Performance Management of Executive Management of State Owned Enterprises; Alexkor Annual Report 2008/09

Meeting report

The Chairperson apologised to Alexkor for the delay in receiving its briefing which was for reasons beyond the control of the Committee. The apology was accepted.

Dr S Pillay (ANC) said that the role of state-owned entities (SOEs) such as Alexkor was especially important, since they had a broader mandate of transforming society and enriching the values of the people, and that was why Government made its investment in them, in contrast to a normal company that would present its profits and losses. He therefore asked Alexkor to give extra details in its presentation of such matters as the other things that it did, for example, the mark 1 and mark 2 pilot training and training for engineers.

The Chairperson asked Alexkor to feel free to present what it had prepared, and if there remained outstanding matters Alexkor could send information in writing to the Committee subsequently.

Alexkor presentation
Alexkor, the state-owned alluvial diamond company situated in Alexander Bay, Northern Cape, briefed the Committee on its 2008/2009 Annual Report.

Mr Reginald Muzariri, Chairperson: Alexkor, focused on the key strategic issues and the key deliverables that were required of Alexkor. The Richtersveld community had made a land claim in 1998. In the land settlement process, a Pooling Sharing Joint Venture (PSJV) was to be formed between Alexkor and the Richtersveld community (RVC), with transfer of Alexkor's agriculture and ‘mariculture’ assets to the RVC. Key deliverables were the transfer of various assets that were part of the settlement, largely farms and agricultural assets. Alexkor was also required to examine the conversion of old water and mineral rights into new rights and transfer them to the community. Also the marine mining would be combined into a pooling and sharing joint venture, 51% of the assets to be held by Alexkor and 49% by the community. That pooling and sharing joint venture would then be operated by an independent board and management committee on behalf of Alexkor and the community for the benefit of both. Alexkor had then been faced with a number of consequent, for example, updating the company’s environmental plans, reviewing social and labour plans as part of the longer process, examining how mining plans as part of the pooling and sharing joint venture would impact on the area, and then examining restructuring issues within the company.

Alexkor’s ability to generate sufficient revenue to cover its operating costs further deteriorated during the 2009 financial year. As of March 2009 the company had suffered an operating loss of R77.6 million, compared with an operating profit of R5.9 million during the 2008 financial year. The company reported a net loss after tax of R65.7 million during the 2009 financial year compared to R4.8 million during 2008. Alexkor’s operating cost did not show the similar downward trend as revenue. Although the operating cost of R154.1 million (R156.6 million in 2008) was in line with budgeted figures, the majority of Alexkor’s costs remained fixed, whilst variable expenditure decreased proportionately with the decrease in own-land mining activities.

A large proportion of the R77.6 million loss related to adjustments that the company had been required to make in regard to post retirement medical aid benefits. This would be further discussed as one of the challenges that the company had to face.

The company had been required to impose some voluntary severance packages. As a result of that process, the company had decreased its staff from about 240 to 111 members. Apart from the fact that the company had suffered a huge decline in the price of diamonds, the company had also had to cease quite a large proportion of its land mining activities in order to preserve their future value for the benefit of the community. The company had put land mining operations into care and maintenance; there was no new mining now in virgin areas. The company was conducting limited processing of dumps. The company operated in a harsh environment, so if machinery stood still, it went into disuse very quickly; it was therefore important to keep it ‘ticking over’. The company had also undertaken the transfer of agricultural assets. This transfer had been completed by the beginning of the previous year. The company also had to examine queries from the Competition Commission. The outcome was that the company found that it was not necessary to notify the Competition Commission of the transaction, which made the company’s work a little bit easier. Obviously from a regulatory aspect, the company was in compliance with required legislation.

Alexkor was now awaiting the response of the Department of Minerals and Energy with regard to the process of the conversion of mining rights. The company understood that the expected response time was from eight to ten months. As it was a key element of the company’s land claim settlement process, the company was liaising with the Department to expedite its response. Previously the township had been built and developed by Alexkor, and as part of the land settlement process, the land had to be subdivided and registered as a formal township, for transfer to the local authorities in the area. Part of that process required that the company undertook a significant upgrade of the water reticulation and electricity distribution networks. That process was under way as a key project with the aim to transfer the township to the local authorities within 2010.

