Minister on the Department of Public Enterprises Annual Report 2011/12

Meeting report

Minister on the Department of Public Enterprises Annual Report 2011/12
Mr Malusi Gigaba, Minister of Public Enterprises, said that the Department of Public Enterprises (DPE) had achieved an eighth successive clean audit report. This spoke to good financial management despite challenging circumstances. Resources had been limited. The mandate was expanding even though resources were dwindling. More engagement was needed rather than a pure oversight role. The DPE was having to take a management role. It was necessary to maintain strong relations with the sector departments on the question of policy and resulting challenges. This was one reason why it was necessary to look at the legislation and other draft policies that impacted on the DPE's work. DPE had gone further, to the extent of looking at other stakeholder relations. There had been an agreement in the automotive and oil and gas sectors to align state owned companies (SOCs) to focus on customer needs. In the future, the DPE would be able to report to the Committee on this.

Min Gigaba said that the DPE had been working on a new vision. This would assist in the plan to create jobs and implement industrialisation. SOCs had to plan beyond what their balance sheets could afford, and to look for innovative ways to fund projects. Skills had to be extended over a number of programmes. There was also a focus on the task of ensuring greater co-ordination with other government departments. The President had established the Presidential Infrastructure Co-Ordinating Committee.

Min Gigaba said that budgets were insufficient to recruit sufficient skilled persons. The clean audit was not just a result of good management, but also due to changing responsibilities and mandates and the realisation of the objectives. There were still various areas of serious weakness. The economic meltdown had resulted in serious impacts on SOCs. Raising capital for projects on the international market was a challenge as expenses had increased.

Min Gigaba said that great attention had been paid to working with the SOCs. There had been regular meetings with Chairpersons and Chief Executive Officers (CEOs). There were vast oversight mechanisms. Quarterly reports were studied and responses made. This was essential. Investor briefs were sent to SOCs in the past but companies had been unresponsive. A robust oversight programme had been implemented as a result. Continuous improvement was needed to monitor their performance. The environment was difficult, but DPE was continuing to deliver on its mandate.

Mr Tshediso Matona, DPE Director-General, said that the Annual Report had been tabled in Parliament several weeks previously. He assumed that Members had had a chance to study it. The economy was in systematic decline. The picture was concerning. All sectors were challenged in what was a mixed economy. The private sector might perceive risks in a particular way, resulting in a slowing of investment. In 2008, when there had been a similar experience, government had responded with a policy framework. The state was challenged to raise levels of investment by various vehicles, including the SOCs.

Mr Matona said that companies like Eskom and Transnet had major roles to play. There was an important dynamic. Their investment was crucial. There were a number of strategic areas. The first was maintaining investor confidence. The second area was the endeavour to reposition some of the SOCs, especially those with challenges to their balance sheets. Options were discussed with Treasury, especially critical companies like Eskom. DPE had also begun to encourage increased investment opportunities. Another important area was looking to enhance the government approach in certain areas.

Mr Matona said that a number of enablers had been identified. Appropriate resourcing, a coherent and regulatory environment and effective strategic coordination were the elements of this approach.

Mr Matona highlighted some achievements. Shareholder compacts had been signed. Quarterly reports had been monitored. There were a few instances where these had not happened, particularly that with Infraco due to the change of the Board, but the compliance rate was high. The third quarter review of South African Express Airways (SAX) had not been completed. All information was captured in a single report, which gave the DPE a good view of what was happening in the SOCs.

Mr Matona looked at each of the DPE programmes and made some comments:
Programme 1 Administration, a target had been set of fully populating the Isibuko Dashboard. This had been significantly enhanced during the 2011/12 financial year (FY). A joint venture had been established to transfer control of the operations of Alexkor to the Richtersveld community.

Programme 2 Energy and Broadband Operations, Eskom had managed to keep the lights burning. The construction of new power stations would improve the supply of electricity. In terms of broadband, the activities of Infraco had been monitored. Eskom had added generation capacity and had increased its transmission network during the year.

