acting CEO was appointed on 1 August 2018.
17. Over the past eighteen months, our work, with respect to restoring good governance, stabilizing operations, appointing new boards and directly confronting corruption, proceeded with efficiency, speed and purpose.
18. Still, progress in other respects has been slower, as the structural, financial and operational problems we have encountered run deep and require decisive action.
The Changing Global Environment
19. The Department in turn, will have to be cognisant of the changing international trade space:
- The decline in trade intensity driven growth,
- Impact on global value chains and the emergence of global protectionism; as this will have an impact on SOE business operating environment and models:
Role of DPE
20. We now have an opportunity to develop the Department into a modern ethical and effective representative of Government as a shareholder of SOEs. This will also entail a new sense of pride and promotion of our collective national interest among the staff. DPE must and will develop into a centre of Government excellence where the best experts and skills in the various sectors in which SOEs operate.
21. There is a need to re-look the role of the DPE as a Shareholder Ministry. In other words, how should the DPE do its oversight?
New Shareholder Approach
22. Governance and accountability:
- Boards must be increasingly accountable for the financial and operational performance and repositioning of SOEs.
- This new approach will necessitate that we revisit all the instruments of SOE oversight:
- Strategic Intent Statement;
- Shareholder Compacts;
- Memorandum of Incorporation; and
- SOE Performance Appraisal System
22. Positive Impact on the economy:
- Increasing investment in the economy
- Crowding in private sector investment:
- Reducing the cost in doing business and cosy of living by reducing logistic costs and tariffs and promoting the growth of manufacturing linked to local procurement and localisation
- Creating business, medium and small enterprises
- Skills development
23. Looking into the future
- Boards will be asked to:
- Reviewing current business model and developing models appropriate to the conditions
- Develop financial sustainability plans to ensure that SOEs are financially self-reliant.
24. In giving effect to its renewed efforts to turn around the SOEs, DPE will over the next 6 to 8 months work with the Boards of the SOEs to develop new operating models for their businesses, and develop a financial sustainability plan.
25. This will focus on:
- Governance and accountability
- Conscious effort to serve the economy, e.g. assisting with skills development and investment.
- Promoting overall government objective
- Creating business; big and small enterprises
- Reduce cost of doing business in the economy and cost of living
26. This new approach will necessitate that we revisit all the instruments of SOE oversight:
- Strategic Intent Statement;
- Shareholder Compacts;
- Memorandum of Incorporation; and
- SOE Performance Appraisal System.
Priorities for SOEs
27. Eskom faces operational, financial and structural challenges, which are driven by massive cost and time overruns on the new build program, collapse in governance, unsustainable debt levels, under-investment, and poor maintenance of plants, which has led to increased diesel usage eroding Eskom’s cash position.
28. In seeking to stabilise the financial situation at Eskom in the short term, the Minister of Finance will introduce a Special Appropriations Bill in Parliament in the near future.
29. This situation led to over 30 counts of load shedding in the 2018/19 FY which led to an independent Technical Review Team which conducted a rapid evaluation of the maintenance practises, operations and the technical environment of Eskom Generation.
30. Eskom, the Department with the assistance of the Department of Energy and Mineral Resources, and the National Treasury, will need to ensure that:
31. Implementation of the recommendations of the Ministerial Technical Review Team and the Presidential Review Team are implemented by all concerned including Eskom.
32. The President has directed that we formulate a special paper on the future of Eskom. The main focus of this paper will be:
- outlining future energy environment,
- financial arrangements for Eskom,
- address the indebtedness of Eskom and lastly the
- restructuring of Eskom;
- Identify cost saving including coal costs, staffing costs and the introduction of capital efficiency;
- Operationally sustaining a high energy availability factor.
33. The Department will cooperate with the Department of Energy to finalise the NERSA Amendment Act to establish a proper recourse for regulatory decisions.
34. The Chief Restructuring Officer (CRO) will be announced shortly.
35. Transnet’s focus going forward is to improve the efficiency, reliability and cost-effectiveness of its freight transportation by reducing the cost of doing business and improving the competitiveness of the country’s exports. This is in line with the commitment Government has made as part of the stimulus package that a review of port and rail prices will be undertaken, in addition boosting exports and making South African industry more competitive.
