Minister on Department of Public Enterprises Annual Report 2008/09

Meeting report

Ms Themba pointed out that the Chairpersons of the two NA and NCOP Committees had agreed to have a joint meeting so that the Department would have to present only once.

Minister’s introduction
Minister Barbara Hogan thanked the chairpersons for the opportunity for calling the Department to account in  Parliament. It was Parliament’s role to hold the department to account and to give it a view as to how it was performing. It was difficult to separate the performance of the Department against that of the State-Owned Enterprises (SOEs). The SOEs were accountable to government for their mandate, which led to the question as to what was the shareholder’s role. She understood a workshop would be held next year around SOEs and the role of the shareholder which had to be constantly evaluated, reviewed and looked at. Although she was not the Minister during the period under review, she would like to take responsibility because it was not based on the individual but on governance.

She commended the Department for the unqualified audit. The Department had consistently performed very well and she singled out all the members of the team for working towards that achievement, and in particular Ms Sandy Hutchings (CFO).

The last six months had been difficult because of the economic crisis and that had affected the performance of government departments. Going forward, the position of the fiscus and how the fiscus was able to support SOEs also had to be looked at, and they also had to realise that the fiscus was not in as generous a position as it had been before.

There were huge responsibilities for the SOEs, particularly looking at Eskom and Transnet going forward. They had to catch up on infrastructural backlogs and had to be the flagships for the investment that government was making to counter the economic downturn. The responsibilities were huge and Parliament’s participation and oversight would be welcomed.

The capital structure of SOEs was a matter of investigation, a report had already been done by DPE but a report would come to Cabinet as to what the State’s role was in SOEs and their role. DPE had already engaged with one of its regulators and also with Independent Communications Authority of South Africa (ICASA). Government engaging with the regulators was a new experience. This was an issue that they would engage in.

The issue of executive remuneration had come up very strongly in the media in recent weeks. DPE had drawn up and had accepted in 2007, a guiding document for SOEs on executive remuneration. She hoped for further engagement on this given the discussions that had come out internationally with the economic crisis.

The most important issue was to ensure that government’s intent was strategically aligned with what State-Owned Enterprises were doing, which was easier said than done. This was a matter of ongoing debate.

The Deputy Minister, Mr Enoch Godwangwana, referred to the capital structure of the SOEs; that was significant, not only because the SOEs should be profitable, but also critical to achieve the developmental goals that government wished to achieve. The challenge was in ensuring that the developmental objectives of the government were achieved.

The Chairperson of Private Enterprises, Ms P Mentor, said the issues the Minister had raised were critical, as well as the importance of the workshop. Once the ‘developmental state’ had been defined and the objectives set out, they would need to examine the structures put in place to facilitate those objectives.
She reminded the Minister that before that workshop there was the issue of the boards of all SOEs. The Committee was very interested in understanding the skills configuration of these boards and whether those boards were fulfilling their mandate as defined, they were awaiting that report.
 
Department Briefing
Ms Portia Molefe (DPE Director General) went through some key achievements. One of these was the strengthening of boards. Board composition as mentioned by Ms Mentor was something the Department constantly worried about in terms of skills, the issues around gender, race, and trying to move away from the ‘same olds’ on boards while still holding to the fact that they needed people with experience that would be able to provide oversight. With the new Companies Act there were a lot more responsibilities for board members. It was an area that would be constantly watched. It was very difficult to find board members.

DPE statistics remained relatively the same but one of the biggest challenges was the recruiting of people with the appropriate skills.

Programme 1: Administration
Ms Sandra Coetzee (DDG: Chief Investment and Portfolio Management) reported that the first focus of the Chief Investment and Portfolio Management (CIPM) was to strengthen shareholder management, particularly with reference to logical planning, monitoring and evaluation, strengthening ability to assess the capital structures of SOEs and funding models and to improve governance around shareholder share subscriptions and guarantees. Their targets and achievements related to those three key objectives.

CIPM also spent time on the governance of the shareholders rights in the event that SOEs were capitalised, and the securitisation of capital investment through the issue of shares or guarantees. They developed methodologies to ensure timeous execution of the documentation to support the availability of guarantees and to have a proper record or custodianship of those documents in DPE.

The CIPM office also provided specialist ancillary services to other units in the Department, mostly to specific transactions and litigation that the Department was engaged with, such as
- The PBMR shareholder agreement
- An assessment of the West African Submarine Cable initiated by Infraco
- Denel strategic equity partnerships
- The South African Express (SAX) transaction
- Conducted an assessment of the SAFCOL Komatiland Forests (KLF) transactions
- Assisted with the Eskom funding requirements
- Provided litigation management support on the Umthunzi vs Government of RSA & Transnet case
- Aviation portfolio restructuring
- Provided further assessment and commentary on guidelines to the Legal, Governance, Risk and Transactions (LGRT) and SOE teams as and when required.

