Department of Public Enterprises Strategic Plan 2012 to 2016

NCOP Public Enterprises and Communication

06 March 2012
Chairperson: Ms M Themba (ANC, Mpumalanga)
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Meeting Summary

Meeting report

Department of Public Enterprises Strategic Plan 2012-2016: presentation
Mr Tshediso Matona, Director General, Department of Public Enterprises, noted that the Strategic Plans of the Department of Public Enterprises (DPE or the Department) would be tabled in Parliament on that day, and noted that this meeting to engage on it was taking place earlier in the year than usual. He notified Members that slide 2 of the presentation (see attached document) highlighted the Department’s achievements, budget and expenditure. However, he would focus first on the risks and challenges.

Mr Matona mentioned that the Department drew quarterly reports, which were interrogated and analysed, and feedback was given pertaining to the State Owned Companies (SOCs) under the DPE’s control. The SOCs also produced their annual reports. He assured the Committee that there would not be unintended developments or unforeseen events, as the DPE conducted risk assessments, and had been doing so since the previous year. This had helped the DPE to identify the major strategic risks, which were distinguishable from normal operational risks.

Mr Matona mentioned that the first major strategic risk was the possibility that the infrastructure development programme might not be able to deliver on the desired targets to address capacity constraints. For instance, in the case of Eskom, there was a question whether the Eskom current programme satisfied the market demand. In respect of Transnet, there was still significant unsatisfied demand. In this context, it was necessary to consider mitigating responses.

The second major strategic risk spoke to the role that the DPE played in assisting SOCs to access finance. The scale of the planned build programme was massive. There were, therefore, concerns whether the SOCs could access capital at reasonable rates, and what the exposure risk would be to the State. This was very important. The DPE’s role was to facilitate the SOCs and ensure that all possible options were explored. The financing was mostly in the domestic markets but on occasion it could be accessed internationally.

The third top strategic risk related to the competency of the SOC boards and senior management. This would have an impact upon the performance of the SOCs. DPE was developing methods to continuously assess boards, to determine if all the critical skills were in place, and, in cases where they might be lacking, would then find the skills and apply them to the SOCs. This was done on an annual basis. The shareholders had discretion to vet all members of the Board to ensure that the right people were appointed to oversee the affairs of the SOCs.

The fourth top strategic risk related to compliance with the relevant laws and regulations. The competition laws were a challenge, and other examples related to compliance with employment equity, procurement, and preferential procurement laws and policies, as well as compliance with the Public Finance Management Act (PFMA) and broad-based black economic empowerment (BBBEE).  Occasionally, some SOCs found themselves in the situation where their operations were compromised by conflict of laws. For instance, the Marine Coastal Management Act had significant implications for Transnet. The Department would engage with SOCs to give feedback and determine whether they complied. Where necessary, the DPE would also attend to enactment of the necessary legislation.

The fifth top strategic risk was efficiency and productivity of the SOCs. He stressed that they were all required to run profitable business enterprises. Their profitability depended on management and a whole range of indicators with regard to operations. Only if the SOCs performed effectively would they be able to deliver on their commitments.

The sixth risk lay around the understanding of stakeholder expectations in relation to the SOCs, the environment, and government’s strategic objectives. Often there was misalignment of expectations. The Department worked with a number of key stakeholders, including the various provinces and provincial government. Companies could report on their plans but it was often the provinces that attended to delivery, and this was a major area to which attention must be paid.

The seventh top strategic risk was the leadership in the Department. DPE had suffered from some instability, having had three Directors-General and four Ministers over a four year period, as well as a period where no permanent Director-General was in place. There had been significant loss of skills, which the DPE was only now beginning to recover. The DPE required high-calibre skills and these were difficult to find. DPE was reviewing its internal communications, had a newsletter giving coverage to some of these matters, and was now encouraging all the leaders to ensure that they played a strong and active leadership role, and maintain effective and sound relations with SOCs.

The eighth top strategic risk identified by Mr Matona was the Department’s ability to formulate a coherent strategic intent on each SOC. A good strategic intent was one that was aligned with a particular department, but sometimes that alignment was difficult to achieve. The DPE would ensure that the strategic intent was fully set out at each Annual General Meeting (AGM), and that it was also captured in the Shareholder Plan.

The ninth top strategic risk spoke to the economic environment and its effect on SOC revenues, debt and costs. This was obviously a factor that could not be controlled by DPE, as it involved exchange rates, inflation and recession. However, the DPE had asked all SOCs to consider and relate the likely impact of these factors and circumstances on their business, and the DPE would then monitor and try to ensure that early warning signals were sounded, and determine how these might affect each of the SOCs.

The tenth top strategic risk was the capacity of the staff at the DPE, and the quality of oversight. A SOC might submit a report, but the issue was whether DPE could then pick up matters that required attention. Although the DPE had a fair number of skilled people, this remained a risk. In addition, National Treasury had allocated a certain budget and had indicated the importance of keeping the state wage bill under control. Insufficient allocations were made to enable significant wage increases. The DPE faced certain challenges around recruitment, and thus had to revise its plans. The DPE would be severely tested by the scaling up of infrastructure in the SOCs. DPE would like to make recommendations around this.