36. We have confidence in the Board led by Dr Popo Molefe to realise the objectives we have set for it. The process of recruiting the executive leadership of the SOE is in progress and we are expecting a competent and capable executive team that can drive the achievement of the tough task that lays before them.
37. Transnet’s operational performance can be improved further. Rail volumes have remained stagnant over the last MTSF period, well below the target of 330 mega tons per annum (mtpa) set for the company.
38. There has to be an increased effort to understand and respond to the needs of business, thereby contributing to economic growth and efficiency.
39. The Board and management will be set targets in the Shareholder Compact to achieve these objectives.
40. Denel is a case study on damage visited upon the SOE by State Capture driven corruption and thievery. The business has seen its revenues reduced from a peak on R8.2 billion four years ago to a projected R3.2 billion in 2018/19 – a 60% decline.
41. The impact of Denel’s decline on the local industry has been immense as Denel procures more than 50% of its inputs from suppliers, of which 75% are located in South Africa.
42. The Denel Board will concentrate on the following:
- Implementing a restructuring plan it developed during the 2018/19 financial year to position the business for recovery and growth.
- Introduce Strategic Equity Partners (SEPs) to maximise business potential of core businesses and exit non-core businesses, to enhance financial sustainability and business focus. This is not a process foreign to Denel. The following SEPs: Rheinmettal, Turbomeca, SAAB, and Hensoldt have been introduced into Denel subsidiaries with commendable commercial results. These introduced indigenous products onto SEPs international value chains and introduced world class management and manufacturing capabilities into the business:
- Radically improve production and sales of its various defence products
43. Alexkor is one of the entities that are plagued by serious financial challenges emanating from poor management of the mine and unsustainable corporate structure and cost base. There has also been allegations of maladministration and corruption levelled at the SOE and Joint Venture leadership.
44. In order to address these challenges we will be appointing an administrator to oversee the business and ensure that it is restructured for sustainability. We remain confident that the mine has adequate diamond reserves to ensure its viability. The administrator will have to ensure that this is achieved.
DPE Programme overview
2018/19 Expenditure Overview
45. The Department was allocated R6.52 billion for 2018/19.
- Included in the Departmental allocation was an amount of R5 billion for SAA recapitalisation and R1.2 billion for SA Express.
- The allocation for the Department itself was R273.9 million.
- The under-spending of R48.1 million was the result of vacancies. Once a departmental restructuring has been completed in the current financial year, these posts will be filled.
46. The Department has been allocated a budget of R293.0 million in 2019/20, R312.8 in 2020/21 and R332.0 million in 2021/22. The allocation represents an average growth rate of 6.5%.
- The Department’s focus over the medium term will be largely on enhancing the capabilities of the Department in performing its oversight role on the various SOE’s by ensuring that the pool of highly skilled professionals is augmented.
Programme 1 – Administration and Corporate Management
47. The aim of the branch is to provide strategic management and support to the department.
Programme 2 - State-Owned Companies Governance Assurance
48. The priorities for the programme in the 2019/20:
- With the goal of the Government Shareholder Bill be adopted into law by 2021/22 the green Paper for the SOE Bill will be developed this financial year. This will amongst other things address governance, SOE mandates, funding models as well as guidelines for private sector participation.
- SOE Reform is an ongoing process to review the SOE landscape emanating from the report of the Presidential Review commission. The main principles have already been approved by Cabinet. These seek to assess the SOE landscape and ensure that the economic impact of the SOE is enhanced by eliminating duplications and reviewing the current SOE to ensure continued relevance. In addition, the SOE reform aim to guide the appointment of boards and prescribed officers including remuneration and their incentives.
Programme 3 - Business Enhancement, Transformation and Industrialisation
49. The priorities for the programme in the 2019/20:
- Examining on an ongoing basis Eskom’s maintenance plans, operational practices, electricity generation and distribution efficiency, as well as its reserve margin.
- Ensure Alexkor maintains sustainable diamond production and that the joint venture mine with Richtersveld communities is restored to full operation.