The CIPM Office was also responsible for shareholder oversight over Alexkor, and particularly assistance in the implementation of the Richtersveld Settlement with the community.

The operations side, which covered Human Resources, Communications and International Relations, Information Management, Finance and Supply Chain Management, Internal Audit and Secretariat was then reported on and highlighted was the achievement of an unqualified audit, no irregular expenditure and suppliers had been paid within the thirty-day period.

Programme 2: Energy and Broadband Enterprises
Ms Molefe reported that over the years Infraco had two sides to their business plan, the terrestrial network, covering South Africa, and the undersea cable. The undersea cables project was ongoing and due date for finalisation was 2011.

The year under review was for Eskom the period when load shedding had commenced and by year-end load shedding had effectively stopped. Eskom had improved on their maintenance.

In the case of the Pebble Bed Modular Reactor (PBMR), a lot of work was responding to public comment and the company had developed a new business plan looking into the heat process and not electricity, because of the relative simplicity of moving to heat; and also last year began discussions with SASOL about the potential participation with their technology. PBMR applied for a fuel manufacturing licence with the National Nuclear Regulator.

Programme 3: Legal, Governance and Risk
Ms Ursula Fikelepi (DDG: Legal & Governance) spoke on the programme’s outstanding transactions. She reported on the Diabo Trust that was established to transfer shares in Telkom during Telkom’s listing to Telkom employees. The other matter reported on was Aventura owned resorts that were sold to a private sector entity and what was achieved there.

She also spoke on legal advisory services they had provided to SOEs. One of the transactions assisted with from a legal perspective was the winding down of SAFCOL (disposal framework) and Alexkor (the implementation of the Deed of Settlement, the achievement being transfer of the agricultural land and some of the assets).

Programme 4: Manufacturing Enterprises
Mr Mehleli Mpofu (Acting Director: Manufacturing) talked about activities focused on manufacturing entities in Defence and then SAFCOL. The priorities in Defence were really working with other departments and stakeholders in creating a conducive environment for South Africa’s defence industry, which was a follow up from the Defence Strategy conducted by DPE and Department of Trade and Industry (DTI) in 2007.

The first priority was around Defence acquisition spend, and the achievement there related to gaining acceptance for the principle of 60% - 70% of South Africa’s defence spend being directed to local industries, which was the aspiration they were striving towards. In terms of a strategic alignment between stakeholders, a joint DPE and Department of Defence memo was submitted to Cabinet in June 2008 recommending a future-state with regard to the restructuring of Denel. Generally the progress made throughout the year was there was significant alignment and good working relationships amongst all stakeholders such as DPE, National Treasury, Department of Defence & Military Veterans, DTI and Department of Science and Technology and Industry Associations.

A third aspect was the establishment of the Defence Industry Research Centre (DERI) - where DPE was not taking the lead but was providing inputs to other government departments. A structure was agreed and an acting CEO appointed. However the establishment Bill is as yet to be put in place.

In terms of the missile export strategy, there was a proposed equity transaction with the world’s second largest missile house and the Department did a strategic due diligence study as to whether it was the right company for Denel and that study was ready for final approval of that proposed transaction.

The main aspect in terms of Forestry was doing the assessment of the corporate plan. The essence was in terms of the privatisation process and the department ensured that that was embedded in SAFCOL’s corporate plan. However due to the delay in the privatisation of SAFCOL, SAFCOL had to revisit its five-year business plan, so the shareholders compact could not be finalised.

Programme 5: Transport Enterprises
Mr Andrew Shaw (DDG: Transport) gave feedback on Transport Enterprises.

Transnet: Private sector participation in the port of Ngqura, specifically for container terminal operations. DPE agreed with Transnet a proposed joint venture partnership, a process still being followed up on.
Analysing and assessing Transnet’s role and influence in the economy; monitoring Transnet’s non-core disposals programme and monitoring Transnet’s Capex programme. Private sector participation in rail through ensuring access to branch lines by private operators, all in rural environments, quite often small mining or agricultural interests and in some interests had a tourism bent to them as well. The strategy was approved in 2008 and DPE was progressing, together with DOT, the roll-out of some pilot projects over the next year or two.

Aviation: SAA had in the past been financially constrained and but was starting to emerge as financially sustainable. The transfer of SAX from Transnet to DPE was now complete. Restructuring of SAA was successful, having achieved an audited 8% above target, profit margin not achieved due to unexpected increases in fuel prices and fuel hedging losses during the financial year. The process of outsourcing of call centres was suspended due to investigation into award of tender. Likewise for Airchefs tender award.

Programme 6: Joint Project Facility (JPF)
Ms Caroline Richardson (Acting DDG: Joint Projects Facility) covered nine projects under the Joint Projects Facility, which was essentially a strategic projects facility, with the aim to leverage various activities underway in the SOE and the procurement spend of the SOE for broader economic and other benefits to the country.

