Department of Public Enterprises on its 2010/11 Annual Report

NCOP Public Enterprises and Communication

01 November 2011
Chairperson: Ms M Themba (ANC, Mpumalanga)
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Meeting Summary

The Department of Public Enterprises provided an economic context to its mandate which was to help overcome the economic challenges that South Africa faced such as accelerating growth to enhance the standard of living for all South Africans, dramatically increase employment, develop industrial capabilities and decrease the country's dependence on commodity exports and transforming the ownership and management profile of the economy to reflect that of the broader South African population. In order to effectively play its role, the DPE's strategy for 2010/11 was focused on four areas:
▪ the recognition that State Owned Companies were key instruments for the developmental state,
▪ enhanced coordination across government,
▪ funding solutions for State Owned Companies and
▪ building enhanced shareholder management capability.

Consequently, to optimise the contribution of State Owned Companies in industrial policy required a combination of rigorous shareholder oversight; coherent policy and regulatory environment; and well co-ordinated Government programmes to support targeted state-owned enterprise initiatives.

Some key highlights for 2010/11 were:
Department
: Appointment of new Minister, Deputy Minister and Director-General; Development of a new vision for the Department and enhanced mission; DPE received an unqualified audit.
Energy: The Department was instrumental in securing Cabinet support for the funding support package of an additional R174 billion in Government Guarantees bringing the total Government support to R350 billion. This will enable Eskom to deliver on the build programme.
Broadband: Infraco launched its commercial offering at pricing 10% below market levels in November 2010.
Defence: A Framework for resolution of Denel Saab Aerostructures (DSA) was developed. DSA restructuring plan resulted in 28% improvement in DSA's loss position when compared to 2009/10. A roll-over of guarantees amounting to R1.85b was secured as interim support to Denel.
Forestry: The Department initiated work on SAFCOL’s future role for consultation with other stakeholders, to ensure enhanced financial and commercial viability and developmental contribution in light of the role SAFCOL can play in rural development.
Transport: Major Competitive Supplier Development Plan (CSDP) contract between Transnet and General Electric (GE) was signed in June 2010. Ninety of the 100 locomotives to be built in South Africa. Transnet received the first two diesel electric locomotives from the GE transaction in February 2011. Completed the National Corridor Performance Measurement (NCPM) implementation on Richards Bay Coal Terminal and Sishen Saldanha. SAA took delivery of the first A330-200 aircraft in February 2011.
Mining: Alexkor land mining rights transferred to Richtersveld Mining Company. Pooling and Sharing Joint Venture implemented.
Cross-cutting Initiatives: A policy for Programmatic and Transactional Procurements was developed, as was a strategy and business plan for a Centre of Excellence for complex capital procurements with supported interventions defined for the locomotive fleet procurement.

The Department provided statistics on its staff complement, employment equity and vacancies. Under-spending in the Department amounting to R15.54 million due mainly to posts not filled due to the scarcity of special skills and delayed projects. There was however no substantive impact on delivery within programmes as a result of this under-spending.

Members asked questions about Denel’s sustainability and the government guarantees; South African Airways (SAA); money embezzled from the Department; and the vacancy rate.

Meeting report

The Chairperson remarked that she was concerned by some state entities that did not seem to take the oversight role of this Committee and Parliament seriously. The Committee had tried a number of times to perform an oversight visit at Transnet but they had been denied an opportunity to do so. Some entities such as Transnet were not taking Parliament’s oversight role seriously. She also noted that previously the Portfolio and Select Committees responsible for Public Enterprises had attended the autumn school jointly but recently the Select Committee had been excluded. She urged the Department not to consider only the Portfolio Committee but also the Select Committee.

Department of Public Enterprises (DPE) presentation
Mr Tshediso Matona, DPE Director-General, said the DPE was happy to appear before the Committee because it understood that the Department conducted its work under the oversight of the Committee. The Department was clear about the role that the Committee had to play with regards to the Department. The Committee could count on the commitment of the DPE as long as he was DG. The mandate was challenging, as such there were both achievements and challenges that would be presented to the Committee. He thanked and congratulated the Committee for the guidance it had provided by drafting a letter identifing specific areas that the Department had to focus in its presentation. He regretted the misunderstanding with regards to the Autumn school. There were however challenges that had prevented the Select Committee from being included. He apologized for any inconvenience. State Owned Entities were equally accountable to Parliament - as such there was need for the Committee to work with the DPE if the Committee intended to conduct oversight on any of the SOE.

He went on to give a brief summary of the current economic climate. South Africa was facing a range of economic challenges. The country needed to accelerate growth to enhance the standard of living for all South Africans. In addition it needed to dramatically increase employment, develop industrial capabilities to decrease the county's dependence on commodity exports and transform the ownership and management profile of the economy to reflect that of the broader South African population. The work of the DPE was supposed to help overcome some of the challenges that South Africa faced.