The pooling and sharing joint venture was still outstanding because there were some conditions that still needed to be fulfilled. The largest one was the transfer of the mineral rights to the community. The second was to consider the future of Alexkor once the pooling and sharing joint venture was established, for example, exploration with a view to diamond mining of surrounding areas. This was a major concern of the board. Some of the other key issues related to the status of the fiscus. Alexkor had been advised that there was no funding available for state-owned enterprises for the time being. As a key issue in the pooling and sharing joint venture, R250 million worth of environmental damage had to be made good after 50 or 60 years of Alexkor mining. The company had, as part of its previous employment practices, quite significant liabilities that had arisen in terms of post retirement medical aid. These were strategic issues that needed to be resolved for the future. As part of the land claim process, the company still had some outstanding compensation matters to settle, in which regard it was in discussion with the Land Commissioner and the Department of Rural Development and Land Affairs.

Ms Khetiwe Maseko, the Chief Executive Officer, Alexkor, gave a short view of core operational issues. Currently, Alexkor’s current operations were Alexander Bay mining, in which, at the beginning of the financial year, as the company’s mining operations were restructured, Alexkor’s own mining schemes were put on hold; as Mr Muzariri had mentioned, the company now carried on very little mining operations on land. There was a small amount of mining of tailings and dumps; and there were two other groups, one of which was a woman’s group in another area which was one of the resources destined to go into the joint venture with the community. So land mine production had been very limited. The company currently had, on the marine side, 27 shallow water contractors, and over 400 divers. The marine operations had continued as usual, subject to a reduction in ‘sea days’.

The non-core operations were the farms, all productive, which had been successfully transferred to the Richtersveld community in terms of the requirements of the deed of settlement and they were no longer on Alexkor's books. These included diary and ostrich farms. The farms had originally been established to produce food for the consumption of the mine workers. The other mining areas were allocated to the retrenched Alexkor workers. Registered mining lots on the land contained the mining dumps, and remnants around the excavated areas.

The current number of Alexkor employees was about 111. These were permanent employees. There were also about 400 contracted employees. There were also other contractors such as security and catering staff.

Alexkor mined right up to the Orange River at Alexander Bay in the Northern Cape and southwards to Port Nolloth. Alexkor was totally responsible for all the processing and marketing of the diamonds, which it sold on the Johannesburg Diamond Exchange. The contractors used their own machinery for mining purposes, but Alexkor used its own machinery for processing the gravel. Alexkor had achieved its best diamond sale of the past four years, on account of its marketing efforts which included diamonds in different size packets to make it easier for buyers. Alexkor, however, had been affected quite seriously by the prevailing diamond prices, and the global economic crisis had had a major effect. Alexkor was doing ‘quite well’ in production, but had been adversely affected by the decline in the number of what it called ‘sea days’. Sea conditions had changed, for which Alexkor considered global warming at least partly responsible. Sometimes a month or two would elapse without a ‘sea day’. On such days the boats could not put to sea at all, and all production on the marine side was halted. It was important to note that marine production was 70% of Alexkor’s production. That was the only area, until the pooling and joint venture was up and running, in which Alexkor could mine completely without limitation.

On account of the global economic recession, diamond prices had fallen by 50% and most of Alexkor’s neighbours had been obliged to cease production entirely. Alexkor, however, had decided to continue production, because of its social obligations. It was important to note that Alexkor had made very good progress on health and safety. It had had no fatalities over the past year. It had twelve injuries, mercifully not serious. It was important to note that Alexkor had produced a social and labour plan. The township was to be upgraded to municipal standards. This was a huge project that was expected to create some jobs. It was part of the deed of settlement, but also part of Alexkor’s social plan. Alexkor would be happy to show the Committee its work in that regard during the Committee’s forthcoming oversight visit.

