Department of Public Enterprises on its 2010/11 Annual Report

Meeting report

The Chairperson welcomed the Director-General of the DPE and his delegation, and commended them on being one of only three government departments to have consistently received an unqualified audit from the Auditor-General. He expressed the wish that the DG could share his “magic formula” with other DGs, but realised that the achievement was based on hard work, dedication, commitment and a passion for what one did.

Mr Tshediso Matona, Director-General, said the annual report had already been tabled in Parliament, and the Committee had had the report for some while. The presentation would therefore focus on the economic context, strategic thrust, organisation structure, key highlights, programme performance, financial statements and challenges.

In the economic context, South Africa could not avoid being affected by the current uncertain global situation, and this emphasised the need for infrastructural development to provide a sound basis for the country’s export markets.  Accelerating economic growth, creating more jobs and transforming the ownership and management profile of the economy were further challenges. During the 2010/11 period, public sector infrastructure spending amounted to 9,8% of gross domestic product (GDP), compared to 4,6% in 2006/07, and was expected to average 8,4% of GDP over the medium term period, totalling R809 billion.

The strategic thrust of the DPE was, firstly, to integrate the strategic mandates of the state-owned enterprises (SOEs) so that it could track the economic impact of the development of their suppliers and customers. Attention would be paid to the way in which the SOEs interfaced with the private sector, and their operational and financial performance would be closely monitored. Enhanced coordination across government departments was important, because the sectors in which the SOEs operated were shared with a number of “policy” departments, such as Energy, Transport, Rural Development and Trade and Industry. The demand for infrastructure far exceeded the capacity of SOEs to deliver, so the DPE was looking at various alternative funding options.

Turning to the Department’s organisational structure, Mr Matona said this was being reviewed to ensure it was aligned to the Government’s current priorities, and small changes were being made. It was a very small organisation and relatively under-capacitated in relation to the requirements of its oversight mandate. In recent years, changes in top leadership had led to a high turnover rate and a serious loss of skilled professionals. The current total establishment stood at 188 personnel, with 18 vacancies still to be filled. The appointment of 17 new staff in the past six months, with only six resignations, reflected a slowdown in turnover.

Key highlights included the appointment of a new Minister, Deputy Minister and DG for the Department, the securing of funding to enable Eskom to deliver on the build programme and a roll-over of guarantees as interim support for Denel, progress in enhancing the financial and commercial viability of the South African Forestry Company Limited (SAFCOL), the contracts with General Electric (Transnet) and Airbus (SAA), and cross-cutting initiatives.

In the administrative field, the Isibuko “dashboard” was proving an effective tool for monitoring the performance of the SOEs, and work was continuing to refine it still further. Capital structure assessments had been completed on seven SOEs, business and strategic plans approved, and quarterly and end-of-year reports completed, in line with the rules of compliance.

Monitoring of Eskom’s capacity expansion programme involved the monthly tracking of the procurement and building progress, and delivery was currently on schedule, despite significant risks. The DPE had been overseeing the implementation of the Pebble Bed Modular Reactor (PBMR) transition to “care and maintenance” status, and had therefore had to secure a Public Finance Management Act exemption from submitting corporate plans, shareholder compacts and quarterly reports while the company operated with a reduced staff complement.

The Department had developed a framework for board appointments, which would provide a consistent and systematic approach to filling vacancies. A similar directive on CEO appointments had also been drawn up.
The review of board and executive remuneration was almost complete, but the Minister had been instructed by the Cabinet to conduct further, although limited, consultations on the matter before it was finalised. It was hoped the issue would be dealt with within the next month or so. The Department recognised it was an important matter in which the public had an interest, but it believed it should be possible to find a balance between all the issues which were critical to executive remuneration, such as moral principles, the need to be realistic, and the complexity of the situation. The DPE had been working with the Presidential Review Committee, and hoped that the outcome would assist them with their oversight mandate.

The winding-up of Aventura Resorts had not been completed, but the process of transfer was underway, with the receipt of a signed certificate of consent from the Minister of Finance for the transfer of the resort at Plettenberg Bay.

