Alexkor and Broadband Infraco on their 2010/11 Annual Reports

Meeting report

The Acting Chairperson, Dr G Koornhof (ANC), stated that the Infraco Annual Report was not the best he had seen during his time in Parliament. He acknowledged that Mr Andrew Shaw had entered as Infraco’s Acting CEO after the time of the publication of the 2010/11 Annual Report.

Broadband Infraco presentation of Annual Report for 2010/11
Mr Andrew Shaw, Acting Chief Executive Officer, and Ms Ramasela Magoele, Chief Financial Officer, presented Infraco’s Annual Report. Mr Shaw acknowledged that Infraco had had quite a challenged history. Infraco managed to meet a number of its key performance indicators (KPIs) including reduced pricing for telecommunication services and a number of targets related to its financial performance such as earnings before tax and interest and net profit/loss after tax. Infraco did not meet its target KPI for 100% “broadband connectivity, availability and access”, achieving 71% instead. Net revenue reported was R297 million, 3% less than last year’s R306 million, while operating expenses were R244 million, showing a 41% increase on the previous year’s operating expenses. A loss of R206.9 million was reported for 2011, a 631% increase on last year’s loss of R28 million.

Infraco reported on its financial performance for the six months since the publication of the Annual Report in March 2011, noting that Infraco was on target to meet its financial targets set for 2011/12.

Infraco aimed to improve performance in three focus areas going forward: financial performance, performance of services, and its internal processes. As part of its focus on internal processes, Infraco aimed to improve compliance with the Public Finance Management Act (PFMA) and National Treasury regulations. Poor internal control processes were a major weakness within the company and so measures had been put in place to deal with this.

In February 2011 a corporate plan for Infraco was presented to its shareholder. Infraco had however been requested to review the plan as it failed to demonstrate the sustainability of Infraco over a ten-year period. A newly developed corporate plan was approved by the Shareholder in June 2011 and it identified a number of actions to turn the company around and ensure its sustainability. Part of the strategy was a new set of market related value propositions, a reassessment of Infraco’s future product portfolio and a realigned organisation structure. The enhanced value propositions included an expansion of Infraco’s “metro presence” and its African connectivity. A R700 million capital investment programme had been aligned to meet Infraco’s enhanced value propositions. This would enable Infraco to achieve sustainability in a short time and to meet its commercial objectives and objectives to service under-serviced areas, albeit that the company would most likely continue making a loss for another four years.

Infraco would focus on strengthening its network through investment in infrastructure. It was only with this investment that Infraco would be able generate the kinds of revenue it needed to from a commercial perspective.

Infraco received a qualified audit report. This was largely because the Accounting Authority was unable to confirm whether the fruitless and wasteful expenditure disclosed as R1.9 million and irregular expenditure disclosed as R151.1 million represented all fruitless and wasteful expenditure and irregular expenditure during the year. Note 27 to the Financial Results stated that Infraco had no controls in place to record fruitless and wasteful and irregular expenditure. A number of initiatives had been undertaken in the previous six months to address the significant shortcomings in Infraco governance. Disciplinary action had been taken against six staff members implicated in irregularities. Staff had also undergone governance and PFMA training. As a result of the qualification to the 2010/11 audit, no bonuses were paid to any staff member for the financial year. Four new executive managers had been appointed. A new documentation management system had been developed and a detailed Supply Chain Management policy would be implemented in the near future. An efficient procurement and supply chain system was needed to support Infraco’s doubling of its capex spend in the next financial year and to avoid any audit qualifications. Another weakness in Infraco was poor adherence to “declarations of interest”. Infraco had taken measures to update and monitor this more closely.

Discussion
The Chairperson said that the Committee was pleased that Infraco had identified problem areas in the company and already had plans in place to turn the company around.

Mr P van Dalen (ANC) asked how much of the money stolen from Infraco had been recovered.

Mr van Dalen asked how many staff members who had been fired, were contesting their dismissal and would be back at Infraco in two years time to receive massive payouts.

Mr Shaw replied that Infraco was still collating information about people who had contested their dismissals. Infraco followed a very rigorous dismissal process that was compliant with the Labour Relations Act. The Commission for Conciliation, Mediation and Arbitration (CCMA) chaired the hearings for each disciplinary charge sheet. The processes were extremely time consuming. People could contest the findings and possibly succeed but Infraco had tried to be as rigorous as possible to prevent this from happening.

Mr van Dalen asked if the directors that had been dismissed still owned interests in Infraco. In the 2009/10 Annual Report the interest was around R100 million, and seemed to have halved in 2010/11. Were any payments made to the directors and were they still profiting from contracts with Infraco?

Mr Shaw replied that payments to directors were part of the Board’s processes and that he could not really speak to these. There was a normal process followed in respect of remuneration of Board members. This was based on a compliance framework and there was engagement with the Shareholder as to how remuneration of Board members was determined.

Mr van Dalen said he had read reports in the newspaper about Infraco’s staff morale, that it had not followed labour laws and that it dealt with certain issues in an “autocratic” fashion.

Mr Shaw replied that he had not been sent to Infraco to do something that was entirely “comfortable” for him or for anyone else. When one had to go into a system where disciplinary charge sheets had already been drawn up against all of the executives, except for one, as well as managers below the executive, one did not expect to be regarded as popular. A lot of people in the organisation had perhaps played on this and argued that Mr Shaw had been too draconian. A “change management” process was implemented on 1 October 2011 to address low morale in Infraco as the company was concerned that it could lose key staff members with important technical skills. There was a shortage of telecommunication skills in the country, and Infraco had some very good employees with these skills and did not wish to lose them. The morale of all staff members needed to be improved which could only be done once all disciplinary processes had been concluded. Infraco was actively engaged in building the morale of its staff through various kinds of activities.