Mr P van Zyl, the Chief Financial Officer, Alexkor, said that Alexkor now operated with only three contractors on land and 27 in shallow waters on a strip of 140 kilometres. He acknowledged that creative thinking by contractors to improve productivity levels on both land and sea had increased diamond recoveries from 25 620 carats in 2008 to 26 059 in 2009. The global economic crisis had negatively affected the diamond prices in the second half of the year reducing sale prices by as much as 50%. The average diamond price received declined from $763 for 2008 to $617 for 2009. Whilst a weaker rand/dollar exchange rate assisted Alexkor, it was still insufficient to compensate for the low diamond prices and the rand diamond revenue decreased from R139.8 million in 2008 to R127.5 in 2009. The 2009 revenue however exceeded the year’s budget by R20.6 million on account of the higher than budgeted carat production. The marine mining operations actually did quite well, despite the big decrease in ‘sea days’, which Mr Van Zyl blamed on global warming.

Although the total cash and cash equivalents amounted to R276.9 million as at 31 March 2009, only R97 million remained available for operational purposes at the end of the 2009 financial year. The balance of the cash and cash equivalents was earmarked for ongoing litigation, Government-funded projects, implementation of the deed of settlement, Boegoeberg rehabilitation, pooled and shared joint venture recapitalisation and environmental rehabilitation trust funds.

Discussion
The Chairperson pointed out that the Netherlands Fellowship was offering short training courses in urban development and urban change from June to July 2010, and suggested that Alexkor might wish to nominate candidates. The closing date for applications was 16 November 2009.

Dr M Mangena (AZAPO) asked about the legal contestations.

Mr Muzariri replied that the company would try to settle as soon as possible.

Dr S Pillay (ANC) asked about the transfer of the mining rights. The Department of Minerals and Energy would take eight months to complete this transfer. The viability of the company depended on the PSJV agreement. He questioned the benefit of the R9 million to be spent on litigation, and observed that perhaps, a bad settlement, or at least a compromise, was better than a protracted battle.

Ms Maseko said that many of the issues were historical. Two cases were ongoing. It had been necessary to reconstruct information.

Mr P van Zyl said that R9 million was held in trust by the company’s attorneys.

Ms G Borman (ANC) asked for comment on Alexkor’s board meeting (Annual Report, page 18). There had been quite a few resignations. She asked about the company’s internal audit, which was outsourced and had not functioned effectively throughout the year (Annual Report, page 26). She asked about the shareholder’s compact signed between the board and the executive authority; however there had been no formal performance appraisal as required by the Public Finance Management Act (PFMA). She sought more clarification on Alexkor’s funding, since there would be no more funding for the time being from the shareholder, namely the Department of Public Enterprises. She asked if Alexkor was seeking partnerships to provide funding to assist it.

Dr G Koornhof (ANC) asked Alexkor about its directors’ report, signed by the Chairperson of the Board and the Chief Executive Officer, in which it expressed concerns about losses suffered in several past financial years on the solvency of the company and Alexkor’s status as a ‘going concern’ (page 27, paragraph 30). Moreover, the directors’ report had said that the current situation was not sustainable in the longer term without the establishment of a PSJV and commencement of mining activities. The independent auditors’ report also addressed this issue and expressed doubt on Alexkor as a ‘going concern’ in the longer term. What plans did Alexkor have to address this issue?

Dr Pillay also was concerned about the viability of the company. Added to the matter of the ‘going concern’ he asked if any studies had been done on the reserve levels of diamonds.

The Chairperson added her concerns on sustainability.

Dr Mangena said that social dynamics were important. In view of the company’s reported loss of R77.6 million, he asked if Alexkor’s workers saw the company’s activities as sustainable in the long term – over the next ten to 15 years.

Ms Maseko replied that she believed that the workers ‘on the coalface’ did see the company as viable. It was their main source of income, and it was fundamental to the local economy.

Mr P Van Dalen (DA) observed that Alexkor’s revenues were small. For a state diamond enterprise one should be talking about billions of rands, not millions. This seemed like ‘a Mickey Mouse company’, while the Chief Executive Officer’s salary had increased by 300% in the past year; this was a larger salary than that of the City Manager of Cape Town, who supervised 23 000 workers, while Alexkor had fewer than 150 and was not making a lot of money.