While Denel continued to perform within the international benchmark of an 85% success rate for securing long-term orders for the SA National Defence Force on agreed programmes and contracts, the DPE was looking at the financial sustainability of the company. The three guarantees it had received from Treasury over the years had been rolled over while the company remained in financial difficulties. The future of Denel depended ultimately on the country’s future defence strategy, and the outcome of the Department of Defence’s work in this area was being eagerly awaited, as it would provide a framework for resolving Denel’s future. In the meantime, Denel remained a “holding operation” facing serious financial challenges.

The board at SAFCOL had been asked to develop a turnaround strategy.

Mr Matona said the activities of South African Express in the Congo had been reviewed, as it was experiencing challenges with its partner in that country. He believed a decision had been taken to divest itself from the partnership.

Skills development for SOEs had become an important aspect, and a skills “dashboard” had been created, populated with information on what SOEs were doing. Regular reports were submitted and evaluated, covering the training of engineers, technicians and artisans through the various programmes supported by the SOEs.

Presenting the financials for the period under review, he highlighted the fact that there had been a massive decline in the DPE’s budget, from R3,991 billion in the previous year, to R555,5 million. This was because of the transfers to SOEs in 2009/10, which did not happen in the past year. The under-expenditure of R15,5 million was largely due to lower compensation costs as a result of a high vacancy level.

He reiterated the DPE’s need to enhance its capacity by employing and retaining people with the specialised technical skills to perform its shareholder role of managing SOEs’ investments.

Discussion
Mr A Mokoena (ANC) complimented the DG and his team on their performance during the review period, and also paid tribute to the impact of the recent strategic workshop on SOEs, which had been an empowering experience for members of the Portfolio Committee, and would assist them in their oversight role.

He asked Mr Matona for his view on how the Presidential Review Committee (PRC) would handle the remuneration issue.

The DG responded that if the PRC concluded its work according to schedule, the Department would be very happy, as well as the SOEs and the country as a whole. However, it was uncertain that they would complete their work on time because of the complexity of the exercise, covering issues such as governance, structures, financing, and performance, making the scope of the investigation far too large for its timeous completion. However, even if their report were produced tomorrow, it would attract much debate in both the public and government circles because it dealt largely with recommendations regarding the restructuring of State entities. He suggested that the Portfolio Committee should feel free to invite the PRC to discuss these important issues, as the PRC would recognise the important role the Committee had to play.

Mr Mokoena asked what the asset value of PBMR was, and how long it would take to get if off the books of the Government.

Mr Chris Forlee, Deputy DG: Energy and Broadband, said the net asset value was technically zero, because all of the plant and equipment had been written down. It would probably realise about R16 million if sold as scrap. The PBMR had R169 million in the bank, of which R60 million was being kept aside to decommission the fuel laboratory. The projections when going into the “care and maintenance” period was that it would be a two-year phase up until 2013, and as things were going better than expected, there could still be R50 million left over at that stage. There were now only nine staff members, operating from a facility whose lease expired in March 2013. The main issue in closing was to sort out the agreement with the other shareholders, and progress had been made. The annual general meeting was due to be held in November, and the intention was to downsize.

Mr Mokoena said that when Transnet had presented its report to the Portfolio Committee, one issue which had been most disturbing had been the disclosure that R8 billion could not be accounted for, even though there were three levels of auditing – internal, external and the Auditor-General. He asked for confirmation that there were mechanisms in place to prevent a recurrence.

The DG said it had been made clear to Transnet that this transgression was unacceptable, and that there could never be an excuse for management failing on such a scale. The DPE was working closely with the entity to ensure it did not happen again. It was standard practice for auditors to rotate, but some had “been there forever.” Rotation would now take place to ensure good governance.

Mr K Dikobo (AZAPO) drew attention to the high vacancy rate, which suggested staff were leaving because the Department was not a good employer. He asked what exit interviews revealed, and if it was difficult to fill vacancies, was the Department sourcing skills elsewhere?

He was supported by Mr M Sonto (ANC), who said the skills shortage was a “nemesis” which had dogged the DPE in previous years, and wanted to know what the Department’s strategy was to address this.

The DG said the DPE’s oversight role as a shareholder presented a challenge, as this was a specialised mandate requiring staff with specialised skills. Trying to fulfil that mandate within the normal structures of public service and remuneration was highly challenging. Financial analysts, for instance, were not going to leave well paid jobs in banks to join the public service. He lamented the fact that in 17 years of democracy, the country had not produced public-spirited professionals motivated by more than simply remuneration. The DPE had introduced new employee categories and incentives to try to lift it out of the public service “strait-jacket,” but it could only go so far before it fell foul of the rules. People with the completely wrong skills were responding to job advertisements, while some DPE staff were being poached by SOEs. On the other hand, it should be possible to second staff from the SOEs to plug gaps in the Department. Retention of staff was essential, and depended not only on financial rewards, which was the current method, but also the provision of a career path, which could lead to one becoming CEO of one of the SOEs.

