Department of Public Enterprises on its 2011 Strategic Plan

NCOP Public Enterprises and Communication

22 March 2011
Chairperson: Ms M Themba (ANC, Mpumalanga)
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Meeting Summary

The Department of Public Enterprises presented its 2011-2014 strategic plan which included an assessment of its 2010/11 performance and the state-owned enterprises (SOEs) over which it had responsibility. It had to ensure that the SOEs were both sustainable and delivering on government’s developmental objectives. A core role of the SOE was to provide a strategic network infrastructure to ensure the security of logistics, energy, and telecommunications supply. Employment creation was high on the agenda for the Department and SOEs were expected to partly fulfil this need. The ownership and management profile of the economy needed to be transformed to reflect the broader South African population. Contributions and impacts of SOEs such as Transnet and Eskom were highlighted as these companies envisaged growing the economy over a long-term period.

Economic growth within the country was slow partly due to the effects of the recession, and in turn the Department would not give more transfers to SOEs. The focus going forward would be on making SOEs more sustainable by stimulating investments from the private sector. The presentation also spoke on the evolution of the role of the DPE and its action plan in response to the New Growth Path. The purposes, priorities and budgets for 2011-2014 were outlined. Finally it looked at the contributions and impact of SOEs, specifically Transnet and Eskom’s investment programmes. The broader economic impact of Denel, SAA, South African Express and the developmental role of SAFCOL were also explained.

The Chairperson wanted to know why there were so many acting positions in the Department. It requested that the SOE focus should be on the development of skills by means of offering training to unskilled workers, as this would benefit more in the long term. A member from the Northern Cape felt that the Transnet investment was not directly impacting on the poorer community but rather that capital gain was the number one priority for this SOE. Employment equity targets were also questioned because of the seemingly uneven distribution of jobs amongst the different racial groups. Members also wanted more clarity on the issue of Alexkor and the transfer of land to the Richtersveld community.

The Department of Public Enterprises made the point that SOEs were businesses, and as businesses they had the responsibility of running as smoothly as any other business without government funding. However, there were weaknesses in the management of some SOEs resulting in problems. These SOEs then run to the state for bail-outs and initial transfers became wasted. A new approach was needed whereby SOEs were put in a position where they were forced to deliver. Capitalisation happened not through transfers, but rather by leveraging private capital markets. Private companies could come in to help the balance sheets of SOEs as transfers had a temporary effect of helping SOEs out of trouble.

Meeting report

Opening remarks
The Chairperson extended apologies from members who could not attend namely Mr O De Beer (COPE, Western Cape) and Mr M Zulu (IFP, Kwazulu Natal). She requested that the presentation also focus on the achievements of the Department and not only on the challenges it were experiencing. She noted that there were many acting posts in the Department and said that this was a concern going forward, as it might hamper the progress of work that needed to be completed.

Department of Public Enterprises (DPE) Strategic Plan 2011-2014: presentation
Mr Tshediso Matona, DPE Director General, explained the evolution of the Department’s strategic mandate over the years since 1994. From 1994 to 1998, the establishment of the Department as the office of privatisation focused on the disposal of state-owned enterprises (SOEs). From 1998 to 2003 the emphasis shifted to the restructuring of SOEs with a strong focus on equity partnerships, initial public offerings and the concession of specific assets to optimise shareholder value and economic efficiency. Post 2003 the Department focused on developing SOEs as focused and sustainable state owned business entities delivering on a specific strategic economic mandate. The long term achievements envisaged were the security of supply in energy through the build programme, a national presence in airline capacity, broadband capacity, and efficient transport infrastructure. Achievements also focused on the consolidation of aerospace capability, a focused manufacturing capability and the export of defence solutions.

Mr Matona went on to outline the mission of the Department. He explained that the shareholder had distinct responsibilities. The shareholder exercised specific powers which included the appointment of all directors after Cabinet’s approval as well as the approval of significant and material transactions. The board and management were responsible for ensuring the financial sustainability of the company through coherent utilisation of the company’s assets, the appointment of all management and staff as well as the management of all aspects of operations. He explained that funding must be derived from a commercial tariff. The scale of the infrastructure challenge was too large for it to be funded out of the fiscus alone. Government needed an enterprise in the sector to ensure continuity of strategic intent.