Mr M Sonto (ANC) asked how Infraco had managed to appoint four new executive managers given the loss that it made.

Mr Shaw replied that it should be understood that Infraco was a start-up company and had always been expected to make losses for a period of time. He could guarantee that at the end of this financial year, Infraco’s objective was not to be profitable but to exceed financial targets set by the Shareholder. Its new Corporate Plan estimated that it would take four to five years for the company to begin making a profit. A true measure of whether Infraco had been effective in the market place was not whether it had made a profit or a loss, but was whether or not it had managed to meet its revenue targets. Mr Shaw and the Board’s view was that Infraco had not acknowledged the need for high-quality executives in the past. A process of extensive headhunting for the right people to fill executive posts had been undertaken. He was confident that the new executives had the required skills and experience to take the company to the next level. 

Mr Sonto said that resignations and “firing” had taken place in the company and asked if these people still had links of some sort to company activities. If it was found that an executive member had had an interest in (or irregularly benefited from) Infraco, did they still have connections to the company and procurement processes? If so, what was being done to correct this?

Mr Shaw replied that there was evidence that there were some linkages between people who had been dismissed and Infraco. The industry was a relatively small one and so this was probably inevitable. Infraco had had fewer resignations than expected. The company wanted to enforce a performance reward ethic in the company.

Mr Sonto said that there were some investigations that had not been concluded. Why had law enforcement agencies been brought in, in some instances? Was it because people were not being cooperative?

Mr Shaw replied that a forensic investigation had been initiated at the beginning of the process. The challenge with the forensic investigation was that it had to hear all of the evidence from all the disciplinary processes before it could formulate its activities to engage with the police. A case had been opened and it was being investigated if people had received funding or payments outside of their salaries. This required the subpoena of bank accounts. The Commercial Crimes Unit in SAPS was quite slow in addressing some of these issues. Infraco wanted Deloitte to provide it with some feedback on the process by the end of the calendar year. This would give the company an indication as to whether funds had gone missing and whether people had received kickbacks. Once the investigation had been included, Infraco would initiate criminal proceedings if necessary.

Dr S van Dyk (DA) said he had been a member of this Committee in the Third Parliament e Committee at the time when meetings were held about the establishment of Infraco as a public enterprise. The current Acting CEO had been present at all those meetings. Taking into account what was discussed at that stage, was Mr Shaw satisfied with the trend of the development of Infraco to date? Was Mr Shaw positive that Infraco had good prospects or was Infraco another public enterprise that would struggle to get off the ground? Did Mr Shaw foresee problems and delays in Infraco and if so, could he please inform the Committee of these so that the Committee could assist Infraco?

Ms September said most of her questions would be related to the PFMA. What responsibility had the Board taken for the problems experienced by Infraco? Had any Board members been asked to leave and what had they said about Infraco’s shortcomings?

Mr Shaw replied that all he could say was that Infraco had recently put in an almost entirely new Board that had a great amount of enthusiasm for the company’s governance clean-up and turnaround plans.

Mr Mandla Ngcobo, Broadband Infraco Chairperson, also replied to the question saying that the Board was very young at only one month old. The Department of Public Enterprises (DPE) was in a better position to answer questions about what happened with the previous Board, as the new Board had not yet had an opportunity to be properly briefed on what the previous Board had or had not done.

Ms September replied that she was sure that the Board could have familiarised itself with PFMA and King lll and their own functions by this stage.

Mr Ngcobo replied that the new Board had finished its induction programme and was about to form subcommittees, the most important being the Procurement Committee.

Ms September asked about the nature of actions taken against dismissed employees.

Mr Shaw replied that most of the actions taken against staff were PFMA and governance related. PFMA could be quite onerous for companies competing in the commercial market. Most companies would probably not require the level of the clean-up required by the PFMA.

Ms September asked if staff were not getting bonuses for the financial year.

Mr Shaw replied that the decision to not give staff bonuses had a very demoralising impact on staff. Some staff in areas of the business that were operating effectively felt that it was unfair that they should not receive bonuses because other people in the organisation had let them down. Infraco would aim to reward staff in the current financial year where appropriate.

Ms September commented that it was now 2011 and company governance structures were still being trained on the PFMA. Had the Board and the DPE not picked up on the fact that there had not been PFMA training to date? If staff had not received PFMA training, then by what laws did they operate?

Ms Magoele replied that it had been taken for granted that people who were part of a state-owned company understood the PFMA but that in actual fact the level of PFMA knowledge at Infraco was shocking. Training on PFMA would be undertaken every six months. One of the reasons behind the lack of information on fruitless and wasteful expenditure and irregular expenditure was that employees did not know their definitions nor could many tell the difference between the two.

Ms Matsietsi Mokholo, Deputy Director-General: Legal Governance and Risk, DPE, said that the Department was currently preparing an induction for the Board to outline its expectations, especially in terms of the PFMA and other regulations.

Mr Shaw stated that in some areas of Infraco there had been no governance framework at all.

The Chairperson asked how was it that no one out of the Infraco Executive or Board, the DPE or the Committee had picked up the fact that Infraco had no governance framework. This was a frightening question that they needed to ask themselves.

