Minister of Public Enterprises on 2009/10 Annual Report & State-Owned Entities in a Developmental State

Meeting report

Minister of Public Enterprises opening comment

Ms Barbara Hogan, Minister of Public Enterprises, said that the Department of Public Enterprises (DPE) was stabilising some areas. An Inter-Ministerial Committee had examined issues surrounding electricity and it would be winding up its work shortly. The DPE was striving to achieve synergy. She thanked the Committee for its oversight role.

State-Owned Entities in a Developmental State - Methodologies and Impact
Mr Andrew Shaw, Acting Director-General, DPE, said that this presentation was a reaction to questions posed by the Committee on an earlier occasion. It dealt with methodologies and impact with a focus on Transnet and Eskom. He noted the core role of a state-owned enterprise (SOE) was to provide a strategic national structure, to ensure security of supply and to develop a key industrial capacity. Government was the only social agent with an interest in ensuring adequate investment in infrastructure. Forward-looking programmes were needed. The private sector could also play a role. Investment was a prerequisite to sustaining the economy. Industrial development could accelerate the development of specific technology. Infrastructure investment could develop industrial capabilities. It was vital for the state to take a role in the development of complex, high-risk areas of manufacture.

Ms Ursula Fikelepi, Deputy Director General: Legal, DPE, said that the mission of the DPE was to ensure that SOEs were financially sustainable and that the SOEs delivered on government's strategic objectives. The Department wished to apply the best practices to shareholder management services. There had to be a balance between the interests of the SOE and the national interest. There were three components to an SOE, namely the shareholder, the board and management. The shareholder owned shares and not the assets of an SOE. Ownership of the shares gave the shareholder specific rights and powers. These were the right of the shareholder Minister to appoint directors, with the approval of Cabinet, and executive directors on the recommendation of the Board. The shareholder had the right to approve significant and material transactions, to issue a strategic intent statement, to conclude a binding shareholder compact, to access information to monitor and evaluate performance, to enforce accountability and take remedial action, and to produce good practice notes.

Ms Fikelepi said that the board and management bore the responsibility for the financial sustainability of the SOE. Specific responsibilities were the development of strategic and business plans, the appointment of management and staff, the management of operations and the development of detailed company policies.

Ms Fikelepi said that the funding for an SOE must derive from a commercial tariff. If the scale of the infrastructure challenge was too large, it to be funded from the fiscus. Government needed the presence of SOEs to ensure continuity of strategic intent. The resulting SOE needed to be separated from policy departments. This would avoid conflicts of interest between consumers and SOE interests, and between the SOE and the private sector. The prime function of policy was to advance the interests of the consumer. Separation of the interests of the SOE and the private sector was needed where sector policy promoted competition and where the regulator needed to be seen to set a fair price.

Mr Anthony Kamungoma, Acting DDG: Chief Investment and Portfolio Management (CIPM), DPE, said that the shareholder management process integrated national strategic objectives into SOE planning and operations. The strategic intent statement was the primary tool to communicate the state's expectations of SOE strategy. It resulted from discussions between sector departments, National Treasury and the Presidency. It demonstrated the wider social objectives of the SOE. The next step was for the Minister and the SOE Board to conclude an annual shareholder compact. This was required by National Treasury regulations. This compact would document key performance measures and objectives.

Mr Kamungoma said that the next step was the submission of a corporate plan. The SOE had to submit these plans and budgets annually to the Minister and National Treasury at least one month before the start of the financial year (FY). The plan must contain implementation details. Finally, the activities of the SOE were subject to performance monitoring and evaluation. The DPE was required to monitor the performance of SOEs by the National Treasury. The ‘Isibuko Dashboard’ was a mechanism that had been created for regular reporting. The Minister would issue investor briefs to the boards, advising corrective measures where necessary. SOEs also had to report to Parliament.

Mr Kamungoma said that the Dashboard included information on key areas such as finances, operations, capital investment, capitalisation, intra-governmental policy, socio-economic issues and risk. It would ensure clear, comprehensive and timely performance monitoring. It was web-based. Key performance data was keyed in by the SOE, which was also required to validate and approve the data. The DPE added analysis and reports on performance but could not change the data.

Mr G Koornhof (ANC), temporarily in the chair, asked the DPE to move more quickly as time was an issue.

Mr Shaw said that the DPE had developed a comprehensive risk management framework. Risk analysis was based on the likelihood of a certain event happening and the impact, should it happen. He made a graphic presentation of how the risk analysis was portrayed. The highest risks were those displayed in the top right corner of the graph. Risks were ranked from the perspectives of both the SOE and the DPE.

Dr Edwin Ritchken, Strategic Project Advisor, DPE, said that the DPE had developed a procurement policy to entrench supplier development in each transaction. A procurement policy had been designed to enable fleet procurements. The objective was to enable procurement that was long term and went beyond the capabilities of the balance sheet. These might therefore require government support as they went beyond the SOE’s mandate. Such procurements might impact on the broader economy. Progress was being made in the development of the system. There was a profoundly different normal supply procurement procedure. The policy had been completely re-engineered.

Mr Koornhof commented that Transnet had visited the Committee the previous week.

Mr Shaw said that the DPE had developed a comprehensive Board induction programme. This was intended to equip directors with the necessary knowledge and skills to run an SOE and also to make them aware of government's expectations. Directors may not be au fait with government policies. Key elements were identified.

Mr Benedict Mogadime, Director: Skills Development, DPE, said that the DPE had established a unit to manage skills development. The mandate had been expanded to ensure that SOEs participated in the support of the National Skills Development Agenda. Scarce and critical skills were defined in shareholder compacts and monitored on the Dashboard. There was collaboration across the different SOEs reporting to the DPE in order to avoid a silo approach. SOE training facilities would be coordinated to contribute to additional artisan training for the national pool. The DPE was soliciting funding from the Department of Higher Education and Training (DHET), National Skills Fund (NSF) and Sector Training Authorities (SETAs) to fund training of additional artisans. The Dashboard monitored SOE supplier network skills development in respect of infrastructure investment and maintenance programmes. Partnerships with SOEs DHET, SETAs, NBI and Further Education and Training (FET) Colleges would be facilitated. SOEs had to remember that they were training for the nation and not just internally.