Mr Matona highlighted the key advantages of the SOE model. SOEs provided the South African state with a vehicle to drive investment in key areas. It enabled consistency of strategic intent and charged a commercial tariff thereby ensuring that the sector paid for its development. This was particularly important when the sector was of a scale which made it impossible for fiscus to fund its development. SOEs also had the ability to partner the private sector because of a common underlying logic that both were commercial and companies. A core role of the SOE was to provide a strategic network infrastructure to ensure the security of supply. Government was the only social agent with an intrinsic interest in ensuring adequate investment in infrastructure. Network infrastructure such as logistics, energy, and telecommunications was fundamental to supporting general economic activity.

Mr Matona explained that government investment did not preclude operational partnerships with, or direct investment from, the private sector. However, while such investment was a prerequisite to sustaining the economy, it would not enable a transformation of the economic trajectory. He said that South Africa was facing a range of economic challenges. Some key challenges included a lack to accelerate the growth rate of the economy to create wealth that enhances the standard of living for all South Africans. Employment creation needed to be dramatically increased in the formal economy and industrial capabilities had to be developed to decrease the country’s dependence on commodity exports.

Mr Matona said that a range of policies reflected the commitment of the South African government to overcome these challenges. These included the Performance Evaluation Framework, the New Growth Path, and the Industrial Policy Action Plan. These policies would help to increase investment in fixed assets, technologies and skills to support the growth process. This would enhance the competitiveness of the economy through better infrastructure services, managing the value of the currency and leverage public procurement to develop manufacturing.

Mr Matona outlined the Department’s plan of action in response to the national economic strategy and the New Growth Path. The present constrained growth situation was linked to a SOE balance sheet planning, funding and procurement process. This needed to change. For the SOE to play a role as a growth catalyst, a paradigm shift was required in the design and implementation of SOE investment programmes. In the short to medium term the Department’s strategic focus would be on implementing initiatives to drive investment in infrastructure that unlocked higher growth rates. This would be done by providing decisive leadership and ensuring that the government shareholder management model was implemented.

Mr Matona added that it should be recognised that the DPE’s role as Shareholder was distinctly different from the role of policy departments, who were also shareholders. This Shareholder role required specific capacity and capability to enhance the Department’s technical ability to manage SOE investments, which in itself required adequate mechanisms to attract and retain specialised technical skills. Other “sister departments” such as the Departments of Energy and Communications also had to come in and play their role for monitoring purposes. The Department’s inability to source the required technical skills affected its role in being a value-adding interface between the SOE, policy departments, SOE customers and other stakeholders.

Mr Matona continued by presenting the performance by the Department against the 2010/11 strategic plan. One of the outcomes was the delivery of new Electricity Generation capacity by Eskom according to its approved build plan and as directed by the Integrated Resource Plan (IRP). The progress on this was that 5032 MW was commissioned and would be delivered to the system by 2017. Another outcome for 2010/11 was the facilitation of the introduction of Independent Power Producers (IPP) as determined by the IRP. The progress up to date was that a ring-fenced procurement function had been established with Eskom as an interim arrangement to facilitate IPP procurement. Restructuring the Pebble Bed Modular Reactor (PBMR) Company was also an outcome for the Department over this period and the downsizing of the company to nine permanent staff had been completed. The packaging of the intellectual property and the company’s operation in preparation for the Care and Maintenance phase was largely complete.

The restructuring of Denel and the creation of a Remuneration Panel that would promote appropriate remuneration policies and practices for Chief Executives and the Boards of Directors of SOE were other outcomes envisaged during the 2010/11 strategic plan. This panel had completed its report and recommendations and the DPE was currently in the process of consulting with key stakeholders before a final decision was submitted to Cabinet for endorsement. The agreement on a way forward with the Richtersveld Community to ensure that the lives of the community were improved was completed. All Alexkor, State and Northern Cape Provincial land had been transferred. Subdivision and zoning of the township was conducted and general plans were approved. The upgrade of township civil and electrical engineering services to municipal standards had commenced and was expected to be completed by July 2011. Alexkor’s agricultural and mari-cultural assets had also been transferred to the community. Other key measurable outputs included an assessment of strategic options for the future of SAA and alignment to the African Aviation Strategy and a rail reform policy process and its implications for Transnet Freight Rail.