Ms September asked what National Treasury’s role in Infraco’s shortcomings had been. Had Treasury been informed of Infraco’s difficulties?

Mr Shaw replied that Infraco was meeting all of its obligations in complying with the Treasury.

Ms Magoele also replied that she was not sure to what extent Treasury had been involved in Infraco in the past. The DPE would however be Infraco’s link to Treasury.

Ms Mokholo added her response saying that National Treasury had been informed of the shortcomings in Infraco. The Minister had forwarded his correspondence on the matter to National Treasury in which he had indicated the Shareholder’s intervention.

Ms Borman said that Infraco was fortunate to have Mr Shaw as acting CEO. His presentation had answered a lot of the Committee questions on governance issues arising from the 2010/11 Annual Report. Page 28 of the Report said that S Meer had only attended two out of the five Audit and Risk Committee meetings, while another individual had attended zero out of two meetings. On the same page, T Magasa was appointed in September 2010, then resigned in February 2011. This was too short a time for an appointment and was an issue for concern.

Mr Shaw replied that he could not comment on this as he was not with Infraco at the time but agreed that the information did not make for good reading.

Ms Borman said it was startling to read that no meetings for the Tender Procurement Committee had been convened. This surely opened up opportunities for the possibility of corruption.

Mr Shaw agreed that this did demonstrate a shortcoming.

Ms Magoele replied that all of Infraco’s committees, and especially the internal Procurement Committee, should sign and understand an ethics code of conduct. Infraco was finalising a document to provide members of the Procurement Committee with information about what gifts they could accept and which interests were acceptable and which were not.

Ms Borman said that seven of Infraco’s sixteen targets, on pages 40 and 41 of the Annual Report, had not been achieved, making specific mention of Infraco’s failure to meet its target of 100% “broadband connectivity available and access” as well as its failure to meet the target for network infrastructure, operations, maintenance and development. Could Infraco give some explanation for these unmet targets?

Mr Shaw replied that it would be unusual for a state-owned company to achieve all of its targets, as some of them were “push targets”. However, it was clear to him that Infraco had not achieved some of its basic financial targets. Infraco was pushing to meet a number of its network compliant targets within the current financial year. Infraco would be putting pressure on its contractors to restore faults on the network much faster. Infraco might still have a table of “irregular expenditure” going forward as there were things that came “out of the woodwork”. It would take time for the company to be turned around. Infraco hoped to meet the targets of its internal auditors and ensure that its audit report was not qualified in the next financial year. The company was on target to meet both of these requirements.

Ms Borman asked how Infraco viewed the necessity of applying for an Individual Electronic Communications Network Services (I-ECNS) licence.

Mr Shaw replied that international consultants had done analysis for Infraco and had identified that it was best for Infraco to remain a wholesale player, for which it had a licence, and not compete in the retail sector, as it did not have the mandate or the infrastructure do so. However, there were two reasons that having an I-ECNS licence would be very useful to Infraco. One was for Infraco to service under-serviced areas. In areas where Infraco was not working with Sentech, the I-ECNS licence would enable Infraco to take its services directly to schools and clinics or hospitals. The second reason was that part of Infraco’s value propositions were to deal with international customers, or customers based in SADC countries. Many of these customers did not have South African licences and so Infraco would need a licence to service their requirements. It was a key part of expanding infrastructure into SADC.

Mr A Mokoena (ANC) asked if Infraco had had a direct interface with the Presidential Review Committee (PRC), or had the DPE done this on Infraco’s behalf?

Mr Shaw replied that the PRC had come to Infraco and done interviews with them and had also asked Infraco for a great amount of data. PRC seemed very interested in Infraco’s engagements with Sentech. Infraco had fed into this process but it was difficult for Mr Shaw to say whether or not Infraco had actually influenced the process.

Mr Mokoena asked to what extent the Pebble Bed Modular Reactor (PBMR) owed Infraco money.

Ms Magoele replied that PBMR did not owe Infraco any money.

Mr Mokoena commented that some employees resigned to escape being dismissed so as to position themselves to secure benefits from the company in the future.

Mr Shaw replied that one of the key areas where there had been an issue about whether or not there was a conflict of interest was in respect of transmission equipment. Infraco was in the process of issuing a tender and would like to opt for a tender for multiple suppliers for transmission equipment so that Infraco would have different suppliers geographically in different parts of its network. In this way Infraco could get the best deal. Infraco would seek Section 54 PFMA approval from the Shareholder where necessary.

Mr Mokoena replied that the essence of his question was whether there had been any “evergreen” contracts with people who had resigned.

Mr Shaw replied that Infraco was currently going into a process of new contracting for transmission equipment which was where the majority of the contracts lay. He did not have any knowledge of evergreen contracts.

Mr Mokoena asked if Infraco was working with universities to recruit young people into the field of fibre optics and communications.

Mr Shaw replied that Infraco did have a learnership programme. Its Shareholder had been clear about the need for Infraco to maximise the number of youth brought into the company. Infraco brought in recently qualified individuals who wished to gain telecommunications experience. As the company had been growing so quickly, it had absorbed all of these graduates into the company in the last year. Infraco would probably not be able to do this in the forthcoming year, but it would absorb some of the better performers. Infraco also offered bursaries to students. These bursary programmes were being restructured and aligned to the needs of the company.