Programme 3 Legal and Governance, the targeted output was monitoring the adherence of SOCs to regulations. Progress was being made on winding up Aventura.

Programme 4 Manufacturing Enterprises, DPE had looked at the positioning of Denel in the aerospace industry. It could not depend on a single source of income. He was pleased with the progress that was being made. Huge revenues had been expected from both internal requirements and export business. There had been a difficult process in reconfiguring SAFCOL. An intensive programme of diversification had been launched.

Programme 5 Transport, the efficiency of Transnet continued to be promoted. New locomotives were being acquired. The airlines were being encouraged continually to become more profitable. Several new routes into Africa had been opened. Sustainability lay in finding a market share on the continent.

Programme 6 Joint Project Facility, norms and standards were being developed. Companies were being encouraged to be bolder in implementing transformation programmes.

Mr Matona said that there had been a shift in the organisational structure of the DPE. The number of programmes had been reduced. There was an important emphasis on human resources (HR). There were a number of vacancies. The staff structure at the end of the FY was 189. Of these posts, 21 were vacant and this made an impact. By September 2012 the establishment had grown to 202, of which 32 posts were vacant. Most employment equity targets had been achieved. He presented an update on the allocation of resources after the end of the 2011/12 FY.

Mr Matona said that there had been a significant reduction in the budget. The final appropriation for 2011/12 was R353 million (down from R555 million the previous year), of which R346 million had been spent. Fewer transfer payments were being made. Overall expenditure was at 98% of the budget, which was high and within the norm of a 2% variance. Underspending was mainly due to the vacancies. Expert services were needed. The shortage of capacity had resulted in some projects not being completed. DPE sometimes had to go to the market in order to fill posts. Strategic partnerships had been set up with some universities. That being said, there was no significant impact on service delivery. DPE was running a tight ship. DPE had a considerable amount of work to do, having under its control some of the biggest players in the economy. He wanted to see DPE hold onto its skilled people.

Mr Matona outlined some areas where targets had not been achieved. In terms of energy, the most recent round of tariff increases had been delayed. The work around special agreements with major energy users was still facing challenges in the negotiation phase. The shareholder compact in the broadband sector had been delayed due to the appointment of a new Board. Financial aspects had been challenging due to a delay in the market position study. The government shareholder management model had had to be held in abeyance. Current DPE remuneration guidelines had been delayed. The definition of Denel's strategic role had not been completed. The Defence Review had not been completed. An inter-governmental task team was still completing a study on the role of SAFCOL. Partnerships were needed with the communities in which SAFCOL operated. In terms of transport, the roll-out of concessions on Transnet branch lines had been delayed. A new legislative framework was needed.

Mr Matona said that there were some overall challenges. The first was the lack of a clear policy framework which had caused some targets not to be achieved. The economic environment was an all-round major challenge. Businesses such as Transnet were badly affected by the economic slowdown. Financial resources were limited.

Mr Matona said that one of the priorities was continual improvement of the shareholder oversight model. Company investment plans needed to be better aligned to government plans. Both Eskom and Transnet needed a sufficient budget, and oversight was an important area. Skills development had matured significantly but remained an important focus area. Financially stressed accounts needed to be turned around.

Mr Matona said that DPE had benefited from a positive relationship with the Committee. Members had not hesitated to raise questions where there were uncertainties. He thanked the Minister, who was a hard task master and expected only excellence. He was pleased with the positive report which he could present.

Discussion
The Chairperson thanked the DPE for a good report. He thanked the Minister for his opening remarks. It was clear that there had been remarkable progress. This was due to the leadership of the Minister and the Mr Matona, together with the executives. He recognised that there were challenges, but was sure that these could be resolved. The Committee would always support the good work being done by DPE. It was unfortunate that Members had concerns over the funding of DPE. It was important to wish DPE well in the forthcoming FY, and he looked forward to more improvement. A good standard had been set, and with the team in place DPE could only move forward.

