Minister Hogan's briefing on Public Enterprises 2009 – 2012 Strategic Plan & Budget

Meeting report

The Chairperson introduced and congratulated Ms Barbara Hogan, Minister and Mr Enoch Godongwana, Deputy Minister of Public Enterprises, on their appointments, and expressed good wishes to the Deputy Minister for his birthday that day.

Minister of Public Enterprises briefing
Ms Hogan congratulated Ms Mentor on her appointment as Chairperson of the Committee. She noted that she was pleased to start the Parliamentary session with a detailed review of the strategic plan for the next year, giving members of the Committee an opportunity to engage with the real issues facing State-Owned Enterprises (SOEs), and clarifying the Department of Public Enterprises (DPE) role vis-à-vis the Committee.

Many of the SOEs over whom Members would exercise government oversight, since government was a shareholder, were essential to the economy and provided the economic backbone and infrastructure for it to operate, in fields as diverse as rail freight, harbours, ports, and energy requirements. They were critical because of their role. The budgetary amounts were very large, and so the responsibility of the DPE was very serious. The Deputy Minister and she had been engaging very seriously with the Department, and with some of the Chief Executive Officers of the various SOEs, and were eager to move forward with the Department and its formidable responsibility.

The Chairperson responded that the pertinent and burning issues in the public domain could not be ignored and space should be created to deal with them in the meeting. The Ministers and the Department should make a serious attempt to provide answers to all the questions that would emerge, even if these did not directly relate to the strategic plan.

Department of Public Enterprises (DPE) Strategic Plan 2009 – 2012 briefing
Ms Portia Molefe, Director General, DPE, noted the Chairperson’s comment that the documents were made available only that morning and undertook to ensure that in future they would be available prior to the meeting date.

She noted that the DPE was responsible for nine SOEs: namely, Alexkor; Broadband Infraco; Denel; Eskom; Pebble Bed Modular Reactor (PBMR); South African Forestry Company (Safcol); South African Airways (SAA); South African Express Airways (SAX); and Transnet. Eskom had the largest asset base, followed by Transnet, then SAA.

The Department’s vision was to have SOEs that were efficiently managed and that met domestic and international industry operational benchmarks. They should play a role in the industry in which they operated that ensured optimal allocation of responsibilities between the public and private sector. They should undertake investment programmes with a ‘reserve margin’ to accommodate faster economic growth, and be able to leverage their investment programmes to the benefit of the South African and African economies on a sustainable basis.

The key role of the DPE was to mediate between the enterprise interest and the national interest, to ensure that government’s strategic interest was achieved. Effort had been expended to reach understanding of the SOEs that many of the issues raised under national interest were also crucial for their own sustainability and development internally.

Shareholders of the SOEs appointed a Board to carry out the shareholder’s strategic intent in making investment in the enterprise and the Board was the key interface between the government and the enterprise. The Board was directly responsible for ensuring that the strategy was coherent, that management efforts were focused on the strategy, and that reporting was accurate. Management was responsible for the formulation and implementation of the SOE’s strategy. The assets or profits of a company did not belong to the shareholders, but were the exclusive property of the SOE, and would only revert to shareholders on liquidation.

Ms Molefe noted that ongoing assessment of the SOEs was performed against Key Performance Indicators (KPIs).

The Department had the responsibility of ensuring that the national economy enjoyed security of supply, and this was a challenge, as it was then seen as a service provider of last resort, which created some tension. Only in bad times would it be remembered that the service provider was actually the SOE. Problems had arisen in the past when the aircraft industry moved from excess capacity to being under tight constraints, by which time the policy to bring in the private sector conflicted with the need to act quickly.

Ms Molefe stressed that SOEs could be used by the State to sort out economically stifling market or regulatory failures, especially in the area of network infrastructure. She said there had been a tendency in South Africa to treat SAA not as a network company, although aviation was as important as rail and seaport services. 67% of costs arose not in South Africa but as a result of shipping, which made it even more important to have aviation services. Although overseas airlines had reduced their services, a reduction by SAA would close off South Africa from the international market.

