Committee Report on Public Enterprises 2014 Budget

Meeting report

Members adopted the minutes of the previous meetings held on 25 June and 2 July 2014.

Committee Report on Public Enterprises 2014 Budget

Mr Disang Mocumi, Committee Secretary, presented the draft report of the Committee on the Budget Vote 11 and the strategic plan of the Department of Public Enterprises.

He said the mandate of the Committee is to scrutinize the strategic plan and annual performance plan of the Department and its entities, to see if the funds requested are aligned to the objectives as stated in the respective strategic plans.

The strategic plan of the Department is based on the following principles:

-  Coordination and coherence with government overarching policy frameworks;
-  Identifying clear outcomes to be pursued by the Department;
-  Delivering in the constrained economic environment; and
-  Focusing on cross-cutting outcomes within the Department.

The strategic plan of the Department did not change from what had been presented in the Fourth Parliament.

The mandate of the Department is to ensure that state-owned companies within the portfolio are directed to serve Government’s strategic objectives as outlined in the National Development Plan, and further articulated in the new growth path (NGP), and the Industrial Policy Action Plan (IPAP). The Department aims to ensure the sustainability of state-owned companies and supports the government’s strategic priorities of economic growth, expanding employment and developing infrastructure.

While focusing on the implementation of the National Development Plan (NDP) for the year 2014/15, the main goal of the Department is to ensure that the state-owned companies (SOCs) support the implementation of the NDP and contribute to the achievement of outcomes as per the plan.

The objectives of the Department are to review the shareholder oversight, to ensure alignment of SOC strategies to developmental outcomes; promote good corporate governance; build internal capacity to enhance the Department’s ability to execute its strategic plan and fulfill its mandate; stablise and strengthen the state–owned companies, focusing on their balance sheets and funding options; drive economic infrastructure investment to enhance the capacity of the economy, with emphasis on the strategic integrated projects; leverage off state-owned companies’ procurement spending to support industrialization and transformation.

The Department, as a shareholder representative of the government, does not have the mandate for developing sector-specific policies, but policies relating to the overarching shareholder mandate of the Department. The policy mandate of the Department is within the sector regulatory environment.

The Department plans to strengthen its oversight function over the state–owned companies by increasing its capacity over the medium term, for which the Department received R 78.3 million in addition to the allocations in 2013/14 financial year. The Department will contribute to the objectives of the NDP through Eskom’s build programme and Transnet’s capital expenditure programme, in order to improve industrial capabilities, provide sustainable jobs and improve the productive capacity of the economy.

Programme 1 of the Department concerns education and is responsible for providing strategic management, direction and administrative support to the Department, to enable it to meet its strategic objectives. The spending focus over the medium term will be on supporting the Department to play its oversight role over state-owned companies, by providing administrative support to the Minister and corporate and human resource services of the Department.

Ms Lee Bramwell, Committee Researcher, highlighted the fact that expenditure on the compensation of employees constitutes 48.5% of the budget.  Over the medium term, expenditure on compensation of employees grows by 6.1%, from R66.4 million to R 79.3 million.  The number of personnel is expected to increase from 138 in 2013/14, to 141 in 2016/17.  Spending on consultants is expected to increase significantly -- by 18,2% over the medium term -- due to a shift of programmes, as well as consultants. Goods and services constitute 49.1% of the budget over the medium term, with consultants constituting 10.4% of the budget.

Programme 2 relates to legal governance, the purpose of which is to provide legal service and corporate governance systems, as well as facilitating the implementation of all legal aspects of transactions that are strategically important to the Department and state–owned companies and ensures alignment with the government’s strategic intent.

There are three sub programmes within this programme:
-  Management, which is responsible for strategic leadership and management;
-  Legal, which provides internal legal services and oversight support to sector teams; and
-  Governance, which is responsible for developing, monitoring and advising on legislation and corporate governance and shareholder management systems for the Department and its state-owned companies. It also deals with risk and compliance management.

The spending focus over the medium term will be on increasing capacity to provide legal services, and transaction and contract management support; and on facilitating the creation of a legislative framework for the Department’s mandate, to ensure compliance with applicable legislation and enhance corporate governance procedures by state–owned companies. The programme’ s budget had increased over the past three years due to the increase in the budget for compensation of employees, which comprised 61.5% of the total budget in this period. The programme’s budget is expected to increase by 6.4%, to R 26.9 million, in 2016/17.

The legal component constitutes the largest unit in the programme, at 53.6% of the medium-term budget, followed by governance, at 35.2%. The legal unit increases by 7%, from R11.8 in 2013/14, to R14.5 million in 2016/17.