JPF provided assistance for negotiation and purchase of aircraft acquisition and to leverage procurement to build the local aerostructures industry.

JPF had a property project and SOE non-core property disposal and B-BBEE guidelines was completed last year; and also facilitated public sector transactions and ensured the State’s right of first refusal on SOE non-core property disposal under way. It also aimed to ensure that strategically located properties belonging to the SOE which were deemed non-core were developed in an appropriate manner and received commitments from the enterprises on the proposed approach to facilitate key integrated projects. Approval was granted for the disposal of SAA’s non-core property.

Ms Molefe clarified much of the history for the benefit of members who were new. On the property project, a few years back DPE instituted a moratorium on the disposal of all non-core property by all of the SOEs because it was trying to identify pieces of property that would have been better disposed of if they had been put together and developed either as integrated housing plans or for industrial utilisation, and also to give the State the opportunity to indicate pieces of property that were contiguous with property it had responsibility for or which they had required for development. The moratorium was lifted some time ago once SOEs had listed their properties indicating those that would be disposed via a straight commercial transaction, those that had a more developmental role and those that should be transferred to municipalities. About two years ago a policy for the disposal of property was developed that would ensure that when properties were disposed there would be a bias towards enterprises or BEEs from the province, as opposed to having most properties being taken by companies, especially BEEs from Gauteng, Cape Town and Durban.

Questions by MPs
The Chairperson proposed that the financials be presented later. She asked that the Select Committee be given breakdowns of what was happening in the provinces.

Mr P Sibande (ANC, Mpumalanga) asked for clarification on the Auditor General’s finding of non-compliance and the PFMA. The SAFCOL holding company was winding down but it was reported that the finalisation was put on hold pending finalisation of the KLF land claim; what was the development regarding that claim? He was concerned at the expansion of Eskom’s programme; the nuclear programme may be sufficient to assist Eskom to have the capacity to deal with matters of load shedding. It was alleged that the previous government had been selling yellow cake to Iran for nuclear manufacture; what was the current status quo? He asked for clarification of risk management.

An MP said there had been cynicism about SAA’s profit, how fragile was that recovery? About the policy that DOD should source 60% - 70% of its requirement from Denel, was the Department considering a similar policy for SAA that state officials travelling on business supported it? What was the outlook for the South African Power Project in the light of the economic melt down? That would require a huge amount of resources.

Mr C Gololo (ANC) asked the DG which SOE would require further capital injections in the near future? He asked the Minister at what stage was the process of appointing the new CEO for SAA? How soon would the new DG for the Department be appointed as the current DG’s contract termination was end November. He asked for clarification on the future of Denel as he understood it was being transferred to DOD.

Mr O de Beer (ANC, Western Cape) congratulated the Department on the unqualified audits for the last three years. In the balance sheet under Departmental current assets there was R218 000 as an unauthorised amount needing Parliament approval, what went wrong? Under Manufacturing Enterprises there was a target set in Defence to spend 60% to 70% on local goods, was that achieved? The Department wanted to establish an Exco Council by September 2008, why had that council not yet been established?

Ms D Ramodibe (ANC) thanked the Department for the very informative presentation. Some of the members were new and did not understand what most of the acronyms stood for. On the establishment of Defence Evaluation & Research Institute (DERI), the Acting Chief Officer had been appointed but the Bill was not yet in place, when would that process start?

Dr Koornhof congratulated the DG and the Department for the layout of the Annual Report, which was very easy to read with the targets and performance set out, and it was also extremely helpful that reasons for variance between the target and the actual were declared; and also for the unqualified audit. He echoed the previous member’s question as to why the process on DERI was stalled, which Department was responsible and what was the process forward?

He said that the Audit Committee consisted of the chairperson and three persons, with the size of the DPE he would have expect a larger audit committee for such an important department, and also a composition of an audit committee with not only financial expertise but also industry related expertise. The report indicated that there were no Public Private Partnership (PPP) agreements; did the Department foresee that it may enter into PPPs in the future?
Why did remuneration for consultants increase by 129%, from R21 billion to R48 billion, and whether that was value for money?

He welcomed the statement by the Minister that there was an executive remuneration document with DPE dated 2007, two years later it was very important that that the document be finalised. Three SOEs already appeared before the Committee and in two of those the CEOs earned more than the President of the country. He hoped that the document would address not only the level of the CEOs, but also the percentage increases, additional payments, and also the directors’ remuneration.

Mr M Jacobs (ANC, Free State) noted that outputs and achievements were targeted, were there no failures? Those failures would need to be addressed. Why were SOEs always in the red?

Mr S van Dyk (DA) said the report indicated virement savings on personnel expenditure; personnel expenditure could not be used for any other expenditure but according to the document the savings were transferred to other programmes for personnel expenditure and in some cases for the payment of gratuities. Did that mean under budgeting of the other programmes for personnel? What type of gratuity was that?