Ms Molefe reiterated that the Department must ensure that the SOEs were efficient, had strong balance sheets and were procuring as much as possible from the local economy to build the industrial base. However, it also must ensure that if SOEs undertook investment programmes, there was alignment between these also to the industrial policy of the Department of Trade and Industry (dti) as well as the innovation strategies of the Department of Science and Technology. DPE must also ensure that SOEs were investing in rural areas and providing investment opportunities in secondary and rural towns. The electrification programme of Eskom was concerned not only with the Department responsible for energy, but also with the Department of Provincial and Local Government, who would indicate where the electrification was needed and how much funding was available. Transnet was working on a strategy to revise branch railway lines, particularly in secondary towns where there was economic activity.

One of the most important challenges for the State was to ensure that all of the SOEs were able to promote the Infrastructure Investment Programmes, not only in the global, but also the South African context. Locally, there had been significant revenue downturns, and the revenue forecast was an important source of funding for the investment programme itself. In the global market the credit situation was tight, but increasingly creditors would prefer SOEs because they had the backing of the State. It was important that the rating of the government remained strong. For Eskom, it was important that the regulators and their policies must be seen by funders as coherent, clear and stable.

Ms Molefe then listed the DPE participation in Government’s programme of action (POA), naming a number of projects and responsibilities (see attached presentation for details). These included participation on the Infrastructure Development Cluster, prioritisation of provision of infrastructure to identified small and rural towns, protocols for integrated servitudes and use, investigation of alternative funding mechanisms, the rollout of Information and Communication Technology (ICT) broadband infrastructure through Infraco, upgrading and maintenance of electricity, road, rail, sea and air transport, supply of fuel to inland provinces, upgrading and building of water infrastructure, climate change responses, awareness and education campaigns and reviews of the SOEs in municipalities.

Ms Molefe noted that one of the key advantages of an SOE was its ability to have its own balance sheets. However, there was a need for strong enterprises that were able to engage in the market. Not all the requisites for strong SOEs were always in place. Past challenges had been identified as a lack of clear role-definition, a non-commercial history, capitalisation and funding constraints, accumulated investment deficit, policy conflicts, and lack of clarity on shareholder management powers. The Department was drawing guidelines on the management of such issues. This emphasised its key role of trouble-shooting. There must be clear communication between the Department, players in the market, the management team and Board of the SOEs.

The Chairperson interjected at this point that in the Spring School the Department would assist the Committee to understand and improve its work.

Ms Molefe then moved on to describe the structure of the Department. Three units, clustered by enterprise type – and dealing respectively with Energy and Broadband, Transport, and the Manufacturing sectors, were responsible for monitoring and analysis of the SOEs and would then provide recommendations to the Director General (DG), the Minister and the Deputy Minister. Deputy Directors General must ensure a direct relationship with the departments to coordinate policy changes, challenges and engagement with the SOEs. 

Ms Sandy Hutchings, Chief Financial Officer, DPE, tabled the budget of the DPE. Over the Medium Term Economic Framework (MTEF) period expenditure was projected to decrease fromR3.3 billion in 2008/09 to R183.6 million in 2011/12. Transfers to SOEs amounted to R6.9 billion; including R3.5 billion to PBMR, R1.5 billion to South African Airways; R724.1 million to Broadband Infraco and R259.1 million to Alexkor. The significant decline in 2010/11 related to reduced transfer payments to SOEs. The operational budget was linked to business plans of the units. However, the appropriations across the economic classifications would change, as the Department had not anticipated the appointment of the Deputy Minister when compiling budgets, and this issue would be addressed by National Treasury during the adjustment estimates in September.

Ms Hutchings tabled a summary of transfer payments to the SOEs (see attached presentation).

Ms Shireen Crosson, Head: Corporate Services, DPE, presented the DPE statistics as at 8 June 2009. The full establishment comprised 164 posts. The current vacancy rate was 15%, and the staff turnover rate was15.6%. Employment Equity targets were mostly reached. The Department had reached its own target, 2% above the Department of Public Service and Administration target, of employing 4% disabled people and was aiming at employing 6% disabled. Senior management were 52.4% male and 47.6% female against a target of 50%. The Graduate Development programme was highlighted because of the scarcity of skills. In 2008 DPE appointed 22 interns, of whom three were later employed by DPE and eleven by other departments and private sector organisations. 22 interns were appointed in 2009. The Department also awarded bursaries.

