Department of Public Enterprises Strategic Plan and Budget 2010-2013

Meeting report

Department of Public Enterprises Strategic Plan 2010-2013: Presentation
Ms Sandra Coetzee, Acting Director General, Department of Public Enterprises, said that the presentation, which would include presentations on each programme, would firstly outline the Department of Public Enterprises’ (DPE) recent achievements and budget, and secondly the strategic plan for the future.

Ms Coetzee noted the priority areas, achievements and budgets for 2009/2010. Priorities during this period included a synchronized logical planning, monitoring and evaluation process, a good capital structure framework, sound portfolio equity interest and contingent liability exposure management, and economic and regulatory cohesion for network infrastructure. DPE had also adopted a strong specialist advisory role. It had focused on implementation of the Richtersveld Deed of Settlement, and re-direction of Alexkor’s commercial focus and sustainability.

Mr Anthony Kamungoma, Chief Director: Investment and Portfolio Management, DPE, presented on Programme 1. He mentioned that DPE’s achievements under this programme included aligning the activities of the State Owned Enterprises (SOEs) with national socio-economic development, successfully monitoring SOE performance through the Isibuko dashboard, and developing a quantitative capital structure decision-making framework.  Specifically, he said that the DPE was successful in its chief activity of giving ongoing transaction advice to SOEs.

Ms Sandy Hutchings, Chief Financial Officer, DPE, presented to the Committee the priorities that the Finance, Corporate Services and Communications Programme had for 2009/2010 and the successes of these activities. There had been compliance with relevant financial legislation, an improvement in supply chain procedures and information management, and the DPE had undertaken effective internal and external communications strategies. Ms Hutchings then drew attention to the administrative budget for 2009/2010 and noted that total expenditure stood at 95,98%. The underspending was predominantly due to under compensation of employees due to unfilled posts and resignations during the year.

Mr Chris Forlee, Deputy Director General: Energy and Broadband Enterprises, addressed the 2009 priorities of Programme 2, noting that these had been largely successful, although there was a need to undertake the assessment of SOE board members more regularly. Mr Forlee noted, specifically in relation to coal transport logistics, that it was decided that a levy would be placed on each ton of coal transported and that the electricity tariff would therefore not necessarily cover the full cost of upgrading and maintaining the roads along coal-transporting routes.  There had been underspending by 0.07% of budget, mainly due to unfilled posts. He noted that there were difficulties in attracting applicants with the right set of skills.

Ms Ursula Fikelepi, Deputy Director General: Governance and Transactions, DPE, presented on Programme 3. She noted that there were successes in complying with legislation, legal advice to internal clients and that litigation – specifically the legal action between Umthunzi and Transnet – was successfully concluded. Advice had been given on Board and CEO appointments. There was also underspending in this programme, with 98.92% of the budget having been spent, and, like the previous presenters, she ascribed this to unfilled posts and resignations during the year.

Mr Kamungona addressed the activities of Programme 4: Manufacturing Enterprises. He made particular reference to Denel.  He said that the lack of alignment of Denel’s manufacturing outputs with the Department of Defence’s strategic requirements was due to the lack of a finalised defense strategy from this department.  He also said that some of the prioritised activities were not achieved due to the slow economic nature of the previous year.  There were, however some successful achievements, including enabling Denel’s development contribution and assessing the strength of the board. 

Ms Caroline Richardson, Acting Deputy Director General: Joint Projects Facility, DPE, addressed Safcol’s prioritised activities and successes in the previous year.  She noted that Safcol was still in the process of finalising future and past land claims but otherwise had met its projected achievements. The overall expenditure on Manufacturing Enterprises stood at 99,53% of budget, with this expenditure dominated by transfer payments to Denel in respect of a Denel/Saab Aerostructure indemnity claim.  Once again, underspending was due to unfulfilled posts and resignations during the year.

Mr Andrew Shaw, Deputy Director General: Transport, DPE, addressed Programme 5 relating to Transport Enterprises Programme, and discussed the activities relating to Transnet, South African Airways (SAA) and South African Express (SAX).  He noted that an analysis into Transnet’s impact on the economy showed that this SOE was making a beneficial impact in the poorer provinces of South Africa.  This result was due to the diverse nature of Transnet investments that effected R93 billion in income over five years to these provinces.  SAA’s activities had also resulted in considerable successes.  SAX’s Public Finance Management Act (PFMA) application for a  joint venture was granted.  The Transport Enterprises Programme spent 100% of its 2009/2010 budget, which was dominated by a transfer payment to SAA for the conversion of a guaranteed loan into equity to reduce SAA’s debt. 