Transnet
Ms Raisibe Lepule, Acting Deputy DG: Transport, DPE, discussed Transnet which had a strategic mandate to enhance national competitiveness in port and rail logistics. The core business was to assist in lowering the cost of doing business in the country, to enable economic growth and enhance the security of supply in a cost effective and efficient manner. There were six focus areas guiding Transnet's strategic mandate:
• Improving service levels and efficiencies. Strong disincentives for poor performance would be created.
• A sustainable capital investment would be followed whilst maintaining the health of the balance sheet.
• Ensuring that new capital investment was translated into tangible improvements in transport services.
• Policy and regulatory challenges would be met in a collaborative manner.
• Participating in the achievement of a responsive and economic infrastructure that would meet the needs of a growing economy.
• Innovative means had to be found for private sector involvement to enhance Transnet's service and to improve the competitiveness of the freight system. Because of limited funding, private operators were being encouraged to operate on Transnet's branch network.

Ms Lepule said that Transnet was striving towards a culture of performance. The Department did not want to see any SOE collapse. Appropriate levels of gearing were needed. Transnet was geared to operate a hub to hub service. Investment must transform into value for the economy. A sustainable infrastructure was needed in the pipeline sector.

Ms Lepule presented Members with a range of key performance indicators. These involved financial value creation, infrastructure and maintenance, human capital and safety. Money spent on human capital should develop skills and create a safe operating environment.  She also presented an example of a shareholder compact list of targets. It focused on how Transnet utilised its assets and its safety record. An important target was in the throughput of shipping containers. Slow processing created backlogs and traffic jams around the ports.

Ms Lepule said that Transnet planned to invest R93,4 billion in capital assets during the following five years. They had spent approximately R72,4 billion in the previous five years. Since the start of the capital investment programme, 21 major projects had been launched. Some were still in progress. Transnet felt that it was making the right investments. There had been some capital scrubbing and re-prioritisation.

The Transnet investment programme would have significant impact in the provinces. Significant benefits would accrue to the Northern Cape, KwaZulu Natal, Mpumalanga and the Eastern Cape. The provisional gross domestic product (GDP) figures were some R115 billion from the investment of R80 billion to date, and over 500 000 jobs had been created.

Transnet had a comprehensive internal skills development programme. The School of Ports, School of Port Operations and School of Pipelines were based in Durban. There were eight campuses of the School of Rail spread throughout the country, and eighteen campuses for the School of Engineering, also spread nation-wide. The Schools of Excellence were being fully accredited and trade test centres were already accredited with the Transport Education and Training Authority (TETA).

Transnet had secured three major Competitive Supplier Development Programme (CSDP) transactions. A deal with EMD had been finalised in November 2009. The plan aimed to see Transnet Rail Engineering (TRE) become part of EMD's global supply chain for rebuilt motors and engines, to accredit TRE's maintenance facilities for EMD locomotive maintenance and to localise the supply of at least 10% of the value of parts. EMD was supporting TRE in acquiring work in Africa. The value of the contract was R550 million. The second transaction was the refurbishment of fifty locomotives to virtually new condition. The third transaction was the award of a contract to General Electric (GE) for the supply of 100 new locomotives. This had been signed in December 2009. The value of the contract was R2.6 billion. TRE would work with GE on the overhaul and upgrading of locomotives. Components would be made locally. Training would be provided.

Ms Lepule said that the CSDP transactions would contribute to local manufacture and assembly capabilities. Some railway industries had become run down but were being brought back to productivity now. Competitive supply capability was being developed. TRE would become a centre of excellence for locomotive original equipment manufacture (OEM). TRE would now have access to the global market.

Ms Lepule said that Transnet had increased its spending with Broad-Based Black Economic Empowerment (BBBEE) suppliers significantly in the previous four years. In 2009, 59% of Transnet's procurement had gone to BBBEE suppliers, an amount of approximately R13.5 billion. In 2010 the amount had increased to 65%.

Eskom
Mr Chris Forlee, Deputy DG: Energy and Broadband, DPE, spoke on Eskom. Its strategic mandate was focused on energy provision including generation, transmission, distribution and retail and all related matters. Eskom's principal strategic objectives included catalysing economic growth with the accompanying creation of jobs and the established of local manufacturing capability in targeted areas. This was doubly necessary because of the magnitude of the building programme.

Mr Forlee said that Eskom had four focus areas guiding the strategic mandate. These were ensuring the reliable supply of electricity to all South Africans. It would ensure its contribution to adequate future electricity supply to South Africa. The introduction of independent power suppliers meant that Eskom was no longer the sole supplier. The third focus area was the support of the country's developmental objectives, and the final focus area was ensuring the business sustainability of Eskom.

Mr Forlee presented the shareholder compact key performance indicators (KPIs). These were part of a wider compact. The areas highlighted were financial value creation, operational efficiency, infrastructure and maintenance, human capital and BBBEE. The target for demand side management energy efficiency as 994 Gwh, which represented 0.5% of what Eskom could supply annually. A new and important KPI was the efficient use of water. Eskom still needed to improve on its BBBEE rating.

Eskom planned to invest over R500 billion in capital assets in the following five years. This excluded investments made by the private sector. Forward looking investment plans amounted to more than R350 billion. Planning had slowed down. Capital projects included generation plants being returned to service, new plants being constructed and improvements to the transmission networks. The Cape Grid in particular needed strengthening. Since the beginning of the current FY Eskom had trained 438 procurement and supply chain management practitioners. With the amount of money to be spent it was important that these functions be conducted properly. The local content target was 50%.

Eskom's investment programme would have significant local and national impacts. He presented various projects in the different provinces, using different technologies, and the impact they would make. While there would be an impact on the national GDP, there would be a much greater impact on the local economy. There was a typing error in the presentation in that the Medupi power station would create 19 000 jobs and not 1 900.