Programme 1: Administration
Ms Sandra Coetzee, Deputy Director General: Investment & Portfolio Management, DPE, described the Office of the Investment and Portfolio Manager, whose role was to collect, aggregate, analyse and communicate relevant information relating to the SOE portfolio and the environment, with a major focus on risk identification, monitoring and correction, strategic advice to Ministerial and Departmental teams and development of frameworks to enhance the shareholder management process. The portfolio and investments must be managed to show government and the public that there was improvement of value and reduction of the exposure of the fiscus through investment, which would be reached through a number of defined ways, as listed in the presentation.

Inter-government consultations must assist in meeting strategic intent statements, and there must be clarity of purpose, communication and delivery between the shareholder and the enterprise. This Office acted as the interface between the stakeholders. Its specific priorities for 2009/10 included synchronisation and precision of planning, monitoring and between the National Economic Planning Framework and the SOEs’  delivery, the continuation of monitoring of capital structure, portfolio equity interest and exposure, the specialist advisory role and continuation of implementation of the Richtersveld Deed of Settlement and redirection of Alexkor’s commercial focus.

Programme 2: Energy and Broadband Enterprises
Mr Chris Forlee, Deputy Director General: Energy and Broadband, DPE, explained that his Unit did oversight on Eskom, the Pebble Bed Modular Reactor (PBMR), and Broadband Infraco. It had to ensure that implementation of the corporate strategies was aligned to government’s strategic intent, and monitor their performance in operations and finance. He briefly described the scope of Eskom, Infraco’s two phases and its interventions , and the concept and functions of the PBMR. He clarified to the Chairperson that it used uranium and graphite shields in the process.

The strategic priorities for this programme were outlined, including ensuring that targets were reached, continuous monitoring of general and specific programmes, mitigation of risk in view of declining revenues and access to borrowing. It would develop and implement a short term funding solution for the Eskom capital expenditure programme, and a correct funding model based on re-valued assets and a reasonable return on assets. It was to develop and implement a revised business plan and funding model, and a framework for selection of a nuclear technology partner for the PBMR. The operational budget in this programme remained within the baseline for the medium term.

Programme 4: Manufacturing Enterprises
Mr Mehleli Mpofu, Acting Deputy Director General: Manufacturing, DPE, noted that his unit oversaw two manufacturing sector enterprises, Denel and Safcol. It was to ensure that their strategies were aligned to the government’s strategic intent and develop proposals how they could play a key role in the development of the manufacturing sector, as well as monitor and advise on their financial performance.

He described Denel as a key technology based company, predominantly operating in the Defence sector. The various subordinates were also identified. Its key capabilities lay in research and development, engineering of parts and components and facilitation. Although it supplied certain strategic defence capability to the South African armed forces, it could not supply all, and therefore needed to secure other suppliers. It would enter into strategic equity partnerships with foreign companies that could provide it with access to export markets as well as bring other industrial and operational expertise to its own business.

Safcol was a 10% State-owned forestry company, and 100% shareholder of its subsidiary Komatiland Forests (KLF), which owned 80% of IFLOMA, a Mozambican company. It was located in Mpumalanga, Limpopo and Kwazulu-Natal, and dealt predominantly in saw-log production, in a thirty-year rotation. It must maintain the sustainability of its commercial plantation forests and supply saw logs to industry.

Mr Mpofu described the key priorities of his unit as ensuring that both enterprises reached their targets, through monitoring and assessment, as returning Denel to profitability by 2011, enhancing, through better alignment, the efficiency and effectiveness of the Defence Ministry, aligning Denel to key industrial development practices and establishing a clear role for Safcol within the constraints of the Land Claims process. The budget was not significantly increased and the decrease from the previous year was attributed to Denel having received, in 2008/09, a large transfer payment in respect of an indemnity.

Programme 5: Transport
Dr Andrew Shaw, Deputy Director General: Transport, DPE, said that the three SOEs falling under his Unit’s oversight were Transnet, South African Airways (SAA) and South African Express Airways (SAX). He noted that Transnet’s key role was to assist in lowering the cost of doing business in South Africa and enabling economic growth through providing appropriate ports, rail and pipeline infrastructure and operations in a cost effective and efficient manner, and within acceptable benchmark standards. The five divisions were set out. He emphasised that until recently there had not been significant investment in infrastructure, which was critical to economic growth and enhancing competitiveness. Priorities for Transnet included careful monitoring of the capital investment programme, monitoring and influencing the regulations around ports and pipelines, enhancing the Competitive Supplier Development Programme (CSDP) benefits, developing legislation and structures of ports, and implementing new branch-line strategies.