Over the medium term, 74.5% of the programme’s budget is allocated to compensation of employees, with the number of personnel expected to increase from 19 in 2013/14, to 27 posts in 2016/17. Compensation of employees increases by 9.9 per cent over the medium term, from R15.4 million in 2013/14, to R20.5 million in 2016/17.

Although spending on consultants decreased between 2010/11 and 2013/14 as the internal capacity to perform legal services increased, it is expected to increase again due to an expected increase in transaction services, contractual agreements and governance agreements, and spending on legal costs is expected to increase over the medium term.

Programme 3 covers portfolio management and strategic partnerships, the purpose of which is to align the corporate strategies of the state-owned companies with government’s strategic intent , as well as monitoring and benchmarking their financial and operational performance and capital investment plans.

This programme also has sub-programmes:
-  Energy and broadband enterprises, which deals with Eskom, Pebble-Bed Modular Reactor and Broad Band Infraco;
-  Manufacturing enterprises, which deals with Denel, Alexkor and the South African Forestry Company;
- Transport enterprises, which deals with Transnet, South African Airways and South African Express Airways;
-  Economic impact and policy alignment, which aligns state-owned companies with overarching government economic, social and environmental policies; and
-  Strategic partnerships, which ensure that state–owned companies maintain commercial sustainability and attain the desired strategic outcomes and objectives.

Ms Bramwell noted that over the medium term, the focus will be on enhancing capacity to oversee strategic infrastructure projects.  This includes the training of staff and developing new project management tools to improve oversight of the current build programme.

The programme’s budget decreased by 10.6%, from R140.8 million in 2013/14, to R100.5 million in 2016/17. This decrease is due to the Department not making transfers to state–owned companies in the foreseeable future.

The Department’s budget has decreased from R1.4 billion in 2012/13, to R259 million in 2014/15. However, it will increase by 9.9% in 2016/17. The decrease from R 1.4 billion was the result of transfers to the SOCs.  Compensation is expected to increase from R131.9 million in 2014/15, to R169.9 million in 2016/17 as a result of the expansion of the establishment over the medium term.  Goods and services, including payments for capital assets, is expected to increase from R110 million in 2014/15, to R115.7 in 2016/17, to support the increased establishment.

The structure of the Department increased from 168 employees in 2009, to 210 in the 2012/13 financial year, and will increase to 227 over the MTEF period. The Department has reduced its vacancy rate from 19.7% in 2009, to 11.9% in March 2013.  The Department is faced with challenges in terms of retention of specialist skills.   However, it is exploring ways to retain key skills beyond increases in remuneration packages.

Discussion

Mr K Morapela (EFF) asked for a justification as to why the government is using consultants to do the work of the Department.

Ms N Michael (DA) said that in the previous meeting, they had discussed with the DG the issue of having filled positions that had been lacking in the Department for a long time. In the past, most of the employees at the Department worked in an ‘acting’ capacity, but now these positions had been filled. It was a bit worrying when 18.2% of a budget is spent on consultants, yet the positions which required consultants before had been filled. It was a duplication of what was already a cumbersome staffing component. This Department is operating on a very small budget.  The DPE does not fund its entities, the entities fund themselves and DPE’s funding is for the operation of the Department.  Something was going decidedly wrong within DPE if these positions had been filled and the Department still required such large amounts from the outside.

Dr Z Luyenge (ANC) said that the Department claimed to have filled the vacant posts, yet at the same time it is committing to not having a vacancy rate of more than 10%. There was no way it could be allowed to use allocations in the Department for consultants, rather than other aspects of oversight. The use of consultants must be explained by the Department. The Committee has an obligation to establish whether the use of consultants carries any requirement of a skills transfer to the available staff.

The Chairperson asked Members what the response from the Department had been when this issue was raised at the previous meeting.

Ms Michael stated that the response was that the DG was very happy that the positions had been filled and DPE was ‘on track.’

The Chairperson noted that this contradicted the report, where it is stated that there was a decrease in the number of consultants. In this financial year, there will be an increase of 18.2%.

Ms D Rantho (ANC) requested that the researcher should be given an opportunity to clarify why there was a need for this 18% increase. On page 9, the Department alluded to the fact that it has a shortage of critical skills. What are these critical skills?   If they do not fill the posts, they will keep using consultants.

Mr R Tseli (ANC) said that the DG had tried to clarify which specialized skills were not in the Department.