Mr Mokoena asked to what extent there was a “digital divide” between the Northern and Southern hemispheres.

Mr Shaw replied that the WACS cable would make a huge contribution to breaking this divide. Infraco was confident it would have a huge impact and was confident that South Africa was setting up infrastructure very quickly. One gap in South Africa was fibre cables to homes and offices. There were under-serviced areas in South Africa but mobile providers were increasingly penetrating these areas. With the assistance of Infraco and the Under-Serviced Area Licences( USALs), this penetration would increase over time. Infraco’s challenge was to be commercially sustainable but also service under-serviced areas. This was a difficult balancing act for Infraco.

Mr C Gololo (ANC) asked about Infraco’s alignment and collaboration with Sentech in which Infraco was responsible for the cables and Sentech was responsible for the signal.

Mr Shaw replied that alignment and collaboration with Sentech continued. Infraco had a good relationship with Sentech which it planned to intensify.

The Chairperson said that the basis for Infraco’s qualified opinion was significant. The Auditor could not state whether or not the information on fruitless and wasteful and irregular expenditure was complete. Despite this, how closely could Infraco estimate the fruitless and wasteful and irregular expenditure reported in the financial statements?

Mr Shaw replied that it was difficult for him to judge whether or not the tables were complete. Infraco had focused on improving its document management system so that it could avoid receiving a qualified audit opinion in the next financial year. When he came into the company he had been asked to look at the storeroom which was an old office and in which there were unfiled documents lying on the floor. An effort to track and file all documentation from a year back had been made.

Ms Magoele replied that Infraco often received calls from suppliers for outstanding payments but of which Infraco had no record. Every week she received about two emails from suppliers or service providers saying that Infraco owed them money but for which internal records could not be found as a result of Infraco’s poor documentation system. There might be legal cases initiated against Infraco because of its refusal to pay these suppliers however, before it paid them, it needed to investigate whether or not suppliers had in fact done the work for Infraco. In some instances, technical teams had even been deployed to investigate if work had been done for Infraco. This caused Infraco to incur interest; however, Infraco would rather incur the interest while it verified what services it owed money for, than pay money out to people it did not genuinely owe money to. Ms Magoele hoped that by the end of December 2011 Infraco would have resolved these outstanding payments.

The Chairperson referred to Note 21 to the Annual Financial Statements which contained information about “related party transactions” and “Director (Interest)” under which substantial amounts were recorded. Could Infraco please address this?

Mr Shaw replied that it was difficult for him to comment on what was in the report, as he did not know how the issue of director interests had been addressed in the past. His focus was to deal with executive management and the managers below them to ensure that clean processes of declaring interest were followed.

Mr Mokoena asked where Infraco’s headquarters were.

Mr Shaw replied that Infraco’s headquarters were next to the Johannesburg Golf Club and that the Committee was welcome to visit Infraco there.

Mr Mokoena asked if Infraco had anything that it could call a “patent” and how safely kept it was.

Mr van Dalen asked why the expenditure identified under “remaining irregular expenditure” on page 86 of the Annual Report was reported as having not been ratified or condoned whereas the note said that the contracts had been subsequently signed by the suppliers. Even irregular expenditure had to be regulated in some form by a decision of the Board and this was not happening at Infraco, especially in the case of the R130 million worth of fibre optic contracts that had been entered into without the correct level of authorisation. Were the contracts going ahead or was Infraco getting that money back? Infraco had spoken about missing documents. It needed to assure the Committee that it was a serious business and not akin to a “local spaza shop that sold single cigarettes”. It was very concerning.

Mr Shaw replied that Infraco had put in place a comprehensive documentation management and storage system which included the scanning of all documentation that was then stored electronically as well as off-site. If anyone wanted to get access to a file, they had to sign the file out and return it.

Ms Magoele also replied saying that Infraco was in the process of condoning everything that was irregular. Some irregular expenditure had not been condoned because it was still being investigated. Infraco might still have some open items that would not have been condoned by the end of the year, mainly because of ongoing investigations.

The Chairperson said that what Infraco had reported to the Committee was a sad state of affairs and very frightening but the Committee was encouraged by Infraco’s leadership and commitment to turn Infraco around.

Mr Chris Forlee, Deputy Director-General: Energy and Broadband Enterprises, DPE, commented that it was only 355 days ago that Members were present at the launch of Infraco’s commercial offering to the market at 10% below market which was a huge celebration. Three days before that the Annual Report had been presented to the Committee. It had also bothered the Department that no one had picked up on the irregularities and some of Infraco’s shortcomings. A number of the reports he had received from Infraco had said that policies were in progress. In hindsight, because Infraco had in some sense been an Eskom subsidiary it had adopted a number of policies from Eskom, but being a much smaller company, Infraco did not have the capacity to manage the policies in the same way as Eskom. A lot of gaps had then materialised. From mid-November 2010 to 1 April 2011, speedy action had been taken by the Department. The Department had instituted a pre-notification requirement for all transactions greater than R0.5 million. The Department was also enhancing its oversight role by specifying the information that it wanted from Infraco’s quarterly reports and by engaging with Infraco on its quarterly reports. The Department had approved the current corporate plan but needed to consider the best way forward for the company to be sustainable and to achieve the goal set for it to service underserviced areas. DPE was offering guidance on Infraco’s next corporate plan. The Minister of DPE and the Minister of Communications had agreed to reestablish the inter-ministerial committee on broadband and had agreed to look at four areas in giving direction on the new corporate plan: the collaboration between Infraco and Sentech; the national broadband implementation process; the possibility of merging Infraco and Sentech; and the framework for Infraco’s participation in projects of national importance. The Department saw value in this company.