Mr M Nhanha (COPE) echoed Dr Koornhof’s remarks regarding the layout and graphics of the Annual Report and asked how much it cost to produce that report. The Department said there were shareholders in SOEs and also that they did not have much control over the boards. A report tabled by Denel showed appalling statistics, particularly in relation to their transformation targets. There was also a recommendation about board members of SAA serving on too many other boards, and as a consequence not having time to perform their fiduciary duties in SAA. What remedy did the Department have in that regard? It was reported that SAA had over R1 billion profit for the last financial year but were trying to deal with the fifteen airbuses that were ordered. Could Treasury intervene if money was found to pay for these aircraft? They should be paid for because in any event most of the existing fleet was not owned but rented.

Mr Sibande asked why the performance on the two key projects under Nuclear was not recorded in the Annual Report?

The Chairperson noted that Table 1.3 reflected 54 senior managers posts, of which 33 were filled. Table 1.2 reflected 58 posts on salary levels 13 to 16 permanent contracts, of which 37 were filled. Why did the figures not tally? She asked for clarification on Table 2.5 on job evaluation. The number of posts on that table did not correspond with figures provided in other tables.

Ms Mentor asked whether the process of appointing the new DG was under way, and whether the Minister would conduct an exit interview when the DG left. Entry interviews were conducted but exit interviews would be very valuable because that person would be freer to pinpoint weaknesses to be corrected. She linked the Chief Investment Portfolio with the Joint Project section and asked to what extent the Department did intensive research and whether each SOE did its own research. Was DPE aware of the amount of manufacturing taking place in every SOE and the shortcomings and opportunities? Had they investigated the possibility of consolidating SOEs or new SOEs for the State that would enable the State to fulfil certain of its mandate? Why not merge SAA and SAX; she didn’t understand the rationale of having two airlines?
The State was not spending enough in terms of R&D and DPE was strategically located to influence the amount of R&D the State did and should have a dedicated research unit within the DPE. She asked for a comprehensive report on the disposal of non-core assets. Parliament should always examine when there was injection into SOEs as to whether it was an equity injection, it seemed that bailouts were being used very carelessly.

Dr S Pillay (ANC) said five years ago the SACP had asked whether companies were the best way for SOEs to bring the services needed to its people. In terms of the Companies Act the shareholder’s only power was to appoint directors. Was there a mechanism for the State as 100% shareholder to have a different type of monitoring and influencing mechanism? A non-core asset was not necessarily a non-core asset for a government policy. It may be a non-core asset for an SOE but not for government, therefore it was wrong for an SOE to dispose of a non-core asset because it was worried about the balance sheet, it should come back to its rightful owner. At one time Transnet’s mandate was transport. Having taken a focus on rail transport, it decided SAX was not what they wanted to do, but transport was still a core asset of this government. DPE was trying to manage those core businesses rather than focus on what the needs were politically as a country.

Mr P van Dalen (DA) wished to know when the appointment of a CEO for Transport could be expected.

Mr R Lees (DA, KZN) was concerned that there seemed to be interference in the boards of the various companies and the companies could then have a political rather than a profit mandate and the taxpayer would continue to pick up the tab for future losses. Very little had been said about the PBMR, it was not going to go electricity, it was going to go heat and Sasol was going to be a customer for heat, he needed more clarity. Shares would be subscribed when a shareholders agreement was signed, would they be put out for private subscription? Transnet had a very successful arrangement with the Banana Express in KZN but terminated that. It was subsequently falling apart but was not talking about private partnerships for branch lines such as that one. He hoped the Creighton line would be stabilised as soon as possible and ensure that that the very popular tourist attraction was not jeopardised. He shared the sentiments of Ms Mentor in terms of SAX and why it was transferred to DPE and not SAA, they were in different markets.
Why did DPE pay R140 million for it and then have to recapitalise it with another R445 million? Transnet needed to get rid of it and DPE should have taken it for nothing. Eskom already had a R60 billion subordinated loan from the State, with guarantees of R176 billion for loans and yet were looking at 40% to 50% increases in tariffs, had they taken up the R176 billion that the South African government had guaranteed? Alexkor properties had been transferred to the community, and after transfer were preparing a feasible mining plan for future joint operations, surely that should have happened before the transfer?
He understood the SAA profit was a refund of deposits paid for the purchase of aircraft.

The Chairperson drew the DG’s attention to the report on the Autumn School, both Select and Portfolio committees had attended. This was not 2008, but in  2009. Ms Molefe apologised for the corrections and asked Ms Richardson to check that it was correct in the Annual Report.
 
DPE responses
Ms Sandy Hutchings (CFO: DPE) responded to the question of transgression of section 43 of the PFMA.
That was in the previous financial year and was an oversight on the part of management; it was not in this financial year.