Ms N Michael (DA) had been under the impression that the Minister had an open door policy. She was concerned that she had sent various letters to his office requesting a meeting with him, but one of his staff kept replying that the Minister would not meet with a DA delegation. She congratulated the Minister for the action on SAX. It was bold but had been needed, and the country was in a better position as a result. The R5 billion given to South African Airways (SAA) had raised many concerns, especially with the losses being incurred by the airline. Many of the Board members had resigned, and there seemed to be a breakdown in communication between the Minister and the management of SAA. In 2006, the CEO had sued SAA. She asked if the Minister was concerned by this action. A policy document had been drafted under the then Minister Mac Maharaj, aimed at encouraging competitive behaviour. She asked if the continual bail-outs to SAA would not kill off competition. The Deputy President, on allegations that the Medupi project was connected to ANC financial partners, had said that there should not be political involvement. Costs were spiralling at Medupi and on other projects. She asked if the contractual clauses for cost overruns would be invoked. The BHP Billiton contract had caused Eskom a R5 million loss, and she asked if this would be treated in the same light as the SAA bail-out.

Mr M Nhanha (COPE) asked where the Presidential Review Committee (PRC) was located in government. He wanted a view on expertise. While it was ideal to bring in international experts, it was important to cultivate expertise at home. The Minister could be regarded as one such local expert as he held a Doctorate in Transport Economics. There should be a link-up with the universities which could provide this expertise. He had been impressed with the announcement on the deal for new locomotives for Transnet. Although a Chinese company had won the contract, there would be significant local content. He asked how long the project would take.

Dr G Koornhof (ANC) was impressed by the eight consecutive clean audits. This made the DPE one of the best performing across government. They could be proud of this achievement. There had been a special pricing agreement, but this had been delayed. He asked if there was any discussion with the National Energy Regulator of South Africa (NERSA). It was a burning issue and an answer was needed. The second issue was the multiple private operators on railway branch lines. No progress had been reported. This had been the same situation the previous year. A lot of private capital was not being invested. He asked if this was a case of a lack of trust. The same situation seemed to apply regarding the road network. SAA had gone from a R649 profit to a current loss of over R1 billion. Their Annual Report had not yet been tendered, and was only expected the following month. When Members had visited DPE, they had observed various oversight systems. He asked how it was possible that the Isibuko dashboard was in place, and yet did not seem to be delivering the expected results. He asked where the problems were. There had been a R21.5 million bill for consultants, a large portion of which had gone to SAA. He asked if this had been money well spent.

Mr E Marais (DA) congratulated the DPE on the signing of the shareholder compact. A major concern of his party was the application by Eskom for a 16% increase. Municipalities used electricity tariffs to fund other services. There was a wide range of mark-ups between different municipalities. Revenue from electricity contributed more to municipal coffers than rates. It was of utmost importance that this situation be addressed. Municipal tariffs were becoming unaffordable both to private consumers and small business. Some small companies were closing down as a result. He asked if the Medupi and Kusile projects were on track.

Ms G Borman (ANC) also found it a pleasure to work with DPE. This had been the case for some time. However, it did seem that the same questions were being asked. She shared the concerns over the spending on consultants, and asked what this was achieving. Of critical importance was the HR aspect. DPE was not a policy making department. From what she heard, remuneration was a challenge. The right people could not be recruited. She asked what could be done to engage with public service policies. The right people needed to be in the right places. She asked if there was any discussion as to what was planned after the Medupi and Kusile projects. There was some uncertainty regarding the Presidential Review Committee on State Owned Enterprises (PRC) and SOCs, especially SAFCOL. People could not get excited if their future was in doubt. She asked if any private sector investment was being investigated, and to what extent the Minister was involved.

Ms C Gololo (ANC) asked about new or existing infrastructure projects. In many cases, consultants were former CEOs or executive staff of SOCs or government departments who found a way to return to the public service though the back door.