The Chairperson said the Committee appreciated the frankness and transparency of Infraco in its presentation and answers. The Committee asked for Infraco to convey its best wishes to, and appreciation of, Infraco’s staff for their hard work. The Committee wanted to work with Infraco and was considering having quarterly interactions with state-owned companies from January 2012. The Committee would like to do a site visit at Infraco’s headquarters soon as this was much more meaningful as a form of interaction.

Alexkor Audited Annual Results Presentation for the 2010/11 financial year
Mr Reginald Tafara Muzariri, Chairman/Non-Executive Director and Mr Berno Lategan, Acting CEO, Alexkor, presented the Alexkor Annual Report for 2010/11. The company received an unqualified audit opinion and recorded an operating profit for the first time in five years. Net profit was R84.2 million, and operating profit was R11.3 million. It was proud to report that there had to date been no fatalities on its mines. Production at Alexkor rose by 20%, and this, together with higher diamond prices accounted for Alexkor’s increase in gross revenue from R163.9 million in 2009/10 to R195.9 million in 2010/11.

An Emphasis of Matter was that although the company had sufficient cash resources to meet its operating cash requirements for the foreseeable future, there was significant doubt about the ability of the company to continue as a going concern in the longer term without the commencement of sustainable mining activities. Concerns were also raised about Alexkor’s non-compliance with the corporate plans, shareholders compact and performance information. The planned targets had not been specific, measurable, time-bound and well-defined. Alexkor had since improved its compliance with PFMA and National Treasury regulations and had adopted King 3.

The Deed of Settlement signed between Alexkor, the state and Richtersveld Community in 2007 envisaged the establishment of the pooling and sharing joint venture (PSJV), in which the land mining rights were to be ceded to the community, while Alexkor would continue to hold the marine mining rights. Land mining rights were ceded to the community on 28 March 2011 and registered on 6 April 2011.

The upgrade of the Alexander Bay Township had an estimated completion date of 30 June 2012. The total project expenditure was estimated to be R110 million at completion.

As part of the new strategic intent approved by the Shareholder, Alexkor had been granted a mandate to pursue other diamond mining and related opportunities outside the Alexander Bay area in order to expand its mining operations.

Discussion
Mr Borman said it was nice to see that Alexkor’s financial statements had improved since last year.

Ms Borman said that four out of six of the executive management team were “acting”. Could the Alexkor comment on this and say when it expected to have this rectified?

Mr Muzariri replied that, since 2007 when the Deed of Settlement was reached and agreed on, Alexkor had been through a process of fulfilling certain conditions before the PSJV could be established. Part of this process precluded Alexkor from making any permanent appointments pursuant to the PSJV being established, as following the establishment of the joint venture, the new Board would have to make these appointments. As of 4 April 2010, a number of positions were being resolved. The Acting Mine Engineer had been permanently appointed as the Mine Engineer. A Human Resources Manager and a Security Officer had been appointed. Alexkor was still seeking a Mineral Resources Manager but had identified a candidate.

Ms Borman quoted the concern noted in the Auditor’s report “that although the company had sufficient cash resources to meet its operating cash requirements for the foreseeable future, there was significant doubt about the ability of the company to continue as a going concern in the longer term without the commencement of sustainable mining activities”. It seemed as if Alexkor would be okay until March 2012. Alexkor was very important to the Committee as it provided jobs and was an entity that was able to grow the community and its jobs. Could Alexkor give the Committee some indication as to how it would be moving forward on this matter?

Mr Muzariri replied that Alexkor did not have a revenue stream going forward as its business had been handed over to the PSJV. Alexkor anticipated that over the next two to three years it would be undertaking significant exploration. The last time that proper exploration was done at Alexander Bay was 1998 when the land claim settlement process commenced. There had been no significant investment into Alexkor since this time because of the uncertainty stemming from the land claim. In 2007, the formal Deed of Settlement was put in place and Alexkor had been directed to stop all mining activity. In order to maintain the mining equipment some revenue was required and so a subsequent agreement had been reached with the community for Alexkor to continue with minimal operations. This was also necessary because sand would otherwise clog up the mining equipment if it sat idle for too long. Alexkor had continued with its marine mining operations although harsh environmental conditions had negatively impacted on the marine mining. Even with all of these constraints, Alexkor had managed to seek new ways of operating which had helped to increase its productive capacity.

Ms Borman asked why M Mpanza, the Mine Engineer, had increased remuneration from R520 328 in 2009/10 to R862 000 in 2010/11. Similarly, Dr V Makin’s remuneration had increased from R142 537 to R209 491 and C Towell’s from R195 906 to R258 548. What was the explanation for these big increases?

Mr Muzariri replied that Mpanza had only been employed seven or eight months into 2009/10 which was why his salary for that year was reflected as being lower than in 2010/11. Dr Makin had been appointed as the Chairperson of the Remuneration Committee in the 2010/11 financial year which was why she had received an increase on her previous year’s remuneration. Further, as part of the integration process she had been appointed to the Remuneration Committee of the PSJV. Towell had been appointed to the Audit Committee in 2010/11 and so held an additional portfolio. He was also the Chairperson of the Tender Committee which had met more often than usual to deal with the increased number of tenders emanating from the upgrading of the township.