Ms Richardson addressed Programme 6: Joints Project Facility. This programme too had achieved success in its prioritised goals. Specifically, she mentioned the Competition Supplier Development Programme, the South African Power Project, and the African Programme Regional Supplier Benchmarking and Development Programme. The latter, however, had experienced a lack of progress due to the fact that the project manager had left.  The Joint Projects Facility Programme underspent in Goods and Services due to delays in commissioning of procurement in respect of the Human Resources and Capacity Building programme.

Lastly, Ms Hutchings addressed the general budget utilisation.  She noted that the books were not closed as yet, so adjustments could still take place to the figures presented. She noted that the DPE had, overall, spent 99,79% of its budget for the 2009/2010 financial year.  Underspending was, on the whole, due to unfilled vacancies and resignations during the year.

Discussion
Mr H Groenewald (DA, North West) asked questions with regard to the Richtersveld Deed of Settlement implementation, specifically, how many people were involved, whether the problems with the mines had been resolved, and whether the people in Richtersveld had expressed their satisfaction with the  mines and government. He also asked where this community obtained its water. He enquired how much in total was spent to implement this deed of settlement.

Ms Coetzee responded that considerable progress had been made to date with enacting the Court order.  She said that all land rights had been restituted, as well as all the mining rights.  The process of transferring new order rights to the community had been completed.  The marine mining rights were still with the State, but these had been integrated with the community.  She said that water services were provided by the municipality. Ms Richardson later added that this water came from the Orange River.

Mr Groenewald said that in regard to Medupi Power Station, he had heard reports that contractors had not been paid and asked how true these were. He asked how many consultants were used by the DPE on this project. He asked about potential water problems facing the project, how much money had been spent on this project and how much was still required, besides the World Bank loan amount.

Mr Forlee responded by saying that the situation with regard to Eskom at Medupi was improving and that no consultants were used.  Instead, Eskom utilised a process of upskilling its own consultants, who were then used in the project.  He mentioned that when the DPE had visited the site, the Premier of the Province and the Mayor had reported that the people in the area were happy with the investment.  The issue of water, he agreed, was indeed a problem.  The first three water units were suitable, but the next three or four needed an upgrade and details of this were currently being discussed.

Mr Groenewald asked about DPE’s view of the future role of nuclear power, and which were potential areas for future nuclear sites.

Mr Forlee responded that funding was the major obstacle in regard to nuclear power.  The three sites that were being considered were Koeberg, Duynefontein and Thyspunt. He later added that upfront costs were higher in respect of nuclear power, although the ongoing running costs were lower.  This meant that large amounts of capital were required.  He said that in six months a clearer position on nuclear power would be taken.

Mr Z Mlenzana (COPE, Eastern Cape said that he was focusing on more generic questions as a result of time constraints. With regard to the Energy and Broadband programme, he asked how the delivery of capacity expansion programme was proceeding and what challenges it faced, as well as the funding issues faced by this programme.

Mr Mlenzana asked who “the community” comprised in the Richtersveld Deed of Settlement.

Ms Coetzee responded that “the community”, as a negotiation body, was represented by the Community Property Association (CPA) which was recognised as the appropriate vehicle to claim land rights.  She said that the Department has no influence over the CPA.

Mr Mlenzana questioned the nature of price-fixing, which was currently a controversial topic, particularly in regard to the transport SOEs.

Mr Shaw responded that the allegations of price-fixing against SAA were an assumption, with no clear supporting evidence.  He said that SAA was under investigation, however, and therefore he could not comment on the issue further. Generally, however, he made the point that a general increase in demand would result in a general increase of prices.  This could perhaps be misconstrued as price-fixing.  Additionally, tickets would often be often marked up so it was not the base ticket price that would be viewed by observers in relation to the price-fixing.

Mr Mlenzana asked about the progress of the restructuring of Denel and the involvement of the Department of Defence (DoD) in the process.

Ms Coetzee responded that the role of the DoD was material.  She said that the restructuring of Denel was being halted as a result of outstanding decisions on the part of the DoD.

Mr M Jacobs (ANC, Free State) asked how the Free State province was affected by Transnet’s benefits to the provinces.

Mr Shaw responded that the Free State province, as well as Limpopo, did not benefit as much as the other provinces from the Transnet investment, as the Free State had no significant rail or port investments. The provinces that benefited the most did so as a result of their geographical location.  He said that 2008 figures illustrate that investment in the Free State amounted to 6% of Gross Domestic Product (GDP).

Mr Jacobs asked when the DPE transfers to SOEs would end, and made the point that at some stage they would need to be profitable.