Mr Matona then presented the Department’s budget appropriation for 2010/11 by giving an expenditure overview. The Department had spent 88.45% of its annual appropriation up to and including 28 February 2011 amounting to R491.4 million. The remainder of the budget would be used for disbursement during March by giving a R20 million transfer payment to PBMR, R6.3 million for commitments (orders placed) and R7.5 million towards salaries.

Mr Matona went on to explain the strategic plan of the Department for 2011-14. This included outlining the organisational structure, DPE budget and SOE transfers and guarantees. As at 1 March 2011, there were 162 filled posts out of a total of 185 posts in the Department and the vacancy rate was at 12.43%. Employment equity targets were determined by Statistics South Africa (Stats SA) and these targets were partially reached in some ethnic groups.

Mr Matona gave the DPE budget per programme and explained that over the MTEF period expenditure would decrease from R555.5 million in 2010/11 to R210.4 million in 2013/14 which was as a result of reduced transfer payments to SOEs. This decrease was marginally offset by an increase of R30.1 million in current payments over the same period. The increase was mainly due to increased spending on compensation of employees due to annual increments and an increase in the establishment from 175 personnel in September 2010/11 to 181 in 2011/12 and going forward to the outer years. Accordingly, expenditure on goods and services would increase to provide support to the larger personnel establishment.

Mr Matona outlined the appropriation per economic classification, summary of transfer payments and payment for financial assets to SOEs, transfers per SOE as proportion of transfers from 2004/5 to 2010/11, breakdown of expenditure per programme and priority areas and expected outcomes.

Mr Matona ended the presentation by explaining the contributions and impact of SOEs. Transnet’s investment programme would have significant provincial impacts. Significant benefits accrued to the Northern Cape (through which the Iron Ore Line ran), Kwazulu Natal (which had the busiest port), Mpumalanga (in which many coalmines were found, and through which a major portion of the Coal Line ran) and the Eastern Cape. Transnet’s investment programme would have a positive macroeconomic impact on the GDP, capital formation and employment by creating a total number of 575 856 jobs over a ten year period (2008-2018).

Eskom’s investment programme would also have significant provincial impacts. Eskom facilitated support programmes in communities where its capacity expansion projects were implemented, focusing primarily on capacity building, skills development and job creation; thereby enhancing the socioeconomic fabric of communities in which Eskom operated. Eskom also supported developmental programmes in rural communities. In addition, Eskom continued to ensure local content, skills development and the participation of small, black enterprises and black-women-owned organisations in communities around Eskom capacity expansion programme sites. The Eskom build programme was expected to stimulate the economy to the tune of more than R350 billion and create more than 40 000 direct and indirect jobs in the process.

Denel had had a number of broader economic impacts. Denel was an earner of foreign exchange. Approximately 40% of Denel’s revenue was derived from exports. The product and services to the Department of Defence were Rand based which allowed the country to save on foreign exchange. The defence sector had high economic multipliers, such as employment, export multipliers, when compared to the general manufacturing sector. Over the years, most of Denel’s manufacturing activities required high-end skills. This resulted in the diffusion of new technologies and processes down the value chain. SAA also had a number of broader economic impacts. The infrastructural role of network air services was essential for a modern economy and the tourism industries. The other SOEs also had an impact on the broader economy and/or the areas in which it operated.

Mr R Tau (ANC, Northern Cape) highlighted that coming from the Northern Cape, he thought that the Transnet investment was not benefiting initial groups identified, such as the youth and the poor. The profit was going towards capital gains. He thought that the project had to be moved to another province.

Mr Matona replied that it was not possible for this investment to be relocated as the project was bound to specific mineral-rich areas. Interaction with provincial government was needed to ensure that the investment heeded a number of objectives. This was an important concern raised by the Member as the quality of planning for development was lacking. The strategic plan also included new indicators which would measure the socio-economic impact of SOEs. In the future, the Department needed to look more carefully at initial investment proposals to ensure that the interests of communities were also attended to. 

Mr Z Mlenzana (COPE, Eastern Cape) said that he appreciated the presentation. A review of the mandates of SOEs was needed. Funds given to SOEs had to be properly implemented. He asked whether the money allocated to the Departmental budget for SOEs was actually achieving goals.