- Optimise Government forestry assets holdings which are currently split between SAFCOL and the Department of Environmental Affairs, Forestry and Fisheries.
50. Monitoring progress and working with Transnet in improving the cost-effectiveness, efficiency and reliability of its freight transportation system and achieving a modal shift from road to rail as well as investigating the implications of giving effect to Section 3(2) of the National Ports Act, i.e. corporatisation of Transnet National Ports Authority;
51. Monitoring and supporting the turnaround of both SAA and SA Express, including achieving policy alignment through a holistic approach to policy affecting the aviation sector, giving consideration to the consolidation of the airlines, exploring the possibility of introducing a strategic equity partner, and assisting the airlines to secure sufficient funding to meet their liquidity requirements.
52. Supporting the Denel turnaround by engaging with key stakeholders within government to achieve alignment on the disposal of non-core businesses and introduction of private sector partners in Denel businesses as well as ensure that the sovereign and strategic capabilities are sustainable.
We would like to thank, the outgoing Chairperson of the SAA Board, Mr JB Magwaza. Your contribution is appreciated.
Let me also take this opportunity to thank the outgoing GCEO of Eskom, Mr Phakamani Hadebe for being a guiding hand at the power utility.
Lastly, I would like to thank the Acting DG, Mr Thuto Shomang for answering the clarion call of Thuma Mina, for steering and leading the Department in difficult and turbulent times. I would also like to thank the leadership of the Department.
I thank you.
Deputy Minister Phumulo Masualle: Public Enterprises Budget Vote
11 Jul 2019
Speech by Deputy Minister Phumulo Masualle, MP 2019/20 Budget Vote: Public Enterprises
Honourable House Chairperson
Honourable Minister Pravin Gordhan
Members of the National Assembly
Boards of State Owned Companies
Executives of State Owned Companies
Fellow South Africans
Honourable speaker, as I approached the podium, I made sure to stare quite closely at some of the members present here, you would recall, that recently president Ramaphosa delivered his speech, which was transmitted to other venues, by way of a hologram. Meaning he was there, but not there. As I came up I felt I needed to make sure whether the members around us here, are actually here, or perhaps they themselves have taken to this technology and are abusing it.
Honourable speaker, the president, recently tasked us to buy into a vision of our country. One that looks beyond the perils and challenges of today. Instead it sees an image with solutions. It places South Africa, as a country that has embraced the fourth industrial revolution, and in many instances, is an example to the world.
This image illustrates to us, how working together and actively obtaining consensus from our people can go a long way into building a better South Africa
The vision as I imagine it, sees our SOC’s being agile companies, effective businesses that deliver reliable service to the country. It sees, the like SAA, being the beacon of our national air carriers, self -sufficient and working efficiently in a united Pan African led air travel ecosystem that competes well in the global air travel space.
Honourable speaker, this vision is not a new vision. It is in fact a re- imagination of what we once were, and could be again. Our SOC’s have been plagued by many challenges. These, if left unabated, will surely result in their collapse and failure.
Speaker, corruption and malfeasance has crippled not only our SOC’s but our Country as well.
It has tarnished the good standing that some of our SOC’s held in the world and has brought them to their knees.
However, Speaker, we cannot allow this to render us a failed state.
As a government and department we are determined to root this out at all levels.
We are addressing the structural challenges facing our SOC’s and are taking tangible steps to diversify their service and product offering. They must be market agile and fit for purpose. The interventions we implement must be efficient solutions that safeguard the interests of all our people in providing cheap essential services, whilst becoming a viable and self-sustainable going concern.
We will strive to stop the bleeding, strengthen governance, and address the issues of critical skills shortage, whilst addressing operation issues. These include; seeking manpower efficiencies, the maintenance and development of infrastructure.
Going forward speaker, we must stress that Boards must perform their fiduciary duties, it is not the role of the department to run the enterprises and present a financial stability plan.
Thuma mina / Khawuleza
Madam Speaker, every rock removed, is in itself a great achievement, because it gives an opening for light to come in. The light reflects the hope that lies beyond our plight. The challenges that face our SOC’s require a collective effort to overcome them.