Mr Gololo commended Alexkor on its good record on fatality-free shifts. He asked if Alexkor had considered buying a stake in De Beers in their big sell-off, given that it had been granted the mandate to pursue other diamond mining opportunities outside of Alexander Bay.

Mr Anthony Kamgoma, Acting Deputy Director General: Chief Investment and Portfolio Manager, DPE, replied that Alexkor had a number of liabilities on its books that needed to be addressed. The biggest of these was the Environmental Rehabilitation of Alexander Bay for which Alexkor was responsible. Work still needed to be done on this. Alexkor needed to generate some amount of revenue in order to take care of its liabilities. The post-retirement liability had been restructured uncapped - Alexkor needed to make fixed payments over a five year period to cover this liability. The company needed to be in a position to generate revenue. Given that the PSJV had come into effect and had taken over operations at Alexander Bay, the only source of revenue for Alexkor would be the income from its 51% share of the PSJV. Profits were not expected from the PSJV for at least the next three years. This was because the PSJV had been capitalised to the amount of R200 million and was embarking on an extensive exploration programme to come up with a mine development plan for Alexander Bay area. Alexkor could not expect to receive profits from the PSJV for the next three years. Because of its liabilities, Alexkor needed to generate cash flows in the meantime. It was for this reason that Alexkor had been given a mandate to procure new mining ventures. Alexkor would be looking within South Africa and the SADC region for new mining ventures. It would also be looking at beneficiation opportunities and ways of adding value to the diamonds (that is, cutting and polishing the diamonds). This would hopefully put Alexkor on a more sustainable path.

Mr Kamgoma said that there had been an agreement between the former Department of Minerals and Energy and De Beers on the De Beers Namaqualand Mine. This currently lay with the Department of Mineral Resources and remained on the table. The DPE was still actively engaging on how this could come into the Alexkor’s “stable” but no conclusion had been reached to date. The agreement made provision for the transfer of a 20% stake in the Namaqualand Mine and the question would then be where in government this 20% stake would reside. Given the disinvestment of De Beers in many concessions around the country, Alexkor was not precluded from looking at some of these mining opportunities. The main issue with De Beers was that they had very high overheads and so their costs of mining were high. De Beers had been disposing a number of their older mines which were being taken over by “juniors” who were able to mine at a lower cost. If Alexkor was able to enter one of the older De Beers mining ventures and exploit them at a low cost then this would be worth pursuing.

Mr Gololo said that Alexkor had complained in the past about ageing equipment. How did it plan to improve the situation?

Mr Muzariri replied that part of the challenge for Alexkor was that it was not able to engage in significant capital expenditure whilst there was uncertainty stemming from the land claim. Alexkor had spent close to R6 million on equipment in the 2010/11 financial year which was the first step in preparations for the PSJV. In the current financial year a capex budget of R16 million had been approved. The establishment of the PSJV meant that, aside from the cash flows generated by the business itself, Alexkor could tap into the R200 million made available for exploration.

Mr Mokoena said it bothered him that Alexkor’s balance sheet was quite weak. Alexkor was in the business of mining diamonds which were very expensive and so Alexkor should actually be making very high profits.

Mr Muzariri replied that Alexkor had been precluded from undertaking any land mining activity since 2007 and so none of the diamonds on the land could be mined as a condition of preserving some of the value for the community. All production to date had been derived from the marine site. This, together with changing environmental patterns which had resulted in fewer “sea days” than usual, meant that production had been low but was consistent with Alexkor’s expectations.

Dr Roger Leslie Paul, Non-Executive Director, Alexkor, added that diamond mining in the Alexander Bay area had been going on for almost eighty years. In the 1960s, when Alexkor was at the peak of its production, it was producing more than one million carats of diamonds per year whereas it now produced thirty-five thousand. The higher grade diamonds had largely been mined out, and Alexkor was now mining the low-grade diamonds that were left behind. The larger amount of material that had to be moved to access the low-grade diamonds meant that costs were significantly higher than those associated with the higher grade diamonds. As a result, Alexkor had not made a profit, and accounted for why the balance sheet was so weak. The environmental rehabilitation liability of R256.6 million, accumulated over 80 years, currently sat on Alexkor’s balance sheet making it appear weak.

Mr van Dalen replied that he did not accept that Alexkor’s balance sheet was weak because it was mining low-grade diamonds as he had read that Alexkor had the best quality diamonds and that it received the most money per carat (about R1000 per carat) compared to others who received much less money per carat.

Dr Paul replied that the “grade” of a diamond was an industry term that referred to the number of carats per 100 tons of ground. A good quality diamond mine would typically have 20 carats per 100 tons in the ground, in other words, for every 100 tons of land mined 20 carats could be found. Alexkor’s current grade was seven carats per 100 tons. The quality of the stones was very good and Alexkor was paid about $700 for each carat produced. For every 100 tons of earth mined, Alexkor mined 7 carats for double the industry price which was equivalent to mining 14 carats per 100 tons which was still below average.

Mr Sonto asked why Alexkor was responsible for rehabilitating the mine if it had been precluded from mining on the land for some time.

Dr Paul said that the environmental rehabilitation liability had accumulated from the damage done to the mines in Alexander Bay over the last 80 years, before there was any legislation in place requiring environmental rehabilitation.

Mr Muzariri added that environmental rehabilitation related to new mining activity would be the responsibility of the PSJV. Alexkor would now rehabilitate the land as it mined and avoid building up an environmental liability in the future.