Ms C September (ANC) said that the President had assembled a number of people to talk about the economy. Aspects covered included the salaries of CEOs. She asked if there had been any pronouncement. The future of SAFCOL was still in question. The departments should be encouraged to formulate targets on the analysis of macro economic policies as a matter of urgency. All entities were borrowing money and were being given guarantees. The guarantees given to SAA should not be seen as a bail-out. The state had an obligation to protect its own interests.

Ms September said that more attention was needed on the internal economy. She asked what further cushions and growth plans were in place, and if DPE could create a cohesive programme. The devaluation of the Rand was making an impact. One could not talk about SAA without talking about economic failings, nor about Transnet without considering major economic manoeuvres.

Ms September asked if there were any soft plans to encourage investment, such as the sale of bonds. She congratulated the Minister on stabilising the governance of entities. Turnaround plans had been put in place and Boards had been changed. Immediate action had been taken to stabilise SAA. The onus was on the DPE to regulate between Eskom and NERSA. No one could afford the series of 16% increases requested by Eskom. These increase would create further instability should they be granted.

Min Gigaba told DA Members that his door was open to them. He would investigate why they had been given the reply reported. He was keen to hear contrasting viewpoints and had no reason to run away from such discussion.

Min Gigaba said that the R5 billion guarantee to SAA was meant to address future challenges and not current debt. It had been discussed with Treasury since May, and had been discussed with SAA since 2011. The current challenges had brought the issue to light. The question was whether SAA was properly capitalised. Intervention had been on an ad hoc basis. With many other airlines their shareholders had been called on to make similar interventions. The guarantee would be for two years. The DPE was the shareholder of SAA. It was not prudent to give SAA a blank cheque. A long term vision was needed. The plan was to make Africa the prime market for SAA. The African routes should be more profitable. An overhaul of the route network was needed. However, DPE could not go back to Treasury for such guarantees every two years.

Min Gigaba continued that a vision and long term strategy was needed for SAA. A procurement plan was needed to replace ageing aircraft. Competitors operated newer and more fuel efficient aeroplanes. A task team had been established to address development issues. There was no alignment between SAA and SAX. Both airlines needed a new fleet. There were also other issues affecting the airline industry, such as the transit visa issue.

Min Gigaba said that in his opinion, the question of state support for an airline should rather be a question of the logic of state involvement in the economy. The government's policy was to engage in the economy, and such decisions had to be made from time to time. Other airlines could also approach their shareholders for assistance.

Min Gigaba said that he understood that there had been a series of meetings between the Board of SAA and the Ministry, and between SAA management and the DG. He had made an extensive statement on SAA and had been flabbergasted to hear in the press that there had been a “breakdown in relations”. Three days before several Board members had resigned, he had held a long meeting with the SAA board. A wide range of issues had been discussed and there was agreement on how to handle them. There had been negotiations with Treasury. He rejected the claim that there had been a breakdown between the parties. He stood behind DPE officials. They had done all they could to support SAA. The DPE did not have the power to issue state guarantees. This fell under the authority of the Government Guarantee Committee (GGC) and Treasury. In the view of the DPE, relations with SAA were both cordial and robust. Difficult questions had to be asked, and DPE should not be dissuaded from doing so. It was not just a question of blind support for SAA.

Min Gigaba said that the Board had done the best they could under difficult conditions. The fuel price had increased sharply since the economic downturn of 2008. The current Board had taken office in 2009 and could not have anticipated the length of the downturn. Huge companies had gone bankrupt in this time. Financial analysts were saying that the recession would be protracted. There was nothing that SAA could have done better than they had. One issue was the high airport charges levied by the Airports Company of South Africa (ACSA). The Board members had resigned two weeks before the SAA Annual General Meeting (AGM), but the Board was due to be rotated. Their resignation had not had any impact. The new Board members had already been identified. The resignation of the CEO had not led to any dramatic effect. Only three of fourteen senior staff had resigned.