Mr Forlee said that Eskom's investment programme would also have a significant impact on employment. Approximately 160 000 would be impacted positively by the projects at Medupi, Kusile and Ingula. These figures included construction, supporting staff and coalmine expansion. It also included social services and local business. This figure was only for activities related to the generation of power and not the upgrade and maintenance of the transmission network and the return to service projects.

Mr Forlee said that Eskom had a comprehensive internal skill development programme. R780 million had been invested in the previous FY. He was amazed by the types of training that were being offered at 24 national facilities. More than 6 000 courses were offered. An Academy of learning had been established with provision for engineers, technologists, technicians and artisans. There were already 5225 learners in the pipeline and 4075 engineering trainees and apprentices being trained.

Eskom had leveraged the training of 6 130 people by suppliers. The training was for disciplines such as welders, boilermakers, riggers, fitters, technicians and quantity surveyors needed for the infrastructure construction.

Eskom had leveraged over R1 billion in investment into manufacture for the build programme. Hitachi was the most significant investor, having invested approximately R900 million in a boiler pressure part workshop in Nigel and training facilities in Gauteng. Eskom had increased its spending with BBBEE suppliers over the years. The total measured procurement spending for 2010 was projected as being R72.6 billion.

Ms Mentor asked the DPE delegation to proceed with the following presentation.

Annual Report of the Department of Public Enterprises
Mr Andrew Shaw, Acting Director-General, DPE, pointed out that the DPE had received an unqualified report from the Auditor-General, for which he thanked the members of the DPE.

Mr Shaw said that some key achievements included the strengthening of SOE oversight through, inter alia, the refinement of the strategic mandate and intent, the conclusion of shareholder compacts, the implementation of the Isibuko Dashboard, strengthened board compositions and the introduction of portfolio level monitoring. These were important governance processes. Guiding documents were in place. The South African Power Project had taken up much of DPE's time. The implementation plan had been approved by Cabinet. A substantive CSDP was in place. A construction and maintenance agreement as well as a supplier contract agreement for the West African Cable System (WACS) had been signed on 8 April 2009.

Mr Shaw said that a logical planning, monitoring and evaluation framework was in place. This was an annual chronological cycle of tasks. It included strategic intent statements. A nuclear education course had been completed.  A loan of R60 billion had been subordinated for Eskom and government guarantees of R176 billion were in place. The management of the hospital in Alexander Bay had been transferred to the Northern Cape provincial government.

Ms Shireen Crosson, Head: Corporate Services, DPE, outlined the DPE organisational structure as at 31 March 2010. The management chain went from the Minister and Deputy Minister through the DG to the various Deputy DGs. Statistics showed that the total establishment of the DPE at the end of the FY was 164, of which 140 posts were filled. Key positions were not being filled as quickly as the Department would like to see happening. In particular, the position of DG had been vacant for some time. Fifteen people had been appointed during the FY but fifteen had exited the DPE due to resignations and transfers.

Ms Crosson presented the targets for employment equity. The target for African females was 40.3% (achieved 42.8%), for African males 39.2% (achieved 32.1%), Indian females 1.3% (achieved 3.6%), Indian males 1.2% (achieved 1.4%), Coloured females 4.5% (achieved 5%), Coloured males 4.4% (achieved 3.6%), White females 4.7% (achieved 8.6%) and White males 4.5% (achieved 2.8%). The overall target for the ratio of women to men was 47% female. The current figure was 49% female. The Department of Public Service Administration (DPSA) target for people with disabilities was 2% while the DPE had achieved 4.3%.

Mr Kamungoma listed the achievements for 2009/10 against the CIPM targets. Logical planning, monitoring and evaluation framework guidelines and a calendar had been developed. Guidelines for SOE corporate plan contents and format had been developed. A minimum level of information was needed. The SOE Dashboard had been enhanced. Quarterly DPE board meetings had been held. Reports on financial, operational, capital investment, capitalisation, socio-economic and risk at SOE and portfolio level had been presented using the Dashboard. A workshop had been held to identify and prioritise shareholder risks. A quantitative capital structure decision making framework had been developed.

Mr Kamungoma said that the capital evaluations of South African Airways (SAA), Transnet and Denel had been completed. A model had been utilised in South African Forestry Company Limited (SAFCOL) dividend and Eskom funding assessments. National Treasury was developing a similar capital structure framework for all SOEs. Guidelines had been developed on share subscriptions, shareholder loans and guarantees. An office had been established to deal with these concerns.  SOE medium term expenditure framework (MTEF) applications had been submitted for Alexkor, the Pebble Bed Modular (PBMR) and Denel. A study had been undertaken on the different possibilities for facilitating infrastructure funding. A study of the regulatory frameworks employed for infrastructure investment had not been completed. A service provider had still to be provided. Transactions had been executed involving SAA, WACS, Denel Airbus Military transport, South African Express Airways (SAX), Eskom funding and Aviation Portfolio restructuring.

Mr Kamungoma said that the DPE's business and strategic plans had been approved. Quarterly and end of year reports had been completed.

Mr Forlee said that an annual assessment of integrated communications and technology (ICT) broadband projects had been completed. The shareholder compact with Broadband Infraco had been concluded in June 2010. This should have been completed by April. Monthly, quarterly and annual assessments of Broadband Infraco had been completed. The International Submarine Cable was progressing well. The cable had been manufactured. A request had been made for roll-over funding. There were challenges in laying the cable. An analysis on broadband prices had been completed, and these prices had come down by 70%. A quarterly assessment of South Africa's ICT infrastructure had been completed.

Mr Forlee said that in terms of energy enterprises, procurement and delivery of equipment for Eskom's new build programme was being tracked monthly. Interventions had been made to prevent delays. A framework for the funding of the Kusile power station was being finalised. Reports had been made on assistance provided to municipalities. Eskom was being asked to strengthen these networks. The process of appointing a new Chief Executive Officer and Chairman of the Board had been initiated during the 2009/10 FY and concluded in the new FY.