Dr Shaw noted that SAA was a full service network carrier operating international, regional and domestic scheduled services from its hub at Oliver Tambo International Airport. Improved operational sustainability had been achieved through the two year ‘Seabury’ restructuring programme. However, the airline remained under-capitalised and faced a number of onerous contract liabilities. Passenger volume had declined as a result of the economic downturn. Priorities for SAA included work on the route network, development of a robust financial model, ring-fencing of certain business units and investments, investigation whether it would be feasible to establish South African Airways Technical (SAAT) as a separate SOE, and assessment of contracts and framework agreements.

South African Express was a small regional carrier, operating small turbo prop and jet aircraft with a focus on the smaller towns and cities in Africa and within South Africa. It was very stable, had established a strong profit record, and worked very closely with SAA as a feeder to the main hubs. Its strategic priorities focused on further development and implementation of the African Aviation Strategy, the routes, possible joint ventures and updated commercial agreements. There had been a significant budget increase, due to the increase in transfer payments to SAX, from R585 million in 2008/09 to R1.549 billion in 2009/10. Compensation of employees would reduce in 2009, since a payment had been made the previous year to the Government Employees Pension Fund for a former employee.

Programme 6: Joint Projects Facility (JPF)
Ms Caroline Richardson, Acting Deputy Director General: Joint Projects Facility, DPE, stated that the purpose of the JPF was to identify synergies, and coordinate and develop cross-cutting projects that leveraged the assets, activities and capabilities of the SOEs for the benefit of Africa, South Africa and the enterprises themselves. She outlined the various projects. These included the Competitive Supplier Development Programme(CSDP), aiming to bolster spending on local content and building export capability, the South Africa Power Project (TSAPPRO), which aimed to develop long-term conventional nuclear power generation and strategy, The Africa Programme, which focused on  regional electricity generation capacity, Rail Corridor Development, human resources capacity building, and other projects. She highlighted the priorities for each (see attached presentation). She noted that there was no significant increase in the operational budget for this Programme.

Programme 3: Legal, Governance and Transactions
Ms Ursula Fikelepi, Deputy Director General: Legal & Governance, DPE, noted that her Unit had to provide effective legal services, ensure good corporate governance in the SOEs and implement the legal aspects of various transactions. Priorities for 2009/10 included specific support for shareholder transactions, the closure of Aventura, transfers of minority shareholdings from SAFCOL to rural communities where SAFCOL forests were located, closure of the Diabo Share Trust, which was established during the listing of Telkom, and handing of applications under the Public Finance Management Act. Other day-to-day issues included various issues arising from Annual General Meetings, providing legal advice to the Department, in-house legal and employment issues, and handling of legal actions instituted against the Minister or Department, which she listed in the presentation. The unit would also develop a legal, regulatory and compliance “toolbox” for the SOEs, and monitor their adherence to corporate governance. She described the nine pieces of legislation administered by the DPE, as well as other legislation having an impact on it or the SOEs. She noted that the budget had increased in anticipation of further funding required to cover legal costs, as well as inflationary staff costs. She noted that the transfer payments Alexkor for the finalisation of the settlement reached with the Richtersveld community would cease in 2009/10.

Discussion
Mr S van Dyk (DA) referred to the challenges facing SOEs as they were repositioned into playing a pivotal role. The Department had referred to a new mission, but theoretical statements were not enough; instead a sound, independent, and sustainable operation was required for each SOE. Alexkor was not operating productively and disputes almost brought this mine to a standstill. Broadband Infraco had to compete with Telkom and it was not yet clear whether would serve its purpose. Denel had to be supported by National Treasury for many years and, due to loss of contracts, it had operated at a deficit. Eskom played a major role in the economic downturn in South Africa and the country faced huge problems with it. SAA survived on taxpayer bailouts. Transnet struggled to show sustainable profits. He asked how the Department intended to overcome those problems. He quoted their intention to ensure that SOEs were efficiently managed, meeting international industry benchmarks, playing a role in the industry in which they operated, and undertaking investment margins with a reserve margin to accommodate faster economic growth. He noted that similar statements had been made for the past five years and he would like to see productive outputs.