The collective effort that will ensure we overcome the giant before us. The collective effort, is not limited to the efforts of the Department, nor the executives of the SOC’s, it must include the efforts of labour, unions, the private sector and the people of South Africa as a whole.
We must find creative solutions to the challenges we face. The questions that need our urgent attention are;
- How can we save jobs?
- How can we upskill the current workforce to fill in the gaps of the shortage of critical skills?
- How do we stop the flight of management and technical skill?
- How do we rebuild staff morale in our SOC’s?
- How do we ensure, we have the technical expertise to improve our infrastructure, machinery and maintain the technology needed to manage our operations, effectively?
- Most importantly how can we once again make our SOC’s profitable and self -sustainable business’s
- How do we manage turnaround plans, without greatly impacting the jobs and livelihood of people who have families to take care of?
- We need a mind-set that will say; that Private Sector Participation, whilst being a consideration cannot be the only solution for our SOC’s. Especially when we still need to consider, uGogo Dlamini. A pensioner and supports her children, grandchildren and adopted children who are not working and rely solely on her pension grant?
- How do we ensure her cost of living is not so high that she cannot access essential services?
- Further, what role will our SOC’s play in creating new jobs in our key sectors for the youth, that are tailored to fit in the new world order. This when the analysis reflects that our SOC’s are over burdened with a workforce that is crippling their operations
- Finally, whether the fourth industrial revolution presents an opportunity to create new SOC’s in newly developing strategic sectors
Chairperson, perhaps it is time we elevate the conversation as we look at solving our domestic challenges. The solution may lie in, advancing our strategic partnerships within our Pan- African partners, toward creating a new hub of international trade. Should we not collaborate with them, instead of competing against them on the routes into and out of Africa?
These partnerships for an example, should look into having collaborations as SOC’s, in creating new markets in Africa or consolidating them to unlock value. For example, a collaboration with other African airlines and our national carriers, could be sought to create a new stop off hub for travel into and out of Africa. This whilst establishing new routes. Let’s explore if we along with our Pan African colleagues can influence the direction of global traffic.
This whilst unlocking new value, can also lead to skills transfer and elevation of expertise, establishing new African solutions to our challenges.
Further the value chain will extend to create a new ecosystem to support and grow small businesses and create new jobs
Chairperson the solutions that served us well yesterday, may not meet the challenges we face today.
As part of their performance objectives, boards will be challenged to present and implement viable models of operations that will meet these new challenges.
South African Airways (SAA)
- South African Airways is the South African national airline that provides reliable and extensive air transportation capacity linking SA with the continent and internationally.
- The reality of our domestic aviation environment is that it is effectively deregulated and therefore robustly competitive. International aviation, although somewhat regulated, through a bilateral air agreement system, is also by-and-large free and competitive.
- If our airline assets are to effectively compete and survive in this environment, with a minimal drain on the fiscus, it is imperative that they be turned around and be made fit-for-purpose.
- The Board should work with urgency to address the decline in the airline and its ancillary businesses. This must be founded upon appointment of a world class executive leadership team with credible aviation experience.
- As Government we will not let our SOC’s fail. We are committed to ensure they service and support the national development agenda.
- However, the airline must undergo a rigorous and substantial process of reducing costs, improving efficiencies and strengthening its operations.
- A comprehensive review of its domestic, regional and international routes will be undertaken to minimize losses.
- None core assets which currently distract management from attending to the core business need to be disposed of.
- House Chair, we must stress to all our SOC’s that we are working within limited budget framework. They must use the fiscal injections wisely and efficiently.
- The Board of SAA will be reconstituted. This so to ensure it is better equipped to discharge the strategic, leadership and governance responsibilities.
- While we understand that the state-owned airlines face immediate and urgent liquidity challenges, the real answer to their sustainability lies in stabilizing their current operations and preparing the entity for a strategic equity partner in the near future.
- Chaiperson, we must note that SAA has recently added a new fleet to the New York direct line, this will assist in improving the service offering
- It is imperative to get the alignment between our two state-owned airline companies properly harmonized.
South African Express Airways (SAX)
- South African Express operates secondary airline routes connecting smaller cities with major metros as well as connecting South Africa with some of neighbours: Botswana, the Democratic Republic of Congo and Namibia.