Mr Mpofu responded to the question of SAFCOL winding down, which was specifically the status of the KFL land claims process. A task team was in place between the Department of Forestry and Land Affairs, the Department of Land Affairs were aiming to complete the verification of land claims by the end of this year and thereafter negotiations would start with the land claimants, DPE would be providing input into the nature of negotiations.

In respect of Eskom and load shedding, Ms Molefe explained that the reserve margin was at around 10%. If there was a sudden upswing in the economy there could be some risk if there were a lot of new connections coming into the system.

Mr Chris Forlee (DDG: Energy & Broadband) added that consumption and demand levels had been restored to before the downturn. However, since the emergency happened a few things had changed. At the time they were importing around 850 megawatts of power from Cabora Basa, it was now at about 1500 megawatts. Eskom had also brought just over a 1000 megawatts of gas peaking plant into the system which ran on diesel and was what helped the Western Cape, and also brought back a number of the return-to-service stations. That meant about another 5% capacity available in the system. Eskom’s availability of plant had increased by 1.5% which also released an additional amount of plant available to produce because they had now had time to catch up on their maintenance schedule, so they would not be in the same situation as when they had the emergency.

Ms Molefe clarified that Risk Management was undertaken in each of the SOEs but a specialist also provided support. Risk was done at three levels, at the one level the enterprise itself identified its top ten risks and what they were doing to address those risks; at the second level the SOE team within the Department would review the risks identified by the SOEs and generate for themselves the people who were the watchers of the SOEs as to what they identified as the core risks for the enterprise, they would put together a mitigation plan for the risks that they identified; and then lastly the CIPM would identify cross cutting the same risks and DPE would share with Treasury if they were particularly worrying and financial in nature, or operational with the various policy departments.

The MP was correct in that SAA profits were a write back of provisions made for the air bus contract; however, operationally SAA had been profitable but for the hedging losses.

Mr Andrew Shaw said the SAA recovery was certainly fragile, its turnover was R26 billion and it registered a profit of R7 million, which was very tight in terms of margins. It also had a very low equity base. But the extent to which there was some scepticism over the results was not well founded. There was a large hedging loss of R1.5 billion and some things that came back onto the balance sheet, the hedging losses were unexpected and larger than one would have expected under normal circumstances because of the huge fluctuations in fuel prices over that period. On that basis the airline was likely to have a sustainable operational profit providing that market conditions stayed roughly as they were. In the process of the last two years, SAA had been really successful.

Ms Mentor said on behalf of the Portfolio Committee on Public Enterprises, she would like to thank Ms Portia Molefe for the excellent service she had rendered to the Department. It was a pleasure to work with her and hoped she would not be entirely lost to the public sector. If she had a change of heart, she would be more than welcome back as she had really been an asset. She also thanked the leadership team that supported her. The Committee wished her well in her chosen path but she would always be welcomed back into the public service.

Ms Molefe continued that the 60% to 70% procurement by the Department of Defence from the local defence industry was accepted in principle but did not necessarily happen in practice - if it was not available in South Africa.

She said that DPE travelled SAA because recently there was a move towards reducing costs in administration, when the crisis hit some time ago they started travelling economy class internationally. They travelled economy class nationally. For employees, internationally SAA should be the preferred supplier. Domestically it was different because in South Africa it was a competitive domestic space, privately owned airline companies in South Africa could not be regarded as any less South African as SAA and therefore would not be comfortable in making statements that all civil servants must use SAA when they travelled domestically, but she agreed for international travel.

On the South African Power Project and how resources were funded? Due to the huge amount of money over a twenty-year period, it did tend to cause a lot of disquiet for the amount of money that had to be spent to create support in the industry. In percentage terms, only about one percent of the total spend over the twenty-year period was the funding required to support the South African Power Project and that point had to be reiterated. It was only with that investment that we were able to increase the exports that would be derived from the local industry and also the positive effect it gave on the balance of payments. In the implementation the longer-term objective of developing a local industry that supported the goal programme, was kept paramount.

Which SOEs required capital injections and why they continued to be in that state? If SOE companies that were due for disposal, at the time of making the decision that they must actually drive an investment programme, did not do the normal thing in ensuring that the company had a balance sheet that was strong enough to be able to take the investment programme, then they would have the problems they had at this juncture, because one would constantly have a weak balance sheet on which additional demands were added. The enterprise of concern was Denel, not because it had not been sufficiently capitalised to date, it was the instrument being used for capitalisation which caused the problems, and the guarantees, which came with additional interest costs, and so one would continue to have a problem.