Ms Molefe responded that the question of turning around SOEs would require a separate presentation. The Spring School would talk to the turn around strategies for each of the SOE. Most of the SOEs reflected were now performing much better operationally. When their balance sheets reached a point where they were significantly stressed they had to undertake massive infrastructure programme, in a climate of economic crisis and declining revenues. In the case of Transnet, the revenue forecast was done prior to the crisis, but DPE was very clear on the amount of assets injected and the utilisation. She stressed that it was not possible to urn around the balance sheet of an ailing company in a short period of time, especially since the enterprise, without recapitalisation, would sink deeper and deeper into trouble.

Mr van Dyk specifically asked how the Department would envisage that Eskom would overcome its financial crisis if the 34% tariff increase was not approved.

The Chairperson asked whether the 34% tariff increase for Eskom should be given, and what mechanism there would be there to cushion the effects on the poor.

Ms Molefe responded that the transfer payment for Eskom did not come through DPE, but was reflected in National Treasury. If Eskom were not given the 34% tariff increase the country would have a problem. There were some things that could be done to reduce operating costs, but without increases there would reach a point where the entire build programme would be at risk and the investment programme of the country would come to a standstill. The Board members of Eskom had the initial fiduciary duty to ensure that they were not trading recklessly, which was why the tariff application was so extremely important.

In response to the effects of the increase on the poor, Ms Molefe noted that one of the agreements of the Energy Summit was that the poor should not be paying the same rates as wealthier households. Low income households would pay considerable lower tariffs (home light) than higher income households. It was also necessary to ensure that the municipal tariffs were the same, for this category, as the Eskom tariff.

Ms J Masilo (ANC) referred to the Transport section, and asked for clarity on the National Corridor programme and work with other departments.

Dr Shaw responded that the National Corridor Performance Monitoring Project was established a few years ago by Department of Trade and Industry (dti) with the intention that one of the departments involved should be the custodians of the project. DPE established an inter-departmental steering committee, consisting of the three named departments. A project manager was appointed on a short term contract; it was envisaged that there would be a three year period to identify the terms of reference, undertake the work and finalise the project. DPE was also working with a range of other stakeholders in the freight logistics system including trucking companies, third party logistic providers, and major exporters of minerals. This was a multi faceted project and the focus would be on the key corridors, with the first corridor being Gauteng to Durban.

Ms Masilo asked for an explanation as to the way in which the budgetary assets and liabilities were set out.

Ms Molefe responded that these were standard classifications used by National Treasury.

Ms P Tshwete (ANC) asked for clarification on the budget for Programme 3, and specifically the item reflecting R129 million to be transferred.

Ms Fikelepi responded that the transfer of R129 million was in respect of a settlement agreement in the Alexkor claims, which was made an Order of Court, with which the DPE must comply. The Joint Venture must put together a business plan, approved by Alexkor as government shareholder, and when that was approved DPE would make the transfer payment. 

Mr M Nhanha (COPE) noted in the presentation by the Deputy Director General: Transport had stated that SAX was financially stable, and SAA was mostly in the red. He asked whether the Department had a plan to merge the two carriers.

Dr Shaw noted that the question of possibly merging SAA and SAX would be covered in the Spring School. A merger was not a bad idea, effectively creating a carrier like Lufthansa with both regional and international services, and perhaps full and low-cost services in a more innovative way. The real issue was that the balance sheet for SAX alone was much stronger. A merger with SAA would affect that balance sheet. DPE could consider options when SAA was at a stronger point.

Mr Nhanha noted that four graduates had been absorbed into the Department through Internship and the Graduate Development Programme. He asked how the rural youth could benefit from such bursaries, and if there were plans to extend these programmes to universities such as Fort Hare.

Dr Shaw responded that DPE faced challenges in recruiting people who understood shareholder management. The range of skills needed in the Department ranged across legal, accounting and economist. The DPE tried to attract graduates from these disciplines who could be further trained, and the bursary schemes were widely advertised, including letters to every university asking them to identify the potential top students. Most of the interns appointed were black, and most had attended formerly-black universities. Students were drawn from the rural and poorest areas. It was interesting that the Denel Youth Training Centre took matriculants without university exemption, would train them for one year and then enable them to get university entrance.