Mr Matona stated that the eleventh top strategic risk was to do with monitoring of the type of fiscal risks and what type of access to funding was preferable.

Mr Matona noted that some of the risks and challenges he had outlined were overlapping. The DPE was conscious of the fact that it did not have a clear legal foundation for its mandate to oversee the SOCs. In the past, the DPE had tried to formulate legislation and it was now looking forward to the conclusion of the Presidential Review on the State Owned Companies, which hopefully would present opportunities as to how the matter could be revisited.

Notwithstanding the lack of legal certainty, the DPE did have processes and tools to look at the oversight of shareholders (OSED body). The outcomes could sometimes be at variance with the outcomes of the tools and processes. In recent years, some of the SOCs had disputes with their Boards or Chief Executive Officers, and some of the procurement practices were not in alignment with legislation, or not transparent at all. Some accounting practices also posed challenges. The issue of remuneration was highly controversial, and the DPE was working on this and trying to prevent disputes.

Mr Matona urged that the Committee set out clearly what it expected from the DPE by way of reporting. Parliament, in terms of the Money Bills Amendment Procedure and Related Matters Act, could engage with budgetary matters, and the DPE was committed to this process. The DPE was hoping that Parliament might be able to assist with the challenges around lack of alignment. The DPE would be prepared to engage with the Committee on any matter.

Discussion
Mr D Feldman (DA, Gauteng) mentioned that in February 2012 the Minister of Finance had announced a 700 million cash injection for Denel to build an aero structure wing. However, prior to that, in 2007, the then-Minister of Public Enterprises had allocated R8 million to the National Defence Force so that Denel could build a vehicle, and a contract, supposedly lasting for ten years, was issued by Armscor to Denel. He asked what had happened to this project, and why Denel was apparently in such straits, and what DPE was doing about the matter. He noted that he had written to the Minister of Defence and this request to get information was still awaiting approval from the Military Council.

Mr Matona noted that the sustainability of Denel depended both on the DPE and Department of Defence. There had, however, not been full cooperation in the past, but the DPE was still attempting to establish this. The Department of Defence was still trying to determine what was required from Denel, what the strategic and non-strategic assets were, and how that entity would be repositioned.

Mr W Bangana, Acting Deputy Director General: Denel and Alexkor, DPE, said that this was still an ongoing matter. The Hofmeister Project was divided into two phases. Denel had met all milestones in the first phase. The second phase would start when the first phase had been executed to certain specifications. The Department of Defence, however, was looking at reviewing the requirements. Initially, five battalions were required. The Department of Defence was now looking at reviewing that number, because of budgetary constraints. The Estimates of National Expenditure (ENE) and Department of Defence Strategic Plan for 2011/12 contained information on improving the capability levels of the South African National Defence Force (SANDF) and this included the Hofmeister and logistic transport.

Ms L Mabija (ANC, Limpopo) said that the DPE had previously raised concerns about the budget and delivery on a building programme, with major investments into Eskom and Transnet, and she asked what the exact concerns were.

Mr M Jacobs (ANC, Free State) also raised concerns.

Mr Matona said that the R300 billion Eskom project and R110 billion Transnet project were the first capacity programmes since 1994. Prior to these investments being made, there had been no significant investment or systematic approach to the mandate of delivering efficient and affordable infrastructure. The DPE now had a policy and was re-evaluating the roles of these two entities. He noted that the speeches made by the President and Minister of Finance, the National Development Plan and the New Growth Path reports all indicated that business must continue. The DPE would face many challenges with the delivery of the build programme, and the existing programmes of both Eskom and Transnet were being monitored.

Mr Chris Forlee, Deputy Director General: Energy and Broadband, DPE, explained that the ability to project manage had been one of the issues of concern. The DPE had started with an independent assessment on how best to monitor the build. The idea was to put a framework together to determine what the items were that the Department could monitor, to ensure that there was proper management.

Ms Raisibe Lepule, Deputy Director General: Transport, DPE said that she would also submit a written response on some details, but noted that a large part, around 60%, of the R300 billion allocation to Transnet related to the fact that this was the first time it was addressing expansion. There were many branch lines included in the bigger network, but some had been closed or, even if not closed already, were inactive. Some lines had been lifted. She would check up on the details and send through a full report.

Ms Mabija asked if the DPE newsletter covered all provinces.

Mr M Jacobs (ANC, Free State) said that SOCs should be profitable companies. He said that he had always been optimistic about South African Airways (SAA), but noted, with concern, that it continued to incur losses and needed recapitalisation. Mr Jacobs considered this to be a “bailout”.

Mr Matona said that if there were any bailouts given, the DPE would inform the Committee. There was no “bailout” being given to SAA. He pointed out that SAA wanted to grow, pursue other opportunities and expand its network,  particularly in the African region, and to do so it required recapitalisation. The same applied to Alexkor, where other opportunities had been identified.