Mr Mokoena asked if Alexkor’s expansion programme required any adjustments to the Alexkor Act.

Mr Kamgoma replied that the DPE did not anticipate that a review of the Alexkor Act would be necessary. The new opportunities that Alexkor was pursuing were in line with the Act. The Department would however be looking at areas of the legislation that could be beefed up so as to allow Alexkor to operate more effectively.

Mr Mokoena assumed that Alexkor had shortchanged itself by paying R42 million to fund the establishment of the municipality in Alexander Bay considering that National Treasury had made R845 billion generally available for infrastructure development. Why had Alexkor not accessed the money made available for infrastructure instead of spending its own money? It was not too late to access this money - the DPE could assist Alexkor in accessing this money.

Mr Muzariri said he took note of Mr Mokoena’s suggestion and would explore these resources further. Alexkor had received an amount of R110 million from the National Treasury for current work being done in the township.

Mr Mokoena asked who was accessing diamonds along the Orange River. Who was monitoring and policing the diamonds there?

Mr Muzariri replied that, because of the process of the land claims settlement, Alexkor had missed an opportunity for applying for mining rights along the Orange River. As part of the process going forward, Alexkor was considering working with parties that did have mining rights along the Orange River, including Africa Exploration. Mr Muzariri was not entirely sure who policed the diamonds along the Orange River.

Mr Mokoena asked if Alexkor had considered taking its community representatives, as its partners, to enhance its credibility as it tried to expand into Africa and beyond. This would demonstrate that it was not just one of the “vulture” corporates but a successful joint venture model. This would show that Alexkor was geared in terms of empowering the people and would give it an advantage over its corporate competitors in expanding into Africa.

Mr Muzariri replied that Alexkor took note of this suggestion and would consider its appropriateness.

Mr Sonto asked who was involved in the process of Alexkor becoming a “new business”. How involved was the PRC in the turnaround process?

Mr Muzariri replied that this process was being internally driven by Alexkor’s directors.

Mr Kamgoma added that another state-mining company had been established, the Africa Exploration Mining and Finance Company. The DPE had engaged with the Department of Mineral Resources and the PRC in exploring synergies between Alexkor and Africa Exploration and the way in which they could work together.

Mr Sonto asked how Alexkor would rectify the matters of emphasis raised by the auditors given that it had new management.

Mr Muzariri replied that Alexkor had started the process of engaging with DPE to make sure that it had a clear understanding of its requirements and got the necessary sign-offs. Alexkor had a good handle on its reporting requirements going forward and was confident that there would not be a repeat of the matters of emphasis.

Mr Sonto asked what type of improvement Alexkor foresaw for itself and for the community now that it was working with the community.

Mr Muzariri replied that the PSJV was in a position to undertake full land mining. The first order of business was to undertake exploration, for which tenders would be advertised in December 2011 and January 2012. By June 2012 at the very latest, the PSJV would be commencing exploration. By the 2013 financial year Alexkor should be able to report positively on progress made in this area. A lot of work had been done on reviewing Alexkor’s obligations. In the last two years, the post-retirement obligations had been reversed by close to R100 million. Alexkor had done everything it could to contain these obligations. Alexkor was actively working with its partners in the community to look at how it could best manage areas that needed to be addressed immediately, namely the environmental rehabilitation. Alexkor foresaw that its balance sheet needed to be recapitalised.  

Mr Van Dalen noted that there was a decrease in the mining royalties paid in 2010/11 compared to 2009/10 despite an increase in production and profits. Why was this?

Mr Lategan replied that in the previous financial year Alexkor had paid 4% royalty taxes on diamonds produced. In the start of the new financial year a new formula was introduced and royalties paid to the South African Revenue Service were on a sliding scale. The scale started at 0.5 % and went up to 7% and the tax was calculated using a complex calculation based on profit amounts. For the 2011 financial year, due to its profits, Alexkor’s percentage was 1.3% compared to the previous year’s 4%.

Mr Van Dalen had heard that the Acting Mine Manager Mr Basson had resigned. Why his salary was reflected under “Deeds of Settlement” in the Annual Report. Was he also contracted?

Mr Muzariri replied that Mr Basson had not resigned and that Alexkor had a contract with him which ran up until March 2012. Thereafter, Alexkor had the option of retaining him on a reduced basis to provide a mentoring service to whoever was appointed as the new general manager. Should Alexkor require his services further, it would be in a position to retain his services for longer. Given that Mr Basson was a contractor with “other interests elsewhere” it would be prudent, now that the PSJV was in place, to find a permanent person for that role.

Mr van Dalen asked Alexkor to comment on contracts that had not been signed.

Mr Muzariri replied that historically, Alexkor had concentrated production in the northern area of the mine where the bigger stones were located but, as part of the process of moving towards full production going into 2010, Alexkor went through an extensive new tender process which had resulted in the process of 50 new contractors. All these contracts had been signed. Contractors had been out of order to complain that their contracts had not been signed when in fact Alexkor and the contractors were in a process of clarifying and negotiating the terms and conditions of the contracts. Alexkor had allowed current contractors to continue mining until the new contracts had been put in place.

Mr Van Dalen said he had heard that Alexkor was considering expanding into the Democratic Republic of Congo (DRC) and asked why this was so. When he thought of the DRC he thought of blood diamonds, coup attempts and people who had lost a lot of money by investing in the DRC. Why would a South African SOE want to go into the DRC then, especially considering that South African had its own diamonds?