The Chairperson contradicted the DPE’s assertion that SAX was healthy. She noted that she flew on SAX every fortnight to Kimberley. Its fleet was old and had numerous problems. There were constant delays and it even sometimes seemed that maintenance was being done as the plane was flying.

Ms Molefe Portia stated that the distances involved meant that the airline had to use turbo props, not jets,  which would be too expensive over shorter distances. She asked that this issue be further addressed by during the presentation on the annual financial statements.

The Chairperson asked why, in light of the fact that the shareholder did not benefit from the assets and profits of the SOE enterprise, the shareholder should bail out an ailing SOE, and whether this was a fair arrangement.

Ms Molefe noted that in an SOE, all the shares were owned by the State. Technically a shareholder was entitled to get dividends from a company. However, none of the enterprises had been paying dividends because of their financial situation. In the case of Eskom and Transnet there had been agreement that the shareholders would forego their entitlement to dividends, so that the dividends could instead be reinvested in the build programme, to reduce the costs of borrowing. In a private sector situation, the shareholders would have to decide whether to sell or rescue ailing companies. In the public sector the shareholder must behave in a similarly rational fashion.

Minister Barbara Hogan added that most of these SOEs were in financial distress, and the question was what the State intended to do about this. It was even more difficult to consider this because of the economic recession, and it was important to acknowledge and appreciate that the SOEs were not isolated from the effects of that recession. The rescue package, turnaround initiative and general restructuring of SAA had been fairly successful in reaching its objectives, and a small operating profit might be made. However, there were other matters outside the restructuring that affected the balance sheet. Transnet had managed to improve its balance sheet considerably and the next step would be to ensure efficiency in freight movement. It would be extremely difficult to sell enterprises with poor balance sheets, and there were also policy issues. These must be further debated at the Spring School.

The Minister said she believed there was no longer space for inefficient SOEs to operate. In this constrained economic climate, National Treasury and the Cabinet would be asking hard questions, and DPE would have to justify their expenditure. The question must also be asked whether the progress had been satisfactory. A comparison of DPE’s performance in monitoring and evaluation five years ago, compared to today, showed substantial improvement. Government must have an informed view of where shareholders of the SOEs were going. on this matter.

There was a need to look at each of those enterprises, to see what had been achieved and what roles they played in the economy. Eskom was essential; without it the country would collapse and so Government had committed huge amounts to its build programme. Government had been subsidising electricity in the past but it was not possible to grant electricity so cheaply that the provider was no longer financially viable. The provider had to recover some of its operating costs. Although there would be cushioning for lower-income groups, the era of cheap electricity had ended.

Deputy Minister Enoch Gondogwana agreed with the Minister that South Africans must be educated that the days of cheap electricity were over. The application for a 34% tariff increase was interim, and a further application would be made on 1 September. It was impossible to hold back on a price increase while at the same time acknowledging that Eskom needed investment of R385 million to move forward.

The Chairperson agreed with the Deputy Minister that South Africans must be given information on all these issues to appreciate the problems, particularly with SAA and Eskom.

Ms Tshwete referred to the Departmental staff statistics and asked at which level the 26 vacancies were found. She commented that the exit rate was too high and asked whether those leaving were accepting better positions.

Ms Portia Molefe clarified that eighteen of the vacancies were senior management. There had been some press coverage to the effect that the SOEs would be moved to the Policy Department and this had given rise to feelings of insecurity. The Department was advertising the posts. However, she admitted that there were some serious difficulties in attracting the right people. For instance, one post required a person who had both commercial understanding of rail, to appreciate how a railway company should run, as well as railway economics, which was required for effective oversight of Transnet. Salaries remained a challenge. Those leaving might do so for better salaries, or to move to working for the SOE, or simply for operational reasons.

Mr P van Dalen (DA) said that the Minister had cited rail services as critical for the economy of the country, yet constant press reports on the theft of rail tracks seemed to indicate that this critical infrastructure was not being looked after, and merely stripped for scrap value.

Ms Molefe responded that Transnet was actively lifting inoperative branch lines to prevent theft of the metal for scrap. As the active rail branch line strategy was implemented, Transnet would need to ensure frequent services. It did take a great deal of work to protect the assets.

Mr van Dalen noted that the Municipal Finance Management Act effectively forced municipalities to announce price increases, and he noted that if two price increases were being sought by Eskom, there did not seem to be a link to the municipality requirements.