Mr Jacobs expressed his worry about the lack of stability in the DPE in the past. He mentioned that there were concerns about the way in which money had been used, and the huge salaries that were awarded to staff at the SOCs. He enquired as to what exactly the strategic objectives of the SOCs were, noting that the SOCs were supposed to be profitable, create jobs and also assist government, but he was not sure that this would be achieved under the current set-up. He urged DPE to give strategic direction to all of these companies. He believed this would have to include early-warning systems that served to alert DPE to any issues that affected their profitability and viability as going concerns.

Mr Matona agreed with concerns about the running of the SOCs in the past. The DPE was the only department that monitored the SOCs, and it faced similar challenges to those of other departments. SOCs had, in the past, been left much to their own devices, and there had not been a clear framework to guide them strategically, meaning that in periods of instability they tended to take ad hoc decisions on whatever seemed fit at the time.

Mr Jacobs commented that if the skills that DPE needed were not to be found in the country, then DPE must seek them outside. He also urged consideration to the granting of bursaries. However, he felt that the only solution to addressing many of the problems was to ensure that there was stability both in the Ministry and Department.

Mr O De Beer (DA, Western Cape) wanted to know when Alexander Bay would be transferred to the Richtersveld community. He also wanted to if Alexander Bay had enough diamond resources for that community to make a profit, pointing out that the Alexkor/Richtersveld agreement was intended to allow the community to have more dividends. He also raised concerns as to whether there were sufficient skills to manage the Richtersveld project.

Mr Matona noted that Alexkor had been affected by land distribution claims, the same as SAFCOL.

Ms Matsietsi Mokholo, Deputy Director General: Legal & Governance, DPE, said she would have to report back in writing on the township development at Alexkor. The company was looking for new mining ventures outside of Alexander Bay. She noted that skills training was part of the Department’s ongoing review process and it was done on an annual basis.

Mr H Groenewald (DA, North West) felt that the Select Committee was not fully informed about what was happening in the DPE. He wished to get more information on reports that a solar energy farm had been set up, close to the Gariep dam. He commented that the Medupi power plant construction was not seeming to get off the ground. People had not been kept fully informed on that. He also enquired what was happening in relation to the proposed nuclear project in the Eastern Cape. He mentioned that in the previous week there were reports that a gas transformer burnt out, because diesel - at a very high cost - was used instead of gas, and he asked for details on what exactly had occurred, what effect the damage to the reactor would have on the energy demand in South Africa.

Mr Chris Forlee, Deputy Director General: Energy & Broadband, DPE, said that he knew nothing about the Gariep Dam Project. This was not an Eskom project but it might possibly be part of the Department of Energy’s renewable energy programme.

He further reported that the delivery dates for the Medupi power station were between June and September 2013. The project had been delayed by six months, due to concerns and labour issues around the construction of the boilers, but most of this had been resolved, and there were now processes in place to ensure that the same problems did not recur in other phases.

The DPE was waiting for the formal framework to be set up on the nuclear project, but this would be led by the Department of Energy for the nuclear project. DPE was, however, currently proceeding the three environmental impact assessment projects that had initially been done by Eskom.

Mr Forlee said that he assumed that the transformer to which Mr Groenewald was referring was a unit that had broken down, and which was due to be returned after repair in July 2012. Because of this, Eskom had to use the gas plant in Cape Town, and this was quite expensive, as it ran on diesel. Eskom was trying to minimise the costs, and they had already dropped.

Mr Groenewald pointed out that in relation to job creation, the DPE had previously reported that a track-and-report system was being established, to track job creation. He wanted to know when this would be completed and implemented, and if such a system could assist in the validation of job creation projections.

Mr V Ndlovu (IFP) noted the way in which the DPE had evolved and said that its focus appeared to be more on oversight and stakeholder management. He asked the DPE to link the three points on SOC growth, employee oversight, and financial turnover, and then to reflect these points in the DPE vision (page 9 of the attached presentation) and the organisational structure model (page 37 of the presentation).

Mr Ndlovu wondered if the name of the DPE was still relevant.

Mr Matona responded that the DPE had not had any formal engagement on this point. However, thought would be given to it. There would need to be overall consideration on how the Presidential Review on State Owned Companies proposed that any arrangements be changed.

Mr Ndlovu noted that the President, in the State of the Nation Address, and DPE both alluded to “rail capacity”. He wanted there to be more investigation of the problems and gaps that needed to be addressed to ensure a shift from road to rail. He noted, by way of example, that an area such as Kokstad was virtually cut off completely from rail linkages, and asked what would be done.

The Chairperson asked for clarity around the participation and engagement of parliamentarians in the learning programme, noting that she was only aware of the DPE’s Autumn School, and echoed concerns from other Members that the Select Committee was not kept fully enough informed. She urged that any information must be submitted in good time so that the Committee could participate. She would welcome engagement also with other Members, as there were many matters that affected other sectors.

The meeting was adjourned


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