Mr Forlee said that monthly meetings were being held on the progress of the rationalisation of the PBMR project. DPE had approved a revised business plan for the PBMR based on participation in the Next Generation Nuclear Plant (NGNP) project. There was movement in this regard.

Ms Fikelepi said that the transfer of Telkom shares previously held in Diabo Trust had been negotiated after many delays. A service provider had been appointed that would warehouse the shares for Trust beneficiaries. An agreement had been reached with the steering committee.

Ms Fikelepi said that progress was being made with the winding up of Aventura. Audited financial statements had been received for 2004 to 2008. A service provider was appointed to make a determination of Aventura properties. The Minister had issued a certificate to enable the transfer of the Plettenberg Bay resort to Forever Resorts.

Ms Fikelepi said that an agreement had been reached between the Minister, the Minister of Finance and Eskom on guarantees. Input had been provided on constitutional amendments to facilitate the establishment of Regional Electricity Distributors (REDs). The Eskom loan had been negotiated with the African Development Bank (AFDB).

Ms Fikelepi said that the DPE had supported the application of Infraco for an Electronic Communications Systems (ECS) licence. The Minister had been advised on the directives issued in this regard by the Minister of Communications. The DPE had provided legal support to Transnet and the Department of Transport (DoT) on the implementation of the Ports Act. The issue of port limits had been resolved. Senior counsel had been obtained to advise on the corporatisation clause in the National Ports Act. The claim by Umthunzi for R2.2 billion against government and Transnet had been settled out of court. In the case brought by Londoloza Paharpur Consortium against Alexkor, the plaintiffs had missed the deadlines to amend their particulars of claim. A Constitutional Court ruling in favour of Alexkor had been issued.

Ms Fikelepi said that preliminary inputs and comments had been provided on the PBMR issue. The transaction was preceded by the restructuring of PBMR.

Ms Fikelepi said that information on SOE subsidiaries had been provided as part of the governance audit. The Minister had been advised on the composition of SOE boards and terms of board members. Governance systems on the Dashboard had been reviewed. The induction of the SAA board had taken place. Remuneration guidelines had been finalised and approved by the Minister. Terms of reference had been prepared. A service provider had been appointed to provide secretariat services to the Remuneration Panel. Remuneration guidelines had been updated and submitted to the Minister. A service provider had been appointed to provide a legislative comparison between the Companies Act and the Public Finance Management Act (PFMA). Terms of reference had been approved for the oversight Committee.

Ms Fikelepi said that the DPE had assisted SOE teams with advising the Minister on Annual General Meetings (AGMs) and board appointments. The performance of the boards of SAX, SAFCOL, Denel, SAA and Infraco had been reviewed. Guidelines had been submitted for the appointment of CEOs. A board performance evaluation questionnaire had been prepared.

Mr Kamungoma said that the process of aligning Denel's capabilities with the Department of Defence's (DoD) strategic requirements was well advanced. There was not much improvement in the retention of strategic and sovereign capabilities in areas agreed to with Department of Defence but Denel had performed within the international benchmark of 85% success in securing long term orders.

Mr Kamungoma said that initiatives to improve Denel's industrial impact had not been achieved. Denel was striving to achieve over 50% local content. The proposal to align Denel with the Chartered Institute for Procurement Secretariats (CIPS) had not been achieved due to no funding being secured. Denel would rather align to the Competitive Supplier Development Programme (CSDP).

Mr Kamungoma said that the R1.3 billion government guarantee had been rolled over to March 2010. A further R550 million guarantee was approved which expired in July 2010. No recapitalisation was made available to Denel. There was no visible improvement in the performance of Denel SAAB Aerostructures. The delays in the A400M project had impacted on this. Strategic due diligences were done on Pretoria Metal Pressings and Denel Dynamics Missiles. Approval for the latter to transact with a global partner was approved conditionally. Difficulties were experienced in implementing a position paper on landward consolidation. Denel was to submit a request for information to be followed by a request for proposals. Intra-governmental consultations were being held to define national strategic capability. The alignment on roles and responsibilities in marketing Denel capabilities and products had not been achieved as DPE could not agree on a framework with Denel.

Mr Kamungoma said that KPIs in the shareholder compact with Denel had been included in the 2010/11 compact. A year on year improvement in profit margins had not been achieved due to declining local orders and the economic slowdown. There had been an improvement in the gross profit margin of between 16 and 18%, but this should have been 25%. There had been an improvement in Denel's BBBEE rating. An assessment of the suitability of the composition of the Denel board had been achieved.

Ms Caroline Richards, Acting Deputy DG: Joint Projects, DPE, said that the annual assessment and shareholder compact for SAFCOL had been achieved. The company had achieved its net profit targets. An application to take part in a fibre project had been rejected.

Ms Lepule said that a proposed framework for a joint venture in the Ngqura container terminal had been forwarded to the DoT. The Transnet board had been requested to follow up on the transaction structure. A draft strategy had been finalised on branch lines. An entity had been established within Transnet Freight Rail (TFR) in December 2009. Potential concessions had been categorised. The NCM System had been implemented on certain corridors, primarily on the Orex line between Sishen and Saldanha Bay. Quarterly assessments were done on Transnet's CSDP opportunities. The Transnet annual capital expenditure (CAPEX) assessment was completed in September 2009.

Ms Lepule said that SAA had launched three new routes. SAX had implemented the first phase of its African hub strategy. SAX had a joint venture with Congo Express. The business plans of the airlines had been reviewed. The financial model for scenario planning had not been carried out due to the lack of funds, but would be done in the current FY. A process to create Voyager as a profit centre had been initiated. SAA had appointed consultants to advise on establishing SAA Technical an a multi-airline maintenance hub.

Ms Richards said that a CSDP Dashboard had been developed. Some 54 steel companies had been benchmarked. Training had been undertaken. A draft transactional policy on the CSDP had been developed. A position paper on leveraging procurement across government had been developed. A locomotive fleet procurement process had been launched. DPE's position on supplier development had been incorporated into industrial policy. There had been engagement with private sector companies. Eskom and Transnet had produced five year SDPs. Capacity building boot camps had been held for the two companies.