The second concern was Eskom, ultimate policy decisions would have to be made given the application that Eskom had currently put into the regulator that withstood the assumption of being able to use the guarantees that had been provided to Eskom, which Eskom would use as and when it required. Guarantees often had timing attached, so with R176 billion over the next three years, it would only get R115 billion of that. One of the proposals was to accelerate that R115 billion to about R145 billion on the assumption that with those guarantees, it would be able to raise any additional monies.

Rating agencies had indicated that Denel would have to raise the bulk of the funding in the domestic capital market, the question was were they deep enough to undertake such a massive borrowing programme, not only of Eskom but of the rest of the State.

Minister Hogan was not in a position to comment on the judgement regarding the SAA CEO. SAA as a process was well on the road. The new board would be making recommendations to the Minister and they were happy that good progress was being made there.

Ms Molefe continued that the advertisement for her replacement as DG of DPE was closed and was a matter of the Ministers finding the appropriate person.

On the future of Denel, it was an entity that reported to DPE. There would remain a lot of questions around Denel as a company of a particular sector owned by the State and discussions were ongoing with the Department of Defence around how to ensure that if there were not sufficient orders from the Department it secured the capabilities in South Africa. The challenge was to maintain the personnel.

Ms Sandy Hutchings clarified that the unauthorised expenditure arising from the years 1996 right through had been approved and were slowly getting the funding back from Treasury, everything had now been settled. There was no current unauthorised expenditure, that all arose from twelve years ago.

Mr Mpofu clarified that the Exco Council for Defence would work in collaboration with DTI; he was not in a position to say how far that process had proceeded.

Ms Molefe explained that the acronyms were explained at the back of the Annual Report. The Chairperson interjected that on the question of acronyms; in such a presentation, members could not always refer to the back of the Annual Report.

On the question of the Defence Evaluation & Research Institute (DERI), Ms Molefe said that the question was whether the shareholder representative was the Department of Defence or the Department of Science and Technology and one would then be able to know where the enabling Bill was located.

On the issue of the audit committee, PFMA dictated about 94% of budget was transfer payments and the Departmental budget was about R100 million so it was a fairly small budget that the audit committee looked after. The area of concern was to ensure that transfer payments were undertaken in line with the agreements with Treasury, more often than not when making the allocation for the SOE.

DPE did not have any PPPs because it was not a direct line of delivery of service. The SOEs could have any number of projects that included the private sector in their businesses.

The increase in consultants did not mean billions but millions of rand. It was a R21 million increase from 2007/08 to 2009 and the bulk of the increase was for a project undertaken with UNEDO and several pieces of work from consulting specialists were required amongst which would have been the funding options required for SAA going forward. A lot of work went into a study as to what were the core concerns of people in general with respect to nuclear. Some of the projects were indicated in the Annual Report.

Ms Molefe agreed on the remuneration guidelines. DPE had an update, which was in the process of being reviewed inside the Department. Previously they had used inflation as to how the remuneration would change. A lot of philosophical questions had to be resolved around remuneration. How was remuneration dealt with in the current economic crisis? There was the notion that in a SOE one would not get paid as one would be in a private entity. The challenge always was if they did not work for an SOE and worked for a private company some of them would work in companies in which they would have share options, which is something that could not be made available in a SOE.

Ms Molefe tried to indicate why SOEs remained in the red. There was a new concern that SOEs had undertaken an investment programme so had added assets to their balance sheets but, in the downturn, those assets would not be able to generate revenue. That was an additional burden to be dealt with and one had to find ways and means to maximise the utilisation of those assets. The other issue was to find ways of fast-tracking the move from the building of the assets and the utilisation of the assets. The shorter the build programme and the shorter the period from commissioning to utilisation of the assets, was in the interests of the SOE and its balance sheet.

On the issue of virement, there was an increase of 6% that was moved from other programmes into compensation. That was approved by Treasury and was to enable the payment of gratuity to a previous Minister when he was leaving, as well as having to settle an old 2000 debt which was a GPS pension of R4.1 million of a former employee of DPE and with a judgement of that nature on which one was expected to make payment. DPE got permission from Treasury to implement that virement.

On the issue of board members sitting on several boards, several years ago DPE was requested by the Portfolio Committee to do a tabulation across all the SOEs of the various board members and the boards they sat on, which made them a lot more conscious as to how many boards they could sit on. Our company law placed the responsibility on the individual. As a matter of course DPE now checked how many boards a person was sitting on. If they were already a retired person they would normally be able to take a greater load than someone in full time employment. It would always remain a very difficult process to ensure an appropriate allocation of responsibility on people who sat on more than one board.

On the airbus contract and the way it was renegotiated, DPE felt it was time that they traded themselves out of trouble. When the airbus contract was being renegotiated, one of the things between SAA and DPE that they were trying to do was to ensure that the liability and the payment that had to be made had, had to be made at least some time from today at a time when if they continue as they were currently doing operationally they should be able to start generating sufficient cash to at least make those regular payments. The contract was funded by an export credit insurance funding with a French agency.