Mr Matona agreed that a review of mandates was needed. The presidential review committee was currently investigating whether SOEs were performing at optimal levels under the watch of the Department. The funds allocated to SOEs should have been enough to achieve certain developmental goals, but due to mismanagement of funds in some cases, this was not happening.

Mr Tau (ANC, Northern Cape) said that the Committee needed to strengthen its oversight role over SOEs where there was a need for political intervention. He asked whether the Department of Transport had any mandate to oversee SOEs such as SAA.

Mr Matona replied that the Department of Transport did have the responsibility of oversight over SAA. It played a very important role in the negotiation of service level agreements. The Department of Public Enterprises was not completely satisfied with the balance between the mandates of the Department of Transport and themselves, as roles had to be more clearly stated. Infraco was also partly regulated by both the Departments of Public Enterprises and Communications. However, there was still a lot of ambiguity in the policy and regulations of these different departments, and the strategic plan addressed this issue as well.

Mr H Groenewald (DA, North West) thanked the Department for the presentation. He said that developing infrastructure included a broad range of entities and the Department had to look at this in a realistic manner. Firstly, people had to be skilled to become employed. Secondly, places of training had to be established to train those people on the needed skills. Job creation was very important. 

Mr Matona replied that there was revival of interest from SOEs to contribute to the economy by means of job creation. The Department was planning to partner with the Department of Higher Education and Training to establish training facilities for unskilled workers. This would have a positive impact on the broader economy because these people would have the needed certification for future work purposes.

Mr D Feldman (COPE, Gauteng) asked whether a previous investment deal with France for nuclear energy could be looked at and restarted again.

Mr Chris Forlee, Deputy Director General: Energy and Broadband, Department of Public Enterprises, replied that it was not possible for this deal to be restarted. The deal with France was mainly for skills and technology, focusing on thermal and not nuclear energy.

Mr Groenewald (DA, North West) said that Alexkor was a very concerning issue regarding the land claims. He asked for more clarity on the issue.

Mr Anthony Kamungoma, DPE Acting Director General: Investment and Portfolio Management, said that Alexkor had been subject to a number of constraints due to land claims. These constraints resulted in dismal financial performance. However, significant progress had been made in the implementation of the settlement signed with Richtersveld community. All Alexkor, State and Northern Cape provincial land had been transferred, except for the township. The subdivision and zoning of the township had been conducted and approved. Transfer of the township would be made soon and this was expected to be completed in its entirety in July 2011.

Mr Tau (ANC, Northern Cape) asked how it would be possible for the Department to capitalise SOEs without giving them funds from the fiscus.

Mr Matona replied that SOEs were businesses, and as businesses they had the responsibility of running as smoothly as any other business without government funding. However, there were weaknesses in the management of some SOEs resulting in problems. These SOEs then run to the state for bail-outs and initial transfers become wasted. A new approach was needed whereby SOEs were put in a position where they were forced to deliver. Capitalisation did not happen through transfers, but rather by leveraging private capital markets. Private companies could come in to help the balance sheets of SOEs as transfers had a temporary effect of helping SOEs out of trouble.

Mr Mlenzana (COPE, Eastern Cape) asked why the employment equity targets (slide 29) were so uneven in some ethnic groups. He noted that the category of white females had a high achieved percentage at 7.40% whereas the category for coloured males was only at 2.46%.

Mr Matona agreed that it might seem uneven, but all targets were set on the current population statistics. The Department was planning to fill numerous vacancies to close the gap between the different racial groups but this would take time due to the current skills constraints that was facing the Department.

Mr Groenewald (DA, North West) said that Transnet was as ongoing issue with regards to the branch lines. He wanted more information.

Mr Monde Ngqumeya, DPE Acting Deputy Director General: Transport and Aviation, replied that the Minister had signed a performance agreement with the President and the project was on track, expecting to be completed by December 2012.

The Chairperson said that the Committee was planning a trip to the Richtersveld area to see how far things were developing. She wanted more information on SAFCOL but due to time restraints she requested that the Department send her the information instead. She congratulated the Department for a well prepared presentation and wished them well for the year ahead.

The meeting was adjourned.


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