With regard to the sourcing of skills from elsewhere, the DG said the nature of the DPE’s work required it to draw its skills from the South African market. Exit interviews had indicated that the high turnover rate was directly linked to instability at the top of the organisation – four Ministers and three Acting DGs within two years. During the past ten months, there had been stability, direction and leadership, and turnover had decreased.

Mr Dikobo asked if the withdrawal of SA Express from its partnership in the Congo was a good idea, as it was giving the route away, and it would be better to find a new partner.

Ms Raisebe Lepule, Deputy DG: Transport and Enterprises, said SA Express was still operating into the DRC. The problem that arose stemmed from SA Express’s desire to move traffic domestically within the DRC, and this required securing a majority partner. Lessons had been learnt regarding due diligence studies before entering into a partnership, as well as overcoming language difficulties. However, it was not giving away the route.

Mr Sonto asked how far the litigation between the DPE and Londoloza Paharpur Consortium had progressed.

Dr G Koornhof (ANC) wanted similar information on the R85 million litigation case brought by former CEO Jacob Maroga against Eskom, where leave to appeal by Mr Maroga had been granted on March 18.

Ms Matsietsi Mokholo, Deputy DG: Legal and Government, said Londoloza Paharpur was an Indian consortium which had attempted to acquire Safcol. The matter had been outstanding for some time, but the DPE would not pursue it as it was the respondent, and the consortium was amending its papers. The Department would wait and then take a view and exercise its rights accordingly.

As far as Mr Maroga was concerned, the first court had given judgment in favour of Eskom and the Department. The appeal was scheduled for October 31.

Mr C Gololo (ANC) asked what would happen to the staff of Aventura when the company was wound up.

Ms Mokholo said Aventura no longer had permanent employees, merely three people who had been outsourced to deal with the winding up process.

Mr L Greyling (ID) asked what follow-up had been carried out on the Duvha Power Station since the start of the investigation over a year ago (into the turbine failure), as 600 kw had been taken off the grid.

Mr Forlee said the investigation was currently under way, and needed to be finalised with the insurers before the report could be released. In the meantime, the Duvha incident had provided lessons to Eskom and helped them to pick up vibrations in another unit, saving another potential incident.

Mr Greyling asked if the Department was looking 20 years ahead at funding models for SOEs, taking into account the large capital amounts required for Transnet and Eskom. These models should not only deal with the sourcing of finance, but also on how to pay the money back without bankrupting the country.

Mr Forlee said the Department was putting together a framework for private sector participation. This raised the issue of how one involved the private sector, and whether the country would want a private operator to run all of its power plants, for example.

Mr Greyling said he was very encouraged by the South African Renewables Initiative, coming from various Departments, although not much information was available on it. During a recent visit to Germany, a country which was interested in becoming partners in the initiative, he had heard there were reservations over a perceived lack of movement from South Africa. He asked what progress had in fact been made, and whether an announcement could be made at the forthcoming COP 17 climate change conference.

Mr Edwin Ritchken, Strategic Projects Advisor, DPE, said a draft policy had been drawn up to guide SOEs in developing their own policies and practices related to climate change. It would now be an agenda item on every SOE manager’s check list. As far as the Renewables Initiative was concerned, Minister Davies (Trade and Industry) would take a Cabinet memorandum to COP 17 for a partnership agreement with Britain, Norway and Germany.

Dr S van Dyk (DA) asked whether Department followed up to ensure that the recommendations in reports concerning SOEs that had been passed by Parliament, were actually implemented, and not just filed away.

The DG replied that the DPE was required to take action when Parliament accepted a report, and he was not aware of any report which had not been acted on.

The Chairperson said the misappropriation of funds by an employee was being investigated by the Auditor- General, and wanted to know the outcome.

The DG said the employee had been dismissed, and action was being taken to recover the stolen funds.

The Chairperson thanked the DPE delegation for their input, and closed the meeting.