Ms Richards said that a nuclear education course had been completed. An Eskom procurement strategy had been defined. Recommendations had been made regarding renewable energy. There were engagements with the United Kingdom (UK) and Germany. South Africa had concluded regional electricity and rail programme agreements with four out of five host institutions. Investor surveys had started in these four countries, namely Uganda, Tanzania, Zambia and Kenya. There were intergovernmental negotiations in Mozambique and Botswana on power purchase agreements.

Ms Richards said that the skills Dashboard had been completed. SOEs were submitting reports. DPE had participated in multi-stakeholder artisan programmes. Reports on the analysis of FET programmes regarding electrical and welding qualifications had been completed. Terms of reference had been completed to develop workplace experiential guidelines.

Ms Richards said that a national solar water heater installers training plan had been completed. Material development had been finalised, including visual and audio aids for illiterate learners. Three thousand solar installers had been identified for top up training, of which 1 000 had already been trained, and 10 000 for top up and certification. The DPE and the University of Cape Town (UCT) had concluded a memorandum of understanding on a management learning programme and autumn school. This had been held in August 2009.

Ms Richards said that a strategic framework for joint operations between Denel and SAAB Aerostructures had been developed. First draft financial models had been selected. In initial funding requirement had been completed.

Ms Richards said that a framework had been developed for the assessment of SOE innovation performance. This was in the ICT and marine cable sector and would not be applied across the spectrum of SOEs. The WACS supply contract was in force. Approval had been granted for Transnet's non-core property to be disposed of. Terms of reference had been developed for government shared servitude utilisation. At Alexkor information was being gathered to implement such a programme.

Ms Richards said that the DPE, Department of Environmental Affairs (DEA) and Eskom had signed a memorandum of understanding on environmental issues. An environmental Dashboard had been developed. The DPE had prepared a position paper on climate change.

Mr Shaw presented the financial statements. The appropriation for Programme 1 (Administration) was R90.5 million, compared to an actual expenditure of R86.9 million. The appropriation for Programme 2 (Energy and Broadband Enterprises) was R1.960 billion (actual R1.959 billion). Much of this went to the PBMR. Programme 3 (Legal, Governance, Risk and Transactions) had an appropriation of R147.4 million (actual expenditure R145.8 million). The appropriation for Programme 4 (Manufacturing Enterprises) was R199.0 million (actual expenditure R198.1 million). The appropriation for Programme 5 (Transport Enterprises) was R1.569 billion (actual expenditure R1.569 billion). The appropriation for Programme 6 (Joint Budget Facility) was R25.6 million (actual expenditure R24.9 million). The total appropriation for the DPE was
R3.991 billion (actual expenditure R3.983 billion). The figures were roughly the same as for the 2008/09 FY with allowance for inflation.

Mr Shaw said that the increase of R0.6 billion from the previous FY was mainly the result of higher transfers to the SOEs. There was under expenditure to the tune of R7.8 million. This was mainly in the compensation of employees. Some posts had not been filled. The under expenditure was within the 2% benchmark. There was no substantive impact on service delivery.

Mr Shaw said that under current payments, R81.4 million was appropriated for compensation of employees (spent R75.2 million), R91.4 million for goods and services (spent R89.8 million) and R29 000 for financial transactions (spent R29 000). Under the heading of transfers and subsidies, the full appropriation of R3.816 billion was transferred to public corporations and private enterprises. R680 000 was appropriated for household expenses (R678 000 spent). Under payments for capital assets, R1.259 million was appropriated for machinery and equipment (R1.259 million spent) and the full appropriation of 16 000 for software and other intangible assets was spent.

Mr Shaw listed the transfers to the different SOEs. The final appropriations were R680 000 for sponsorships (R678 000 spent), R129.1 million for Alexkor, R208.5 million for Broadband Infraco, R191.9 million for Denel, R1.738 billion for SAA and R1.549 billion for SAX.

Mr Shaw gave a presented a detailed breakdown of expenses in each programme. One of the challenges in Programme 1 (Administration) was the creation of the post of Deputy Minister. There had been some shifting between programmes in order to manage the business plan. He presented a breakdown of the major expenditure items under goods and services. R14.2 million had been spent on travel and subsistence allowances but this was small in proportion to the size of the DPE. The amount of R51.1 million for consultants and special services was covered in the business plan.

Discussion
Mr Koornhof, no longer in the chair, congratulated the DPE. There had been no irregular, wasteful or fruitless expenditure. He asked when recommendations could be expected on the remuneration advisory panel. He noted that Mr Shaw had been the Acting DG for some months. This was happening in several SOEs where senior positions were vacant. He asked what progress was being made with filling these positions and with transformation.

Minister Hogan replied that the remuneration advisory panel had prepared a draft report. She had read it and asked the panel to include other factors. It would take six weeks to finalise this. She would engage with the Committee when it was complete. There were complex questions involved. National Treasury had conducted an independent review and their recommendations would be aligned with the panel's report. She had asked SOEs to wait until the report was submitted.

Minister Hogan said that the appointment of the DG was a really difficult process. This person had to be multi-skilled, with expert knowledge of energy, a huge field in itself, transport, aviation, munitions and armaments, forestry and mining. Someone with this breadth of skill had to be found. The DG also had to be well versed in contracts and financial analysis as well as procurement. The salary on offer was not enough to attract the calibre of person needed for the job. There was a candidate and the person was being considered by Cabinet.

The Minister said that vacancies were not good for the activities of the DPE and its SOEs. The Department was responding incredibly well. Members were taking on additional responsibilities. Professional teams had been set up and incredibly important work was being done. The vacancies were only related to Transnet. All others had been filled.

Mr Koornhof noticed that many Denel targets had not been met. There were two units at Denel that had attracted his attention. Denel Dynamics was welcoming equity partners. He asked what the progress was with this. Regarding SAAB Aerostructures, a government decision was required. He asked when this could be expected and what the details were. There were four cases of litigation pending and one new case involving the former Chief Financial Officer (CFO). He asked what the progress was.