Min Gigaba said that there had been an immediate meeting with the new Board, which had written to him. He did not want to see corporate governance problems with the role of the executive chairperson, who would run the airline until a new CEO was appointed. Suggestions had been made to deal with this situation. SAA staff had been addressed to allay their fears. If a person resigned, he or she must inform the person who had made the appointment first, not his or her colleagues. Using himself as an example, he had been appointed by the President and would therefore communicate with the President should he choose to resign, and it would be up to the President to announce this decision. The resignations had been made public before he had even known about them, and he had acted as soon as he became aware of the situation.

Min Gigaba continued that the new CEO for SAA would be appointed within three months. Other executives had already been replaced and there were no internal problems. He would meet with the task team the following week in order to expedite the formulation of a strategy. Private consultants had been appointed to give an overview of the operations of SAA. The question had been asked if the challenges faced by the airline were only financial. The consultants had reported in September and a long term strategy was being developed. It was possible to turn the airline around. Other African airlines were managing to post profits consistently and were obviously doing something right. SAA was a strong band, and government would work around the clock to get them into a better position.

Ms Borman interjected, asking if SAA would restore their route between Cape Town and Durban.

Min Gigaba replied that he enjoyed flying on Mango on this route. He was able to use the wireless internet access system on their aircraft and could get a lot of work done while in the air. Low cost carriers were taking on more domestic routes, and no route was off limits. Mango was an SAA subsidiary, and was a very good airline.

Min Gigaba turned to the subject of Eskom. Both the Medupi and Kusile projects were on schedule. The former would be on line by the final quarter of 2013. Delays had been addressed. He had convened a meeting with the Japanese ambassador to discuss issues involving the Hitachi corporation. A series of interventions had been implemented. Eskom had been briefed on utilities, and many contractors faced similar challenges. The CEO of Hitachi was working with the DPE to address project concurrence on an ongoing basis. In the case of the Imbula project, the cost had not changed after the contract had been signed. The R9 billion projection was based on geological reports. The project was on schedule. DPE would monitor contracts, and it was not just a question of penalties. The Department was learning. The sheer volume of capital involved required urgent skills.

Min Gigaba said that the Development Bank of Southern Africa (DBSA) and other role players were working with DPE. DBSA had established and office to manage SOC engagement and implement projects.

Min Gigaba said that Eskom had requested a ruling on the BHP Billiton issue. DPE was awaiting a decision from NERSA. There were concerns over the contract. He would prefer to see direct agreements between the parties.

Min Gigaba said that the PRC had concluded its business and would be reporting to Cabinet. Good proposals had been made. There should be input from Minister Collins Chabane. He agreed that the country needed to cultivate its home-grown expertise. The SOCs were doing their best in this regard. The ideal was that leadership would develop in the company. He was hopeful that this situation would be reached one day.

Min Gigaba said that the China South Rail (CSR) company would be delivering 95 locomotives for Transnet. Costs were still confidential, but would be in the vicinity of R3 billion. The bidding process for sub-contracts was still open. CSR was expediting a turnaround plan and would start delivering in 2013. The first ten locomotives would be fully built in China, but the rest would be assembled in South Africa. The idea was that that the fleet would be procured locally. The local assembly programme would see South Africa establish a hub.

In terms of weapon manufacture, the Minister said that between 90 and 95% of industry output was for the internal market and the rest was for export, mainly into the local region. Skills were being developed by current projects. South Africa could be a global player in the market.

Min Gigaba said that Eskom's request for a 25% tariff increase had been reduced by 10% on three conditions. The first was that the coal price was to drop by 10%, the second was that management conditions must improve. Both industry and domestic consumers were called on to reduce energy usage by 10%. The economy could not afford further large increases. South Africa's credit rating was dropping. Resources were needed to finance the building project. Many components of the Integrated Resource Plan (IRP) 2 had not been considered. Renewable energy had to be included. Public hearings would be held, and political parties were encouraged to make submissions. He could not say if the Eskom application had been audited. Changes were needed to the Inclining Basic Tariff (IBT) model, as the poor were losing out. The way of measuring consumption did not take economic conditions into account, such as the case where there were multiple dwellings on the same property.