The Chairperson asked about solvency.

Mr Muzariri responded that the company required cash to be available to continue trading. In terms of historical agreements, the company had offered the best medical aid packages that were available. It was not possible to make changes unilaterally. It was necessary either to put the schemes into liquidation, or negotiate to reduce the cost of the post retirement package. The company was examining strategic alternatives, and admitted that it found itself ‘a little bit hamstrung’. There were significant penalties that could have overall implications for the company. The Deed of Settlement (2007) needed to be complied with. He noted that a representative of the shareholder – the Department of Public Enterprises – was present.

The Chairperson asked about performance contracts.

Ms Maseko responded that the board had arranged a meeting with the Department of Public Enterprises. There were to be performance contracts, aligned with deliverables in the shareholder’s compact, for all management staff.

Mr C Gololo (ANC) asked about the decline in ‘sea days’ attributable to climate change. He asked if there was any high technology equipment that could be employed to retrieve diamonds from under the sea.

Ms F Hajaig (ANC) asked what research Alexkor had undertaken to see if means could be found to mitigate these effects.

Mr Van Dalen asked what Alexkor meant by ‘sea day’. It seemed a ‘good’ excuse for decline in profits that Alexkor could work at sea on only ten days.

Ms Maseko defined ‘sea days’. It might seem like an excuse, but it was very dangerous to mine on days when the weather and state of the sea made it hazardous to set sail. However, the company was examining affordable alternative methods of production on such days, such as platforms.

The Chairperson asked how long this would take.

The Chairperson said that she was sure that with the scientific use of equipment it would be possible to predict the likely availability of ‘sea days’. She trusted that the company was aware of some of the social burdens that could be traced to mining companies.

Ms Maseko responded that the company would have to tender. The matter should be resolved within three years. It did not have to wait for the PSJV. The company needed to involve the community.

Mr Muzariri added that funding was a function of receiving approval from the Department of Public Enterprises. The company could not yet explore other funding partnerships.

Dr Koornhof questioned the R2.4 million salary of the Chief Executive Officer, and asked about the company’s remuneration policy.

Mr Muzariri said that Alexkor followed guidelines from the Department of Public Enterprises on remuneration. Since 2007 many key management staff had left, and the company was operating with a skeleton senior management team, with members assuming responsibility for broad areas and combining roles. For example, there were currently no human resources or operations managers.

Mr Van Dalen asked if there was a lack of motivation.

The Chairperson observed that the question was a little unfair to the board.

Dr Pillay said that the question should be referred to the Department of Public Enterprises rather than to the board, since the board could answer subsequently.

The Chairperson asked if there were any final questions.

Mr Mangena said that his questions had been anticipated by Dr Pillay.

The Chairperson asked for succinct responses, since the Committee was now in ‘critical injury time’.

Mr Gololo asked about the women group in Aleksor which was not part of the PSJV. Previously this group had some issues with management, and would like to meet the Committee on its oversight visit to Alexkor in the week beginning 16 November 2009.

Mr Muzariri responded that Alexkor was assisting them.

Ms Maseko added that Alexkor was going to see if other sub-contractors were needed.

Ms Hajaig asked about the current status of gender equity.

Ms Maseko said that Alexkor had 50 per cent representation of women in its management and board. She considered that the company was ‘doing well’ on gender representation, but admitted that the company was weak in regard to the large group of divers. Alexkor would seek to establish training for divers.

The Chairperson asked if Mr Muzariri understood the matter.

Mr Muzariri replied that he was well versed in the matter. However, some of the particular skills required years of training. Obviously the company would assist to the best of its ability, but currently it was constrained.

The Chairperson expressed dismay at Alexkor’s figures. They were ‘horrifying’. She asked Alexkor to make a plan to improve the figures and make a presentation to the Committee in a subsequent meeting.

Dr Pillay referred to page 14 of the Annual Report on semi-skilled staff. He said representation was ‘miniscule’. He asked Alexkor’s Chairperson to present an analysis in January 2010 together with a plan to improve matters.