Ms Molefe responded as to the extent to which research was undertaken in the Department. It would undertake research relating to the Department, which would include whether the SOE was appropriately structured, and the possibility of merging SAA and SAX. It was decided that because of the state of the SAA balance sheet at that juncture, it would contaminate another balance sheet if they were merged. It was something that should be looked at in the future; there were models everywhere else in the world. The idea was to move SAA to a point where it had a stronger balance sheet and then look at that again. The two working together was critical for the success of both carriers.

The point Ms Mentor raised about general research and development being undertaken in the SOEs themselves was important. They did undertake an exercise and asked the SKA team to participate with the various research units of the SOEs and to look at a strategy as to how to do more research, some was pure science; some of the product development related to the enterprise itself and some in improving efficiencies and operations within the SOEs. Unfortunately DPE was then hit by the financial crisis and started cutting back on R&D. It would be useful if both committees would keep asking questions as to what was happening with R&D in the SOEs.

Ms Molefe would provide both committees with a list of all the non-core assets that were being disposed by all of the enterprises.

She agreed with the point raised by Chairperson of the Portfolio Committee as to what was the bailout and what was investment; the State as the shareholder and as an investor was no different to the private sector.

The changes in the Companies Act and the notion that was raised around what was the most appropriate vehicle for service delivery, she hoped that was a debate that would continue. The difference was that if you wanted them to not depend on the fiscus and to use their balance sheet and their ability to get into the capital market on their own, there was value in having a company as a stand-alone entity. It was a rich debate that should be encouraged. That could lead to the issue of privatisation of basic services such as water and electricity and how it ensured that the populace was always protected.

Restructuring SOEs with the focus on Transnet? DOT and its entities were responsible for passenger transportation and Transnet was responsible for freight transportation. When Ms Ramos was with Transnet one of the things that was absolutely clear was that the aviation portfolio was having seriously negative effects on the rest of the Transnet portfolio, and so Transnet was not able to undertake the investments they were now able to undertake with the rail system and the ports system. It was important that that volatility was taken out and was the reason that the process to separate SAA and SAX was implemented  - so that the Transnet balance sheet would be able to focus on the basic transport infrastructure for freight.

On the PBMR, yes, they had said little now but in the last financial year they were talking about the progress they hoped to have made. The issue of a shareholders agreement was one of the things DPE hoped to have been able to have concluded and signed and had subscription by other shareholders because the anticipation was that the State would not be the only shareholder but would have private players. It was way too expensive for one player to undertake. When the business plan of PBMR was reviewed, instead of focusing on electricity and discussions with the Chinese and with Sasol, and listening to other potential partners as well, it was looking for a route that was less risky in the earlier stages and continue investment in new areas of research like the helium cycle, which was the research the PBMR would be going into. A lot had been done and DPE could do a comprehensive report on what had been done and the challenges faced.

Mr Andrew Shaw responded about the Banana Express, saying that Transnet had made decisions in the past but they did perhaps wish to reconsider taking over the operations of private operators and were now going through the process of taking that back into the market. Transnet had identified that its niche was to play to the primary corridor network in the country and if it could build up a set of effective smaller multiple operators that operated in support of that network, it could benefit from the freight they brought. That related to small lines like the Banana Express, by saying maybe it needs to go back to a small operator that was better aligned to the needs of that specific market, which was very unique and operated on a different gauge.

Ms Sandra Coetzee said the R140 million that was paid to Transnet for SAX, largely represented repayment of shareholder loans extended by Transnet to SAX.

With regard to Alexkor, the question of the transfer of the property and the development of the mining plan only subsequent to that, most of the properties that had been transferred to date were farmland and not necessarily land mining property. The transfer of the property did not necessarily automatically coincide with the transfer of the mining rights, which were subject to approval by the Minister of Mining, and that required a Section 11 process in terms of the Mineral and Petroleum Resources Development Act. That application required Alexkor to apply for a conversion of the old order mineral rights into new order mining rights and simultaneously for the transfer of the mining rights to the community. That application had been submitted and was under consideration by the Department of Mining. It was a requirement for the transfer that a mining plan had to be submitted and that mining plan had been developed. The transfer of land and the transfer of the mining rights were separate processes and DPE did not hold back the transfer of the land because of the requirement for the development of the mining plan, but the mining plan had been developed to enable the transfer of the mining rights.

Ms Molefe said the table on 1.2 was about salary bands (pages 120/122 of the Annual Report) as they occurred in the public service, the discrepancy on the next page, the table 1.3 was supposed to be about critical occupations. The 54 senior managers were not necessarily all under critical occupations, that was her understanding, but she would check the numbers.

Mr Lees said if Transnet was the shareholder of SAX he did not see the need to reimburse those shareholders. In terms of Alexkor, was the mining operation continuing under the guise of Alexkor and was Alexkor then drawing down on the profits. Would the community be getting the benefit of the mining operations that were currently taking place?