Min Gigaba said that the DPE needed to consider the tariff application. Should it not be granted, there would be risks of the build programme stalling. There was also a question on how to move on IRP 2. The sooner decisions were made on the next phase after Kusile, the better it would be. The current estimate on the amount needed for an upgrade of the electricity infrastructure was R4 trillion, and was increasing progressively. Clarity was needed on the situation with the infrastructure so that business people could understand what was happening.

Min Gigaba said that a finalised model was needed to determine remuneration policy. A document had gone to Cabinet for a decision in early 2012, but a call had been made on SOCs to freeze increases. The contents of the document would be made public. A broader government discussion was needed on the macro economic impact of the SOCs. Elements were impacting on SOCs. A shareholder discussion was needed throughout government as a whole. Many SOCs were under-capitalised. There had been a period where investment had not been forthcoming due to policy changes. This had resulted in weak balance sheets. Further discussion was needed.

Mr Matona said that the Minister had dealt with most of the issues raised. A study had been conducted to show what was to be done, and the method, for the utilisation of private sector funding. The DPE had discussed the issue with Treasury, which was in agreement. In anticipation of this, A Deputy DG post had been created to oversee public-private partnerships (PPPs). In catalytic projects the involvement of the private sector was invaluable. Complex issues were involved and state subsidies were required.

Mr Matona said that SAFCOL was a model of community claims and forestry operating in a vertical integration scheme. Risks and opportunities had to be considered. This was the one SOC that was still profitable. Its fortunes were tied to the construction sector. A long term decision needed to be based on strong evidence.

Mr Matona said that the main use of consultants had been for work with the International Air Transport Association (IATA) on the planning of new routes, opportunities in Africa and plans to update the SAA fleet. Treasury suggested the use of consultants in certain fields rather than maintaining such expertise in-house. The consultants had the expertise which DPE lacked.

Ms Matsietsi Mokholo, Deputy DG: Legal Governance and Risk, DPE, said that some of the outstanding matters had been in place for some time. Progress had been made on the Aventura board. All resolutions had been lodged with the Master of the High Court. The observation on the Isibuko Dashboard was valid. The system was still evolving. The Dashboard was updated quarterly. This and the investment reports were oversight tools. More agility was needed in order to respond to challenges. Factors involved were finances, economic issues and rising fuel prices. A forum had been established.

Ms Jacky Molisane, Deputy DG: Strategic Partnerships, said that a massive investment was needed in infrastructure. Public-private partnerships (PPPs) were needed for building. There were partnerships with the Industrial Development Corporation and the DBSA. There were some developments to attract the private sector. Banks, savings schemes, investment bodies and asset managers all had a role to play.

Mr Matona said that the price tag relating to the building plan and infrastructure had to be understood. The figure of R4 trillion was a projection. This was not all budgeted nor approved. Only a portion of the finance had been secured. On the legal suit brought against the former SAA Board Chairperson, the current Chairperson had investigated the allegations and taken action.

Min Gigaba said that the municipalities had been affected by the reduction of the planned electricity tariff increase from 25% to 16%. There was a call on municipalities to pass the benefit on to consumers but this was not happening. He had raised this concern with the Minister for Co-operative Government and Traditional Affairs and they were looking for a solution. Increases would have a negative impact on customers and on the image of government.

Mr Matona added that it was not currently possible to detect if a consultant had been a government or SOC employee previously. In France there was a government agency that practised oversight over SOCs. This was a high-powered body with good capacity. The Constitution did make provision for the use of private funding. It was a struggle to attract skills. Even Treasury worked with consultants.

The Chairperson said that the Committee would meet with the new SAA Board once its feet were on the ground. The response on SAA might encourage proponents of privatisation to call for the privatisation of SAA. The Committee wanted to see SAA working efficiently.

The meeting was adjourned.