In terms of economic performance, South Africa's economic growth rate for the fourth quarter of 2010 was 4.4%, lifting the economy's growth rate for the whole year to 2.8%. Mining output rose in the fourth quarter against the background of high commodity prices and a strong export demand with platinum and coal making the largest contribution to the higher production levels. High growth was posted by all the sub sectors in the tertiary sector. Household consumption expenditure was the major and most consistent part of the growth momentum throughout 2010. The pace of employment creation remained sluggish, despite the recovery in domestic economic activity during the past year and a half. However employment increased moderately in the final quarter of 2010 largely due to seasonal reasons. Labour productivity continued rising, although it lost some momentum due to industrial action that had a negative impact on output.

In order to effectively play its role, the DPE's strategy for the period under review was focused on four areas: the recognition that State Owned Companies (SOCs) were key instruments for the developmental state, enhanced coordination across government, funding solutions for SOCs and building enhanced shareholder management capability.

The Committee was given DPE statistics for its staff complement. As at 31 March 2010 there was a total number of 168 staff, which comprised of 145 filled posts, 19 interns and 3 graduate development programme recruits. However there were 20 exits from the Department most of them being resignations. The vacancy rate was 11.9% but the target that the DPE had set was 10%. In terms of the employment equity targets, the DPE surpassed the targets for recruiting African males and females and Indian males and females. They had however failed to reach the target they had set for themselves for recruiting Colored males where they achieved a 1.845 against a target of 4.4% and White males where they had achieved 1.23% against a target of 4.5%. The DPE was proud that they had exceeded the target set for people with disabilities.

The DG went on to give staff complement statistics as at 10 October 2011. There were 18 vacancies but there were 8 interviews in progress. In addition there were 17 total new appointments and 6 total exits. The vacancy rate was 9.6% against the target of 10%. However he was not happy with the vacancy rate because the DPE was a very small Department.

Key highlights of the period under review were given. A new Minister, Deputy Minister and a Director-General had been appointed. A new vision and an enhanced mission for the Department had been developed. There were only three Departments that had received an unqualified audit from the Auditor-General and the DPE was one of them. His intention as the DG was to continue that track record.

With regards to energy, the DPE was instrumental in securing Cabinet support for the funding support package of an additional R174 billion in Government Guarantees bringing the total government support to R350 billion. In the broadband environment, Infraco had launched its commercial offering at pricing 10% below market levels in November 2010. In the defence environment a framework for the resolution of Denel Saab Aerostructures was developed. A rollover of guarantees amounting to R1.85 billion was secured as an interim support to Denel. A major Competitive Supplier Development Plan (CSDP) contract between Transnet and General Electric (GE) was signed in June 2010. Ninety of the 100 locomotives were to be built in South Africa. Transnet received the first two diesel electric locomotives from the GE transaction in February 2011. In addition, South Africa Airways (SAA) had approved the Airbus transaction and they took delivery of the first A330-200 aircraft in February 2011.

Examples of some performance highlights of DPE’s six programmes:
Programme 1: Administration: Chief Investment and Portfolio Management
DPE had completed a capital structure assessment for SAFCOL, Denel, Eskom, Infraco, SAX, SAA and Transnet and develop a methodological framework for measuring shareholder value. In terms of planning, monitoring and evaluation, the DPE had set a target to compile quarterly reports and evaluate them against business plans. The DPE had managed to complete the quarterly reports and the year-end report.

Programme 2: Energy and Broadband Enterprises
DPE completed an Annual Report assessment of Eskom, signed a shareholder compact with Eskom in June 2010, completed monthly, quarterly and annual monitoring of MTEF targets by Eskom.
Monitoring of the construction of the West African Cable System (WACS) was ongoing and would be completed by mid 2012.

Programme 3: Legal and Governance
DPE had to set up a panel to review Board and executive remuneration. The Review Panel’s report and recommendation was submitted to the Minister in December 2010 and Cabinet briefing done in February 2011. Cabinet mandated that the department engage on closed consultation on a new remuneration model prior to returning to Cabinet with a final decision. The stakeholder consultation included the alignment with National Treasury guidelines and the work of the Presidential Review Committee (PRC)

Targeted outputs and achievements for Programme 4: Manufacturing Enterprises, Programme 5: Transport Enterprises, Programme 6: Joint Project Facility were presented to the Committee (see document).