Mr Sibande referred to the State of the Nation address and the question of vacancies, what was the DPE’s contribution to that?

Mr Gololo referred to Alexkor and asked what percentage did government own in the Pooling & Sharing Joint Venture (PSJV)?

Mr Nhanha asked for clarity on the SAA call centres, the outsourcing process having been suspended due to investigation into award of tender. Was that matter resolved?

Dr Koornhof agreed with the DG that 95% of budget was allocated to transfers and subsidies, to get value for money from those transfers when SOEs appeared before the committee, members would have to ask them whether value for money was received from the Department. Was the Department also looking for value for money and where did it engage with its SOEs with the R3 billion allocated, when and where and how did they engage to ensure that government, the State or the Department did get value for money?

Ms Sandra Coetzee responded that the PSJV envisaged a 51% shareholding by Alexkor. The joint venture had not been formally established because it could only be formally established once the rights had been transferred, however an interim mechanism had been set up being the Interim Joint Board and its purpose was to develop a business plan in order to potentially commence with mining activities even prior to the PSJV being formally established. If the Interim Joint Board’s business plan was approved, the Minister had the discretion to, even in advance of the transfer of the rights, sign the operations to the Interim Joint Board (IJB), and that mechanism would then allow the community to benefit from the proceeds of mining on the 51/49% basis, even though the PSJV had not yet been formally established. The IJB had submitted its business plan and the Department was due to respond to that. So there was a mechanism created for beneficiation prior to the PSJB establishment that the IJB and the prerequisite for the IJB to commence with mining activities in the approval of their business plan.

On the shareholder loan, in the case of the R140 million the share value was very low, there was a depreciated claim value that was independently determined by advisors as R140 million.

Ms Molefe continued with respect to vacancies, DPE establishment was 163, excluding interns, they would have vacancies of about 40 and a percentage of that would be true vacancies. It tended to be difficult to fill some of the posts within DPE because of the skills required, and in the public service because of the whole process to get the post established. They tried to get a full establishment.

Mr Andrew Shaw reported that SAA call centres continued to be outsourced. They were part of the KPMG forensic investigation that the board of SAA was undertaking and would find out from the board whether any particular issues arose in respect of the call centres. There were a number of teething problems in establishing the outsourcing of the call centres and the service was not up to scratch. More recently SAA had gone through a rigorous process of refocusing its customer service and delivery and there were massive improvements in the on time departures, it was now the best airline in South Africa and had similarly focused on improving their key performances in respect of call centres, so they should have improved.

Ms Molefe responded to the question around value for money for transfer payments. In earlier years there were fewer conditions that were attached to the funding. Now when money went to the SOE, there were often specific targets and DPE would tend to watch that it actually did what the funds were required for and that would normally be in the reporting they would undertake. Increasingly, before they could make the second transfer payment to the enterprise there had to be a report that reflected whether that particular milestone had been achieved before the funding was released directly from the Department. So there was close oversight to ensure that the funds were used for exactly the right reasons. That had to be balanced with a particular initiative to take a shorter or a longer period of time but it was watched tightly in the Department.

Minister Hogan thanked committee members for the range of questions and the diligence in which they had been examining the issues. She was surprised how well-up people were on the issues, given that many members were new members to the committee. Parliament faced an information problem in that they did not get sufficient information and that could be a very disempowering thing. It was very important that that information flowed between Parliament and the Department so that it could get to the real issues. She thanked members for asking questions that gave the Minister an alert as to what they needed to be following through. She thanked the DG for the complete professionalism of the team, the way this presentation and the work that was done was absolutely amazing. It was the visionary leadership in DPE and it was primarily the energy that this DG, Portia, had given. She thanked Portia, it had been an incredible time just to see how someone with energy and passion and professionalism led the team. She did not underestimate the kind of stress the team was under and thanked the whole team. It had been a difficult year, and would be a difficult year when reporting at the end of next year for a whole number of reasons, but thanked each and every one for the work they had done and the commitment they had shown, because they were delivering on a core mandate of government: infrastructural development.
 
The Chairperson thanked the DG and officials, Portia was a real leader. As NCOP had requested a breakdown of what was happening in provinces, SAFCOL, Komatiland, the Richtersveld, the Committee wanted to know about all those SOEs and she hoped Portia’s successor would carry on where she had left and be as good as she was, and hopefully it would be a woman. She thanked the Select Committee on Labour and Public Enterprises, it was the first time they had a joint meeting. Their questions were different to that of the Portfolio Committee, the joint meeting was because of the annual report and time constraints.

Ms Molefe had wondered if it was entirely wise to leave now with such interesting things happening in the economy. It was really a tough job but she appreciated the team that she had been privileged to work with.

The meeting was adjourned.