- The current funding arrangements for the airline where Government has had to stand in to meet its funding shortfalls and guarantee borrowings is not sustainable. The consolidation with SAA, as previously stated is a consideration. The Board should work closely and with urgency with their counterparts at SAA to realise this objective.
- The re-fleeting of the airline which has become inevitable if it to be a sustainable business should be effected within the consolidated airline group.
Speaker notwithstanding, we must acknowledge that SAX, has made significant progress since its grounding in May 2018
Chairperson, The Defence Review defines Denel as an integral part of the national security apparatus with the primary purpose of designing, developing, manufacturing and supporting defence matériel. Specifically, Denel maintains critical defence capabilities required for national security. The Minister reiterated this point in his response to the June 2019 State of the National Address when he said ”Denel, our producer of military and aerospace equipment, is a crucial and strategic state entity that was substantially harmed by state capture”.
- The company supports economic growth and industrialisation through the following:
- Securing up to 60% of its revenue from exports.
- Procuring more than 50% of its inputs from suppliers, of which 75% are located in South Africa.
- Absorbing marketing cost, export risk, forex risk, onerous terms and conditions on behalf of local suppliers that would not have been able to assume these liabilities.
- Being the biggest player in the local industry, Denel’s challenges are having a negative impact on the viability of local companies in the defence sector. Numerous companies, in particular SMMEs, are on the verge of collapse as result of unpaid invoices by Denel.
- Denel is implementing a restructuring plan it developed during the 2018/19 financial year to position the business for the future
Chairperson, I submit that the story is not only a doom and gloom and there are in fact positive outcomes these include:
- Prospects for the company are favourable and Denel is pursuing a winnable order pipeline of more than R30bn over the next 24 months. This will provide a solid base for Denel to implement its financial turnaround plan and grow the business.
- The brand remains strong within the global defence sectors despite the local issues caused by the allegations of state capture. There is still broad recognition for the quality of Denel products.
- Denel will soon win further export contracts and strengthen our reputation in the highly competitive global defence arena.
- Denel continues to receive support from local customers in the SA National Defence Force and the SA Police Service.
- Denel is busy with concurrent efforts to restructure the business, restore corporate governance and reduce operating costs.
- Denel has received about 40 expressions of interest from local and international companies who want to enter into partnerships with Denel or acquire parts of the business, this goes without saying that proper governance and PFMA processes will be followed.
- The potential recapitalisation of the business will result in albeit progress returns on investments and grow the company’s cash generation potential.
- The restructuring of the organisation has already led to a reduction of R500m in operating costs and savings of more than R15m at Denel’s Head Office.
- Denel has the potential to generate cash of R1.6bn through the divesting of non-core assets. The results will become visible within the next six months and contribute immensely to resolve the current liquidity problems experienced currently.
- There is a strong potential to reduce an additional R500m in costs from other business activities such as the supply chain processes while cash to the value of R2bn will be generated from the strategic equity partnership activities.
Further to this Speaker we have challenged the executive of Denel to concentrate on the following objectives in the Mid-term period.
- Implementing a restructuring plan it developed during the 2018/19 financial year to position the business for the future.
- Introduce Strategic Equity Partners (SEPs) to maximise business potential of core businesses and exit non-core businesses, to enhance financial sustainability and business focus.
This is not a process foreign to Denel. The following SEPs: Rheinmettal, Turbomeca, SAAB, and Hensoldt have been introduced into Denel subsidiaries with commendable commercial results.
These introduced indigenous products into their international value chains and introduced world class management and manufacturing capabilities into the business.
- The cost base of Denel needs to be addressed to ensure competitive and effective manufacturing and programme management. The support that the customer base, most of which are international , must be serviced with world class delivery.
- The relationship with the funders should be normalised in order to leverage government guarantee support to secure adequate liquidity and strengthen the company’s balance sheet.
- The local industry which has been decimated by Denel liquidity challenges should be resuscitated. A joint effort with DPE, DTI and DOD should be embarked on to restore the sector to the robust health it was in prior to the recent challenges.
Chairperson, it is our view that this Board and management team, supported by a dedicated group of skilled professionals will be