A comparison of the DPE budget and expenditure for 2010/11 and 2009/10 was given per programme. There was a decrease of R3.45 billion in the annual appropriation from R3.99 billion in 2009/10 to R555.54 million in 2010/11. This was mainly as a result of a decrease in transfer payments to SOEs. Under-spending in the Department of R15.54 million was recorded in 2010/11. The amount was mainly for compensation of employees (as a result of some posts not having been filled due to the scarcity of special skills in the market) as well as under-spending under goods and services that arose due to some projects having been delayed. There was however no substantive impact on delivery within programmes as a result of this under-spending.

Lastly the Department outlined its key focus areas for the 2011/14 strategic plan to the Committee.

Discussion
Mr M Sibande (Mpumalanga) needed more clarification about the challenges in growing the economy especially as South Africa had signed many protocols. He asked what informed the Department to continue providing huge funds to Denel, whether or not Denel was sustainable and if Denel had any plans in place to recover the money that they had been given. He voiced his concerns about the vacancy rate and asked how long it would take to fill the vacancies. He asked how much had been spent on land by SAFCOL. Noting the Auditor-General had found out that a DPE employee had embezzled money, he asked how much money and how had the DPE resolved the issue.

Mr M Zulu (KZN) asked if the DPE put in place any conditions before they gave SAA money. He asked how it was possible that there were nine provinces in South Africa but SAA was only flying to four provinces.

Mr Z Mlenzana (Eastern Cape) said that the Director-General had made an attempt to give the Committee what they wantedbut he needed to zoom in more on what was happening in the provinces. The Committee was supposed to appreciate the unqualified report that the DPE had received. He noted that on page 68 of the 2010/11 Annual Report, DPE had mentioned that it had undertook interventions to ensure that Broadband Infraco had established business processes, organisational controls and compliance and governance practices as per the Public Finance Management Act (PFMA) and audit requirements. He asked what the interventions were, how far was DPE in implementing the interventions and if there were time frames. He also asked if the DPE staff complement was enough to do the monitoring work, how DPE guaranteed that there was efficient monitoring, and what was the level of the person who had misappropriated money.

Mr H Groenewald (North West) congratulated DPE on its Annual Report. He urged them to keep up the good work. He asked if Transnet had identified corridors in its railway lines, if DPE was considering companies that wanted to be included in their projects on rail lines and what DPE was doing in order to get cargo from the road back onto the railway. He was worried about the acting personnel in top management and asked how long would it take to ensure the acting personnel were in permanent positions. He expressed concern about Alexkor and asked for more information on the company. The State Owned Companies (SOC) in the North West provinces were facing problems in terms of job creation. What had DPE planned in order to create jobs and help people in rural areas? The need for sustainable jobs was emphasized. He asked for clarification about the nuclear situation and the Pebble Bed Modular Reactor. Concern was raised about the future of Denel and if they had received any orders from other countries. He commented that there was no need to subsidise Denel year after year.

The Chairperson asked DPE to elaborate on the issue of Equity Alliance which had instituted legal action against the Government of the Republic of South Africa in April 2009, claiming an amount of R550 million in damages alternatively R187.5 million representing monies paid by Equity Alliance to purchase shares from Transnet in June 2002. She asked what DPE doing to ensure that they maintained the skills that were needed, if they had any relationships with other Departments such as the Department of Labour in order to train people who they could keep in the Department and if SAA and South African Express were looking for routes.

Mr Matona replied that the issues that the Committee raised were important. On growing the economy in relation to the protocols South Africa had signed, the strategy for growing the economy of South Africa involved international cooperation and relationships which were governed by a number of legal instruments such as memorandum of associations. Trade concessions were exchanged with other countries in order to enable South African goods and services to enter their markets under preferential terms. The South African economy was a globally integrated country. They were too small a country to rely only on the domestic market, especially as there were high inequalities. The SOEs depended on accessing products and technologies from other countries and good cooperation with such countries was needed for the long term. South Africa was part of regional bloc like Southern Africa Customs Union (SACU) and Southern Africa Development Community (SADC) and the international bloc such as Brazil, Russian, India, China and South Africa (BRICS). However DPE did not conclude too many agreements because they exercised a shareholder oversight role over the companies. The vacancies that DPE had started off with were not the vacancies that the ended with. The Department had successfully filled some of the vacancies but in the meantime other vacancies had opened up. There was too much coming and going that was not good for the organisation. DPE was trying hard to address the vacancies which had been made a priority by the Minister. However it was not easy to fill the vacancies. The kind of skills that DPE required was not easy to come by. Hence DPE had to market itself rigorously especially since DPE as a very obscure department which was often confused with the Department of Public Works. A number of posts had been advertised but the reason some of the posts had not been advertised was due to lack of funds. DPE had applied for more funds. DPE had a Masters and an internship programme to develop their staff. Vacancies were a work in progress and the Department had to be given more time. The money that was embezzled was not a huge sum. The official was involved in booking flights and making travel arrangements for DPE officials. DPE dismissed the official. The Department had zero tolerance for corruption and misconduct and if DPE continued to do this, it would continue to receive clean audits. Further, DPE did not tolerate laziness and mediocrity.