Minister Hogan said that the problems at Denel were very apparent. Special focus was needed. The DPE was getting good co-operation from the DG of the DoD. Denel's mission was to produce weaponry for the sovereign state. Their success was dependent on penetrating foreign markets and state procurement. There were problems with fiscal dumping towards the end of the FY. More certainty was needed. There was still a need to decide strategic priorities. The Defence Review was coming and would address the question of sovereign needs. It was very difficult to access first world markets and intermediaries were needed. Equity partnerships were performing well. In the case of Denel Dynamics, the DoD was not willing to accepting an equity partner in the missile industry. The National Treasury was raising concerns. There would be no further recapitalisation for Denel. This message was being sent to every SOE. Some SOEs were taking time to interact.

The Chairperson said that the DPE must not just wield the sjambok. The Department needed to be part of the solution.

The Minister said that the case brought by the former CEO of Eskom would go to court in October.

Ms Fikelepi said that in the Paharpur case a new summons had been issued by the plaintiff. They requested to amend the particulars of their claim but had failed to make the deadlines. In the Navera case management consultants had sued Alexkor and the state for R125 million. The case was in abeyance. It could be taken over by another complainant. In the Equity Alliance matter further particulars had been received. The DPE had filed a plea. The final litigation issue involved Mr du Toit, a pensioner who had worked for Transnet. The Department was exploring ways of dealing with the case. It was still sub judice.

The Chairperson said that DPE had had a whole year to report on these cases. There were matters in the United States of America and UK. The Committee wanted to see a report on these cases by early 2011.

Mr A Mokoena (ANC) also congratulated the DPE on their good performance. He asked if it was a hindrance that the Department of Energy determined energy policy. The DPE was sub-ordinate in this regard. This affected the oversight role of the DPE where Eskom was concerned. The PBMR and the Koeberg plant were in a similar position. This did not sit well with him. The Committee had held a joint meeting with the DoT where issues surrounding Transnet had been raised. One of the issues was the rail gauge. The DPE and DoT held different views. It was a question of how to penetrate the continent. He asked for elaboration on the SAFCOL application that had been declined.

Minister Hogan replied that the DPE had to have policy alignment with other Departments such as the DoC, DoD, DoT and Department of Energy. She could see that there could be conflicts of interest. This was a constraint. The DPE did not have authority over policy. DPE needed to maintain good relations with other Departments. There was extensive engagement especially between the DPE and Department of Energy. There was also engagement between the responsible Ministers. Alignment was happening.

Mr Mokoena asked to whom Eskom was accountable. Minister Hogan was the central Minister.

Minister Hogan replied that the DPE was responsible for oversight. Until approximately four years previously Eskom had been responsible for the security of electricity supply. This was now the responsibility of the Minister of Energy. There was ongoing engagement. Joint meetings of the different Portfolio Committees were extremely important. The requirement would be embedded in the shareholder compact. Planning was now under the Minster of Energy. Eskom had a mandate and DPE would ensure that it was achieved.

The Chairperson had met with Transnet and the Deputy DG of the DoT. They were finding one another. Another meeting had to be held. Transnet saw the need to use a broader railway gauge. The matter had been discussed with the Chairperson of the Portfolio Committee on Transport. At one meeting the Passenger Rail Association of South Africa (PRASA) was present.

Mr Shaw said that the DPE would have to think of any change to the gauge pragmatically. The performance of TFR was poor. Problems were related to poor infrastructure, mismanagement and unreliable rolling stock. Changing the gauge would be extremely expensive. There would be enormous implications such as curvature of tracks, widening of tunnels and others. Widening the gauge, however, would not solve the other problems facing Transnet.

Ms Richards said that the declined SAFCOL deal was part of an offshore investment scheme in Mozambique. The deal was worth R1.3 billion but this expense could not be supported at present. It would take up to fifteen years to recoup the investment. The DPE was not convinced that it was a good idea. There was no clear evidence of SAFCOL having the funding.

Ms Richards said that fibre processing was a growing segment in the market. There were fantastic export opportunities but the numbers did not add up for SAFCOL at present. The problem of afforestation was an element in the decision. Forestry operations were limited to KwaZulu Natal and the Eastern Cape. One thousand hectares were covered and rehabilitation would take ten years. There was a shortage of saw logs which was projected to last for thirty years. Fibre was in the range of products.

Mr S van Dyk (DA) said that the Minister was in her first term in the portfolio. He congratulated her and the DPE on their good performance. He said that the core function of an SOE was to provide infrastructure and to contribute to economic development. Over the past year Transnet and Eskom had not complied with these requirements. Eskom could only guarantee power supplies until 2017. There was a fight between the DoT and Transnet over the collapse of Transnet's infrastructure.

Minister Hogan replied that the figures were there regarding employment. The Eskom build programme was creating at least 160 000 jobs. Transnet was also making a significant contribution. Government did not require returns from the SOEs. Government did not invest in them for returns but for other reasons. The profits made by an SOE were treated as retained earnings. Eskom couldn't retain its earnings due to the costs of the build programme.

Mr van Dyk asked the Minister if she was satisfied with the performance of the DPE. He asked if the SOEs were having a positive impact on employment. He asked if the SOEs were returning a dividend to National Treasury. He asked what contribution the SOEs were making to skills development. He asked what the objectives were for public enterprises.

Minister Hogan replied that it was up to the Committee to decide if DPE was happy with the performance of the SOEs. SAX had been a carrier during the World Cup. She asked how happiness could be defined. People needed to cast off the paradigm that SOEs were doomed to failure. Infraco had achieved significant cuts to broadband costs. Some SOEs were making profits and attracting customers. She was concerned about the strategic mandates. Transnet was funding its infrastructure building programme from its balance sheet. Over the previous five years the balance sheet had been transformed. Members knew what the history of Eskom was. Government was taking responsibility. There had been no blackouts recently. There were savings on operational costs. There had been a very keen appraisal but it was not a question of identifying saints and sinners. SOEs were achieving against their shareholder compacts.