Mr Muzariri replied that the Alexkor board was constrained as to what it can do regarding the PSJV. He had been Chairperson for only one year.

The Chairperson asked Alexkor to explain in greater detail. Thereafter the Committee would test its arguments.

Mr Muzariri agreed.

Ms Hajaig acknowledged the excellent work done by Alexkor for the local community. She asked how big the local population was.

Mr Muzariri replied that the local community numbered about 2 500 persons. Alexkor had administered the medical facilities entirely. The area was remote. It did not have a major issue.

Dr Pillay asked about beneficiation.

Ms Maseko responded that beneficiation had been proposed as a strategic planning option, but the company decided that the PSJV should consider it. It was something that should be reviewed.

Dr Koornhof registered his disappointment with Alexkor on the ‘going concern’ issue. This was a major issue facing Alexkor; in the next annual report the company would have to address the matter in more detail. The Committee could not gloss over it light-heartedly.

The Chairperson, drawing the discussion to a close, said that the Committee wanted to meet with Alexkor early in the New Year. It did not want to wait for the next annual report. Moreover, it wanted to see completion of certain matters within the term of the present Parliament.

Ms Hajaig observed that the matter of Alexkor could not be addressed in a vacuum.

The Chairperson advised Alexkor to take advice from Transnet, the Department of Trade and Industry and the Department of Minerals and Energy with regard to employee retirement issues.

Dr Koornhof asked Alexkor to explain information on page 45 of the Annual Report concerning medical aid liability.

Dr Pillay asked about Alexkor’s post retirement medical aid liability. He said that Alexkor’s employee retirement issues were comparable to those of Transnet and those in the goldfields. He asked how long the company would incur that liability, if social insurance came into being. He was interested in the implications of legislation governing medical schemes. He offered the Committee’s help and asked Alexkor to write to the Committee.

Ms Maseko said that Alexkor had done some work on its medical aid liability.

Mr Van Zyl said that Alexkor was weighing up options before taking a decision.

The Chairperson asked Alexkor to forward its views on the matter in writing and the Committee would offer advice.

Mr Van Dalen asked if poaching of diamonds from the sea bed was a big problem and asked about Alexkor’s security measures.

Ms Maseko said that Alexkor had established good structures in place to protect its security, including areas closed off by fences. The area in which the company operated was not subject to major poaching activity. Sea conditions were a big deterrent.

Dr Pillay asked to what extent establishment of the PSJV would affect the company.

Mr Muzariri referred to research of Alexkor. There was a disconnection between the legal drafting and the realistic time frame for establishing the PSJV.

The Chairperson advised that this question be answered in the New Year.

Ms Maseko referred to a report by an independent interim board that would answer many of the questions on future sustainability of Alexkor.

Department of Public Enterprises on performance management of SOE senior management
Ms Ursula Fikelipi, Deputy Director-General, Department of Public Enterprises, explained the relationship between the shareholder, board and executive management of a state-owned enterprise (SOE). A company had two governing organs: the shareholder in general meeting and its board of directors. The distribution of powers between those organs was regulated by the Companies Act (No. 61 of 1973) and the SOE’s Articles of Association. Such powers generally included the ability to hold general meetings, appoint board members, remuneration of directors (executive and non-executive), management and control of a company.

The shareholder was responsible for the appointment and removal of directors from the board which included the appointment of executive directors (chief executive officer and chief financial officer) who were appointed ex officio. The board as the custodian of the company was expected to act in the best interests of the SOE and the shareholder. The board had an oversight role to review and monitor management’s conduct of the company’s affairs and operations, its delivery and achievement of strategic, business, operations and financial goals and other objectives. Management and control of a company often fell under the board of directors in terms of both the Companies Act and the Articles.

The executive management (represented by the chief executive officer and the chief financial officer) was accountable to the board, and the board was accountable to the shareholder. Thus the board would manage the performance of these executives. Executive management was appointed and managed as part of an employment relationship governed by employment law and human resource principles.