Ms Raisibe Lepule, Deputy Director General: Transport, Department of Public Enterprises, said DPE imposed strict conditions on the guarantees given to SAA such as reducing the liability of the Voyager loyalty programme and ensuring that they sustain levels of profitability. National Treasury and DPE conducted monthly meetings with the SAA management to see how the business was doing. The whole point was for SAA to reduce its reliance on governance guarantees. SAA was a network carrier hence it used OR Tambo Airport as its connecting hub, it was not in its operating model to operate in all provinces. However SA Express operated in all provinces with the exception of the North West. SAA was looking at expanding it operations to Mafikeng and Sun City. The mandate of SAA was to be an African carrier with a global reach and the mandate of SA Express was to be a connector of small towns to small towns and small towns to big towns. The Cape Town-Durban route was being operated by SAA via Mango. In addition SA Express was also on the route. SAA would not fly the route but when the market conditions improved, SAA could go back to that route. In response to the question on Transnet and new corridors, she said DPE had developed and implemented the national corridor performance maintenance system on the bulk corridors. Some progress was being made and overtime the numbers would increase. DPE was looking at the Cape Town-Gauteng corridor and the Durban-Gauteng corridor. DPE was committed to private sector participation in the Transnet environment because Transnet could not finance all of the activities from its balance sheet. The Private Sector Participation framework was being finalised. Some of the Transnet customers, like SASOL, had already started to invest in wagons. SAA and SA Express would be opening new routes. The route review was an ongoing exercise which would be shaped around the mandates of the companies.

Mr Anthony Kamgoma, Acting Deputy Director General: Chief Investment and Portfolio Manager, DPE, said that the primary mandate of Denel was to provide the Department of Defence (DoD) with key defence strategic equipment and services. In the main, the current mandate of Denel was still relevant as it pointed to a company that was a strategic asset and provided defence equipment and services. However Denel's current defence strategy was not optimally aligned with the DoD strategic requirements. Denel's business model was being aligned in order to meet the DoD's strategic requirements. Denel intended to increase its export orders in order to prevent an over reliance on the DoD and in the last few months they had concluded orders to the tune of R5 billion. Over the past few years Denel had improved its financial performance. In 2005/6 Denel's losses was in the region of about R1.6 billion however Denel had managed to make a profit of about R100 million in 2010/11. The guarantees that Denel received, was not actual cash transferred to companies, but surety that government provided when Denel borrowed from banks and other financial institutions. A committee was monitoring Denel to see if they were complying with the conditions of the guarantee. The Alexkor deed of settlement meant that Alexkor and the state were supposed to transfer some portions of land. All the land had been transferred to the committee with the exception of the Alexander Bay township to the community. That was only going to happen when services in the town had been upgraded to municipal level in July 2012.

Mr Chris Forlee, Deputy Director-General: Energy and Broadband, said that the R20 million for the Pebble Bed Nuclear Reactor (PBNR) was part of the R60 million that was approved for the decommissioning for the nuclear facility or fuel leads. The money had not been spent but it had been ring fenced. The nuclear situation was still on the table and the Department of Energy had made a proposal for a high level institutional arrangement to govern it. The regional Infraco policies were all based on Eskom policies and as such they were not suitable for Infraco. The policies were however reworked such as those that related to supply chain management, human resources and finance governance.

Mr Phahlani Mkhombo, DPE Acting Deputy-Director-General: SAFCOL, replied that the issue of land claims fell within the jurisdiction of the Department of Rural Development and Land Reform. As the Department they had taken the matter seriously because 61% of all the land that SAFCOL operated on were the subject of land claims. If all the land claims were successful, it would mean that SAFCOL would not have any land to operate from. An intergovernmental task team was established in order to fast track the resolution of the land claims. The Department had met with traditional leaders to ensure that DPE addressed the land claims. They had met with other stakeholders to try and find a settlement model that would benefit the communities bordering the SAFCOL land.

Ms Matsietsi Mokholo, Deputy Director-General: Legal Governance and Risk, said that DPE went to court expecting that the court would pass an order that Equity Alliance amend its papers or that the Department work towards a better position. The court however made a mid-point ruling in that it allowed Equity Alliance to amend it papers and at the same time the Department was supposed to excerpt a portion of the claim. DPE was waiting for a date to go back to court.

Mr Matona said that job creation in the Northern Cape was difficult to work on because it was not the mandate of the Department to promote economic development and job creation.

The Chairperson asked the DG to compile information from the SOEs in the different provinces on the number of jobs they had created. The relationship between the Committee and the Department was good as it stood but there needed to be proper communication between the two.

The meeting was adjourned.

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