The Chairperson had been in conversation with the Member of the Executive Committee (MEC) for Transport in the Northern Cape. The MEC thanked Transnet for creating 7 000 jobs in the province.

Mr van Dyk said that he had used the word "satisfied" and not "happy". There were problems with PBMR, Denel and Transnet. Infrastructure was collapsing in the rural areas.

Minister Hogan felt that the words were synonymous.

Mr C Gololo (ANC) said that Infraco had applied for two licences. Their application for an Electronic Communications Network Service licence (ECNS) had been successful. Their application for an ECS had failed as there was concern that this would have allowed them to enter the telecommunications market. There was a dispute with the Department of Communications (DoC). This had compelled Infraco to enter into an agreement with Neotel. He asked if Infraco would eventually get the ECS.

Minister Hogan said that the McKenzie study indicated that the financial sustainability of Infraco would be affected if the ECS licence was not granted. There was synergy with another SOE, namely Sentech, which was in crisis. Members should not prejudge the issue. Companies such as Vodacom and Neotel were also in trouble.

Mr Gololo asked why the SAFCOL fibre project application had been rejected. He noted that Transnet would be investing R93 billion in the next five years. He asked if this would include a move to adopt the standard gauge. He asked if this conversion would be included in the CAPEX programme.

Mr Shaw said that the issue of the standard gauge had emerged recently. DPE had spoken to
Transnet and DoT. Transnet was committed to studying the question. It was possible that standard gauge might be used on new infrastructure and on defined corridors.

Ms G Borman (ANC) said that on page 94 of the Annual Report a figure of R51 million was quoted for the hiring of consultants. However, on page 140, where there was a list of consultants used, the total was only R25 million. She needed clarity on this. She said that the reason quoted for the vacancy rate in the DPE was due to scarce skills. She asked if there was any relationship between this and the use of consultants. She noted that R678 000 had been spent on gifts and donations. She asked what the criteria were for these expenses.

Ms Sandy Hutchings, CFO, DPE, said that the figures for consultants did reflect an amount of R25 million. This was in line with public service regulations. There were specific reporting needs. Fees listed under this heading included internal audit costs, ad hoc advisory consultancy and professional services.

Ms Borman could not reconcile the two separate figures.

Ms Hutchings replied that the figures would not tally because of public service regulations. Expenses were based on projects and there was no requirement to disclose the full details. The figure of R51 million included agency fees and outsourced services. The Department had to disclose consultancy fees of a specific nature. The Auditor-General was happy with the way in which the figures were presented.

Ms Hutchings said that the Department had a committee to approve gifts and donations. They considered applications from organisations. An annual project was the "Sixteen Days of Activism". The committee first verified that the project was correct. Legitimate organisations were supported that could demonstrate audited financial statements. Requests were assessed and then forwarded to the DG with recommendations.

Ms Borman asked if anyone could apply.

Ms Hutchings confirmed that anyone could apply. There was a charter. The DPE might prefer to move this responsibility to the appropriate Department. A critical assessment was needed.

The Chairperson asked what the criteria were.

Ms Borman said that government needed to develop the rural areas. This was where the branch lines were found. She stressed the importance of development. A component of development was the delivery of farm produce.

Mr A Nhanha (COPE) also commended the DPE. Their work made him feel proud. He asked what the role of the SOEs was in the Dinaledi programme. Transnet had reported on bottlenecks, especially with the Dinaledi programme. He understood that there was an arrangement between the DPE and its SOEs that each SOE would adopt the Dinaledi programme in one of the provinces. Transnet was doing good work in this regard in the Free State. He asked if the DPE delegation was aware of this programme. He had very little about this activity in the other provinces.

The Chairperson said that the Dinaledi programme involved the teaching of mathematics and science at schools. She was not aware of a link to the DPE.

Mr Mogadime said that this was not part of the mandate or focus of the DPE. He did know that Transnet was involved.

The Chairperson said that it was not up to the DPE to explain this situation. Mr Nhanha should rather ask Transnet.

Mr Nhanha had already spoken to Transnet about the needs of a school in the Eastern Cape. Their reply was that there was an agreement between SOEs and the DPE. It could go back many years. Each SOE had to adopt a province.

Minister Hogan said that DPE was not involved with the Dinaledi scheme. They would have to engage with Transnet.

Mr Nhanha said that he accepted that the DPE had a noble plan to implement the supplier development programme. In reality, however, things were different. He asked if the SOEs had checks and balances in place. The pace of transformation in some SOEs was a problem. He was appalled in some cases. Denel was the worst performing SOE in terms of transformation. He asked if there had been any improvement.

Minister Hogan said that the CSDP contained a system of checks and balances.

Mr Kamungoma said that the issue of transformation had been addressed at the most recent Denel AGM. The review board would monitor progress. Targets had been set.

Mr M Sonto (ANC) asked what the hold-up was. This was a problem across the board.

Mr Kamungoma said that there was an issue of the specific nature of skills. Skills training and apprentice programmes were in place. It was taking longer than anticipated to make incremental progress.

Mr Nhanha said that the R51 million going to consultants and advisers was a lot of many. He asked how many of the consultants used were former employees of the SOE to which they now consulted. 

Minister Hogan replied that Parliament must look at setting a cool-off period. People were being placed in an invidious position. All of the staff of the DPE and the SOEs knew their stuff. She asked if it would be fair to prevent them from practising their areas of skill when they moved on. It was a different story when persons exiting the organisation established their own companies using their inside knowledge. Steps would be taken.

Mr P van Dalen (DA) was looking at the targets set for the SOEs. He asked what the DPE had in place to benefit local companies. At the coal mines, Eskom paid for earth moving and infrastructure. The mining company then sold the coal to Eskom at cost plus 3%. He asked what the Department was doing to encourage Transnet to move away from road transport of coal. They needed to take the trucks off the road. The figures showed that Transnet was making more profit but was transporting less cargo.