Mr Muzariri replied that Alexkor appreciated that some areas were more difficult to go into than others. Alexkor would conduct proper due diligence into areas that it wanted to go into and would ensure make sure that prudent investment decisions were made. The company’s first port of call was to consider investment opportunities in South Africa. Due diligence would soon be done on two possible investment opportunities in the Northern Cape Province.

Mr van Dalen said he had seen Mr Willem Diergaardt on television saying that he had made enough money to retire and so would like to know what he was doing here with Alexkor now.

Mr Willem Diergaardt, Director, PSJV, replied that he did not think the answer to this question was in the Annual Report and that, at this point in time, the Member wanted to discredit him but that he was on serious business today having been reelected by the people as a representative of the community.

Mr van Dalen replied that he did not understand the reply and that Mr Diergaardt was being disrespectful to the Committee.

The Chairperson said that the Committee could ask the delegation such questions and that perhaps members of the Alexkor delegation could answer the question as they had brought Mr Diergaardt along with them.

Mr Kamgoma replied that Mr Diergaardt had been reelected as a representative of the Richtersveld Community in the PSJV and so had been brought along to respond directly to any issues that might have arisen in relation to the community as Alexkor’s partner.

Mr van Dalen had heard reports about the mine having been closed due to health risks and hazards and that the mine doctor was too far away. He had also heard reports about equipment that could not be used because it was falling apart and that it did not have signed contracts in place. Could Alexkor provide some answers on these issues?

Dr Paul replied that the report about the mine being closed was due to the Department of Mineral Resources issuing a Section 54 certificate on the non-compliance of some of Alexkor’s earth moving equipment. The paperwork around the Section 54 inquiry was resolved within one day and the earthmoving equipment was returned back into operation. It was therefore a very short closure of less than 24 hours. Alexkor had a contract with an independent company who provided a medical doctor one day of the week as part of the medical services provided by Alexkor. There was a resident private physician on sight who was also available to help with any health and safety issues.

Mr Muzariri added that management was reviewing how it could get an additional doctor on site to ensure full coverage of occupational and safety issues. Alexkor had envisaged that the Northern Cape Province would step in and provide some of the medical services but this had not happened. There was continuing engagement with the Northern Cape provincial government about this.

The Chairperson said that the emphasis of matter on the audit report were quite material and significant. The report said that Alexkor's “planned targets had not been specific, measurable, time-bound and well-defined” yet this was a basic requirement from National Treasury. Changes to planned objectives, indicators and targets had not been approved. Furthermore, at the time that the Annual Report was submitted, directors had not concluded the Shareholder’s agreement. What progress had Alexkor made to date on the independent audit opinion?

The Chairperson asked if there were any issues that were outstanding from the 2010/11 Annual Report. Was the upgrading of the residential area in Alexander Bay outstanding?

Mr Muzariri replied that there was one last project to be done for the township establishment. This was the water and sewerage works project which would be commencing shortly. The contractors would be required to complete this project before the 30 June 2012 at the latest.

The Chairperson said the Chairman of Alexkor was quoted in the media saying that it needed between R200 and R250 million to pursue its mandate to seek out new diamond mining opportunities. From where would Alexkor get this money?

Mr Kamgoma replied that the DPE was exploring various options for sources of funding for new ventures so as to not be solely reliant on the Fiscus. DPE was also considering ways of supporting Alexkor’s solvency status. The company needed to remain solvent in order to meet its liabilities and to prevent the Deed of Settlement with Richtersveld Community from unraveling.

The Chairperson asked what Alexkor’s biggest challenge flowing from its Annual Report was.

Mr Muzariri replied that the environmental rehabilitation obligation and the post-retirement contractual obligation to Alexkor’s former employees as well as a few current employees were probably the greatest challenges facing Alexkor. Alexkor expected to receive compensation for the remaining assets that still had to be transferred to the community and other structures. Once these transfers had taken place, Alexkor would probably face a solvency challenge unless it received recapitalisation. Alexkor was discussing this with the DPE which was in turn engaging with National Treasury to figure out the best solution. Alexkor had prepared an application for the Medium-Term Expenditure Framework (MTEF) which would be submitted at the end of November 2011 and which it believed would be considered favourably.

Mr van Dalen said that the PSJV was in place and seemed to be taking over Alexkor. He had heard that the management and staff of Alexkor would have to look at other ways of money to get their salaries and other running costs paid because the PSJV was not going to generate any profits. Taking this into account, what was the use of Alexkor staying in Alexander Bay? Why could the government not just have a 51% share in the PSJV which could be looked after by the DPE? It seemed as if there were all these unnecessary bureaucrats in the middle.

The Chairperson replied that if the Alexkor delegation could not answer Mr van Dalen’s question then he would because Alexkor had explained to the Committee why it was doing what it was for the last hour.

Mr Gololo asked if there had been any cases of diamond theft at Alexander Bay.

The Chairperson asked for an update on the cases of diamond theft that Alexkor had reported on in its previous Annual Report. What convictions, sentences and investigations, if any, had there been? He asked for Alexkor to provide a written reply to his question and Mr Gololo’s question within the next two weeks.

Alexkor agreed to do this.

The Chairperson said it was clear to the Committee that Alexkor’s performance had improved. The Committee wished Alexkor well in dealing with its challenges.

The meeting was adjourned.