Mr Nhanha noted that he had been asked to contest the 34% Eskom price hike and he felt the matter should be reviewed from time to time.

Ms Molefe responded that the 34% Eskom increase applied to this financial year, whereas the increase to which the Deputy Minister had referred, which would be sought in September, related to the decision to be made the following March. By 15 March in each financial year an increase would need to be tabled to Parliament.

Mr J Maake (ANC) asked for clarification as to who was doing the capacity building programmes.

Ms Richards noted that “capacity building programmes” were generically all the programmes that related to skills development and capacity building coordinated by the JPF. that JPF coordinated. Those programmes would generally be run directly by the SOE, although the DPE facilitated the projects.

Mr Maake asked for clarification on the disposal of non-core properties.

Ms Molefe noted that most SOEs had done disposal of non-core assets. The SOEs had been asked to identify which properties were critical to their operation or required for their expansion programmes. These were then defined as core to their operations, and may perhaps then be subject to long leases. All other properties were then divided into developmental property suitable for housing or industrial development, and property not falling in this category. The former category could be retained, the latter would be disposed of, according to guidelines at two levels. The disposal was biased in favour of people in the area, and also in favour of Black Economic Empowerment businesses, including small businesses. One example of a non-core property was the Carlton Centre, for which approval to sell was given to Transnet.

Mr Maake asked for clarification on joint shareholdings with the Industrial Development Corporation.

Ms Molefe responded that Denel also had other private shareholders, but there was a defined relationship between public and private shareholders.

Mr Maake asked for clarification of the term “trouble-shooting” as a function of the Director General.

Ms Molefe explained that this was largely related to better communication. There were many complex issues, both with Eskom’s policy and regulation, and in SAA, that required reaching an alignment of understanding of the problem, and an agreed method of dealing with it, between the enterprise, key stakeholders, the policy-makers, and the Regulator. Sometimes the crisis was so large that it would spill over from the enterprise to the shareholders, at which stage there was a need to engage with the Executive authority and ensure that appropriate action was taken.

Mr Nhanha noted that one of the programmes aimed to expand logistics infrastructure by road, rail, air and ports for the transportation of goods and services, including farming and agricultural products. He further noted the priority in the Transport unit to involve small operators through implementation of Transnet branch line strategy. Kei Rail in the Eastern Cape was supposed to run a service between East London and Mthatha. He considered this a waste of taxpayers’ money, as if it was indeed running it was not profitable.
 
Dr Shaw noted that there were ten priority branch lines that were earmarked for immediate investment.

Mr Nhanha stated that a further priority was stated as returning Denel to profitability by 2011/12. He asked whether the Department would be able to persuade the top executives in the SOEs to refrain from taking their bonuses when the enterprises were not performing well.

Ms Molefe firstly stated that the DPE believed that returning Denel to a position of profit by 2011 was possible. She explained how some of the issues around Denel reflected differences in the level of industrial support between countries. She conceded that the question of bonuses for executives was vexed. All SOEs were competing with the private sector for the best staff. Executive bonuses were aligned to the key performances within the company. Even if the results of a turnaround were not immediately apparent, there could be significant work done.

The Chairperson asked where and by whom the carbon coated uranium balls for the Pebble Bed Modular Reactor were manufactured, stating that this must be one consideration in determining whether to pursue the PBMR project. There were uranium deposits in South Africa so the question was whether it was economically viable to import the balls.

Ms Molefe said that she would like to give a separate presentation on the PBMR. This was a really important project and enterprise for the South African economy. It would be the only equipment manufacturer in South Africa apart from Sasol. It was currently in an experimental phase, and a company from Germany was being used. It was however envisaged that the fuel fabricator for both the pressurised water reactor (an Eskom conventional programme) and the PBMR would fall under the Nuclear Energy Corporation of South Africa, to ensure that the benefits of the nuclear programme were localised in South Africa. Fabrication could occur in South Africa.

The Chairperson, expressing her thanks to the Minister, Deputy Minister and Department, said that the Department looked forward to further presentations by the SOEs and Department. During these meetings the SOEs could answer some questions directly. She noted that she would like a list of the non-core properties and suggestions for the timing and methods of disposal. She reminded Members that the budget vote would be tabled on 23 June.

The meeting was adjourned.