Mr van Dalen thought that the deal to purchase the Airbus A400M had been cancelled; Denel had missed most of their targets. They were like the naughty boy in the back. He asked what the DPE was doing to ensure that Denel reached their targets. A naughty boy deserved a hiding.

Minister Hogan replied that the DoD had cancelled the purchase of the A400M. However, Denel SAAB was still providing components. One of the component programmes ad been cancelled but two were still in place.

Mr Sonto said that the mission of the DPE was to ensure that SOES delivered on government's development objectives. Some SOEs were taking good care of themselves and their customers. He failed to see them delivering on the government development objectives. He asked what social investment programmes were in place to assist in the fight against poverty and other social ills.

Minister Hogan said that there were corporate social investment (CSI) programmes. This was an important issue and CSI was a function of many large companies. One of the Members had asked what each SOE had given. Transnet had listed pages of CSI programmes but they were all for small amounts. Government's developmental agenda was not the same as CSI. The companies had to do what they were there for. It was not a requirement for the SOEs but each did have a CSI programme. There had been a furore during the World Cup over government agencies spending money on World Cup paraphernalia. On one hand entities were accused of not being patriotic while on the other hand they were accused of wasting money. This had been a dilemma for the SOEs. The SOEs needed to be transparent on the guidelines that had been issued. She was satisfied that there had not been massive amounts spent.

The Minister said that SOEs should not be seen as currying favour with the people. However, Transnet's initiative of the health train was making a massive contribution to the nation's well-being. This had been especially so during the recent strike.

Dr Ritchken said that there was little doubt that the DPE was making progress with monitoring and evaluation. Supplier development had been a high profile feature of the Transnet report. They were now partners in the procurement and maintenance of the locomotive fleet. There was an enormous amount of activity. Supplier concerns were being integrated into the heart of the process. Senior management was driving some big deals.

Dr Ritchken said that the monitoring and evaluation process was difficult. The problem had not been solved. For example, the locomotive deal with GE would see 100 locomotives supplied to Transnet. There was a target of over 50% local content. South Africa was near to achieving a local content of between 70 and 80% and had overtaken Brazil, which had been working on the same basis for twelve years. Engines, gearboxes and other complex components would be part of the local content programme.

Dr Ritchken said that in terms of structural steel, at least 40% of boilers would be locally manufactured. The procurement for the Medupi power station was almost 100% local. Different targets had been set for different things. A blanket target could not be applied. The country was not there yet and the matter should be addressed at DPE or SOE level. The DPE was working with the Department of Trade and Industries on a joint governance process.

The Chairperson also congratulated the DPE on its performance and for presenting the document on its methodology. It was a useful document regarding the approach on oversight. There was very useful information in the part of the presentation on Transnet and Eskom. She anticipated a session in the near future where Members could interrogate that document. She said that the Committee needed to apply a microscopic eye to Denel. The SOE had to be prioritised over the following six months. Denel needed to turn itself around. There had been one of its business entities with problems previously but now there were two. She thought that SAA had not planned to purchase new aircraft but was now hearing difficulty.

Mr van Dalen said that SAA was not expanding its fleet. The purchase of Airbus A320 aircraft would be to replace ageing aircraft.

The Chairperson said that an SOE could not save on manufacturing costs if its objective was to impact on the economy. The focus on manufacturing was wanting. She asked how many consultants had been attached to SOEs. It was a worrying trend. There was a case of a former DG who had gone into partnership with a former Minister. She hoped that such consultants were not involved in procurement should such a partnership exist. There should be an exit interview and a cooling period. She knew that the Minister was passionate about the issue. This Committee was the one that dealt with SOEs.

The Chairperson said that the Orex railway line was creating many jobs in the Northern Cape. She asked if any person employed by the DPE was paid by some other agency and was not reflected on the Department's organogram. If there were any such people she would like to know what role they played. Every government was at risk of having its policies influenced. Commercial secrets were under threat. The presence of people from other countries and companies heightened the risks.

Minister Hogan said that she had one adviser on her staff that was not on the organogram. This person was paid by the Clinton Foundation and did not interfere in the DPE's affairs. The adviser had been part of the staff for a few months.

The Chairperson asked what measures were in place to measure data validation on the Dashboard.

Mr Kamungoma said that all users of the Dashboard had different rights. Some could only view data and some could only capture data. Others had the right of approval. This power normally lay with the CFO. The responsible Deputy DG would approve the data and only then was it updated.

The Chairperson said that a time line must be set to develop a financial model for SAA and SAX.

Mr Shaw replied that SAX had a sound financial model. The SAA model would be finalised in the follow three to four years. There would be quarterly progress reports. SAA and Denel submitted monthly reports as well as quarterly reports.

The Chairperson said that question of electricity theft had been raised. This was in response to an enquiry from the Chairperson of the Portfolio Committee on Energy, who thought that this matter fell within the domain of the DPE. It was unsure who was responsible for amending the Act.

Minister Hogan understood that this responsibility lay in fact with the Minister for Mineral Resources. Criminalising electricity theft was a whole different matter. The DPE had received a request from Transnet and the DoD to have copper reclassified as a precious metal. There were legal difficulties with this but the matter was being addressed.

The Chairperson asked which Act was to be amended.

Mr van Dyk said that during Eskom's presentation Members had been informed that electricity theft was not covered by the Act and offenders could therefore not be prosecuted. The Committee would help to address this issue as well as the issue of illegal connections.

The Chairperson would like to see where local manufacturing capacity was located. She asked where the emerging industries were located. Perhaps an oversight visit was needed to convince the doubting Thomases.

Dr Ritchken said that this could be arranged.

The Chairperson thanked the Department and the Minister for their attendance. Members were concerned about how persons revolved between the different SOEs. The Committee needed to be convinced that this did not mean that there was a lack of growth. There might be underlying problems.

Committee arrangements
Members discussed arrangements as a study visit was planned to China.

It was noted that the Committee had received complaints about pension funds in that pensioners had only received a 2% increase. In some cases pensioners only took home R9 after deductions.

The meeting was adjourned.