The performance management cycle was described, beginning with assessment, performance planning (setting goals) and implementation. Current SOE performance policies were described in tabular form for the following eight SOEs: Alexkor, Denel, PBMR, South African Airways, South African Express, Safcol, Transnet, and Broadband Infraco.

Remuneration guidelines were approved by Cabinet in November 2007. Remuneration was approved in terms of the Department’s guidelines and defrayed by the SOE. The remuneration, or any adjustment of the remuneration, of executive and non-executive directors, was determined by the SOE in its annual general meeting having due regard for the remuneration guidelines. The remuneration guidelines for non-executive and executive directors were detailed. For example, the chief executive officer and executive directors were remunerated in line with the SOE’s size and enterprise performance. The SOE’s chairperson and non-executive directors were remunerated in accordance with the size of the SOE.

SOE boards were encouraged to establish remuneration committees in line with best practice corporate governance principles. These committees were to review and recommend to the board on such issues as executive pay, incentive policies, recruitment, retention and termination policies and procedures for senior management. The structure for non-executive directors’ remuneration should be clearly distinguished from that of executives. Non-executive directors should not participate in schemes such as incentive payments designed for executives.

Discussion
The Chairperson was disappointed that the Director-General, Department of Public Enterprises, was not present. Her presence was normally expected whenever the Committee invited the Department to brief the Committee. An explanation would be required. She observed that Ms Fikelipi was ‘a lone ranger’? She complained that the Department’s presentation had omitted Eskom. It was apparent that the Department had failed to understand the Committee’s requirements, as was illustrated by receipt of the presentation only the same morning. The document was unhelpful.

Ms Fikelipi said that she had compiled the final presentation the previous day.

Mr Van Dalen suggested that the Committee write to the Department in clear terms to state what the Committee required. It was not fair to criticise Ms Fikelipi since the Committee had not had the time to study the document.

Dr Pillay explained clearly what the Committee required: how boards were selected and mandated; what were their expected outcomes from the shareholder’s agreement; business plans; remuneration of board members; salaries and bonuses; and approval of board salaries by the Department. Regardless of the findings of the King Commission, in a developmental state it was not appropriate to have external board members.

Dr Koornhof concurred with Dr Pillay and added some requirements.

Mr Mangena added that the legislature and the executive needed to come together to resolve ‘a mess’.
Each entity had its own mandate, likewise its own procedures for the appointment of boards. Eskom was huge but competed with private companies. It was difficult to complain about the salary of the chief executive officer of Eskom without referring to benchmarks. Medical doctors received lower salaries than a personal assistant in a governmental department. Some municipal managers received less than the President.

Ms Fikelipi said that each state owned entity had its own policy. Payment or remuneration was determined by the entity’s board.

Dr Pillay said that what had been presented was different. The Committee had oversight of the board, but it was the Department that was accountable to the Committee, and it was the Department which paid the board members.

The Chairperson said that the matter of remuneration needed separate attention and discussion between the legislature and executive. He asked the Department to communicate with the Committee if it was not sure of the Committee’s requirements. Otherwise the Committee would think that the Department did not take the Committee seriously. It would be necessary to call another meeting at which the attendance of the Department’s senior leadership would be expected.

Other business
The Committee Secretary announced the programme of the Committee’s oversight visits for the week beginning 16 November 2009.

The Chairperson proposed that three Members from the ANC and two from the opposition parties, together with the Chairperson, take part in the oversight visit to save travel costs. Mr Van Dalen volunteered to travel at his own expense.

There followed a brief discussion.

Mr S van Dyk (DA) tabled his investigative report on Transnet, which highlighted an increase of only 2% in the pensions of Transnet pensioners since 1990. It was difficult for them to live on a monthly income of only about R1 000. The Committee’s attention was required since benefits could be changed only by the intervention of Parliament.

Dr Pillay said that historically when Transnet coloured employees retired they did not receive any follow-up benefits.

The Chairperson asked all Members to read the Report.

Mr Van Dyk said that annexures to the Report could be obtained from the Committee Secretary.

The meeting was adjourned.