Ms Coetzee responded that there were significant reductions in transfer payments in this year’s budget and there were no plans to include transfers in next year’s budget.  She said that transfers were a constraint on the fiscus and a limitation on funds.  She said that steps would be taken to improve balance sheet health of the SOEs in order that they should rather, seek loans elsewhere.  Ms Coetzee said that with improved SOE performance came a lessened dependency on the State.

Mr Jacobs also asked about the progress of combating corruption and whether the Department had a plan to train people in order to fill the skills gaps that were mentioned by the presenters.

Mr M Sibande (ANC, Mpumalanga) asked what exactly was meant by the coal transport investment.

Mr D Feldman (Cope, Gauteng) asked an associated question as to why investment was not being made into the currently weak railway infrastructure, instead of trying to improve roads, to improve the coal transportation.

Mr Forlee replied that there was a move to upgrade the roads to the tune of R980 million.  He said that the Mpumalanga province was involved.

Mr Sibande then said that the state of debt recovery was disgraceful, and he asked whether the DPE had a recovery plan. 

Ms Coetzee responded that the poor state of debt recovery was due mainly to the lack of success in recovering the cost of bursaries to past employees who had then left the department.  She added that this debt, by nature, was very difficult to recover.

Mr Shaw added that the debt reflected in the SAA balance sheets was due to the R1.54 billion quasi-equity that was reflected in the books.  This form of equity allowed SAA to retain a debt in its books to allow for the grounding of Boeing 747s, which were too fuel intensive.

Mr Sibande asked what criteria were used to select learners for training courses and whether all provinces were considered.

Ms Richardson said that the issue of how training centres recruited was not known.  She said that she would check this information and get back to the Committee.

Mr Feldman asked whether Safcol had a plan to invest shares in certain projects in rural areas.

Ms Richardson said that she would get back to the Select Committee on the breakdown of rural/urban investment.  She mentioned that this was indeed an important aspect of the nature of SOE investment.

Mr Feldman asked about the general loan conditions relating to the World Bank loan.

Ms Coetzee reported that besides the usual financial conditions of repayment, there were conditions with regard to the environment (specifically carbon emissions), the social protection of communities, and the financial health of Eskom.

Mr Feldman requested these details in writing.

Ms Coetzee replied that an appraisal document on the DPE website detailed the full conditions of the World Bank loan.

The Chairperson said that there were concerns that the price of electricity was too low to attract investment.  She asked whether the recent increase in the price had reduced these concerns. 

Mr Forlee said that the average price of electricity was still too low, but that the increased tariff had been ring-fenced and this meant that there would be no problem in attracting investment.  He said that future price increases would assist in attracting private supply.

The Chairperson then asked what the future funding plan for SAA would involve, pointing out that in the past the government had bailed it out.

Mr Shaw said that the financial position of SAA was indeed challenging and that the profitability was still very low.  He said that predictions indicated that 2010 would be a good year for the airline and that the forecast for the future seemed good, with no need for additional funding.

The Chairperson asked how many jobs were created as a result of the R53 billion investment in the provinces by Transnet. 

Mr Shaw said that between 2004 and 2009, with an impact to 2018, the following indirect and direct jobs were created: Gauteng– 145 000, Free State- 19 000, Mpumalanga- 56 000, North West- 27 000 and Eastern Cape- 62 000.

The Chairperson asked why the transfer payments to Alexkor had decreased from R129 million in 2009/2010 to R36 million in 2010/2011. She also asked why there were no transfer payments for Denel and Pebble Bed Modular Reactor (PBMR) in 2009/2010.

Ms Coetzee answered that the reduced transfer payments to Alexkor were as a result of a reduced request for funding.  She said that this was due to Alexkor’s improved performance, as well as the increase in the diamond price.

Mr Sibande asked the DPE to clarify why more money was being requested by the DPE, despite the fact that the expenditure showed consistent rollover of funding.

Ms Coetzee responded that the rollover was due to the conservative financial policy of the DPE.

Ms Hutchings added that the rollover of budget was being used to finance further projects.

Mr Feldman asked the DPE to put in writing the conditions of the World Bank loan as well as the degree of rural development as a result of Safcol investment.
 
Ms Coetzee noted that it was a problem that time was running out, since many of the unanswered questions would be addressed by the second half of the presentation. She specifically made reference to plans for new forms of electricity generation capacity and plans to mix forms of electricity (including nuclear energy and renewables).  She said that in all decisions, the DPE must balance financial health issues with future performance health.

The Chairperson noted that the second half of the presentation  on the DPE’s Strategy Plan would be dealt with in the next meeting.

The meeting was adjourned.