The Chairperson noted that the Members did not approve the18.2% increase in consultants, and the Department was expected to decrease the spending in this financial year.

Dr Luyenge noted that it was important to commend the people that had prepared the report. It was clear and covered what had transpired at the meeting.

Mr N Kwankwa (UDM) referred to the last paragraph on page 7 and queried the percentage, saying that it should be more than 20%.

The Chairperson requested the secretary to check and confirm the figures.

Ms Michael, referring to page 6, paragraph 1 line 4, suggested that there is a need to get a report on the Pebble Bed Modular Reactor because this had been going on for a period of three years.  It should be appearing in the budget, as it should be completed by now.

The Chairperson asked the Researcher how much had been allocated to this programme in this financial year.

Mr Rodney Mnisi, the Content Advisor, said there were no details at the moment about the allocation.

Mr Mocumi stated that there was nothing allocated for the reactor at the moment, as it fell under Eskom. Eskom was the entity funding it, and therefore the Department did not carry the expenditure.

The Chairperson suggested that they should have a time frame when the report about the Pebble Bed Modular Reactor could be provided. It was agreed by the Members that the report should be provided within three months.

Mr Tseli said that if they were to strengthen the oversight role over entities, the Committee should have a look at the agreements between the Department and other entities. When this issue was raised, the DG had argued that such contracts could not be shared with the public.  Why should such a contract not be shared with the Committee, whose role was to oversee the Department?  Did this mean they did not trust the committee?  It could not perform an oversight role on an entity if it did not have such an important document.

The Chairperson noted that committees were allowed to have those agreements, and there was a need to follow up with the legal head as to whether they were allowed to have the shareholder agreement. It did not make sense for anyone to play a meaningful role if they did not know the parameters when they conducted an oversight.

It was resolved that this should be followed up with the political head to allow them have all the shareholder agreements of the SOCs.
 

The Chairperson said there was a need for the Department to find a lasting solution to the problem of copper and electricity theft with the relevant stakeholders. She noted that there was a need to put a time frame on this issue, when the Department should inform them about the methods or solutions they had come up with to deal with this matter.  The Committee’s role was not only to oversee, but to advise the Department and give suggestions on how to solve certain problems.  She suggested that the researcher should find out more about the theft issues and come up with a resolution which would address the problem so that the Committee could put forward a proper recommendation.

Ms Michael mentioned that the City of Cape Town and the Eastern Cape had a department called the “Copper Heads.”  It was a section of the metro police force which was tasked with dealing with copper theft. The statistics showed that in areas where the Copper Heads operated, there was no copper theft. This was a system that was in place and working.   It was something the Committee could look at and see how to advise DPE on the matter.

Dr Luyenge supported this proposal, noting that copper was an asset that could not be left accessible to theft by the public. The establishment of such a unit in the police force was very important.

The Chairperson, on the advice of the Secretary, said there was a bill to address the problem.  It was intended to criminalise copper theft. She suggested that there was a need to follow up on the bill itself, and ask the Department to address this issue within two months.

It was agreed that the researchers should be tasked to look into this idea and come up with recommendations.
 

Other issues raised by the Committee were:

-  They observed that energy reserve margins at Eskom are very low, and urged the Department to ensure that there was security of electricity supply;
-  Board members of SOCs were serving on too many boards, and the Department should regulate the number of boards they could serve on at one time;
-  The Presidential Review Committee had tabled its report to the President.  However, the Committee urged the Department to work on the shareholder management bill and the review of the remuneration of executives of SOCs.
-  Small and emerging suppliers were not given contracts by SOCs because they were not competitive, and the Committee urged the Department to ensure that these enterprises were supported and promoted to be competitive.  Members asked what the Department meant when it said that those companies were not competitive -- in what areas, which skills?  What were they doing to ensure that those entities were competitive?  It was agreed that the Department should include small and medium enterprises in whatever they were doing, and the level of skills or competitiveness should be made clear.  Their mandate was to make sure that the economy grows, and to develop the society itself. They could actually train those entities to that level;
-  There was lack of investment by the private sector in infrastructure development, and the Committee urged the Department to develop mechanisms to incentivize private sector investment;
-  The salaries of executives of state-owned companies are too high, and exacerbated the inequalities in the South African economy;
-  Some state-owned companies had not achieved all their performance targets, and the Department should ensure that they perform better in the 2014/15 financial year;
-  The Department has a shortage of critical skills, and that has impacted on its capacity to exercise its oversight responsibility.  Dr Luyenge asked which skills these were.  He requested that they should be specified or quantified. What skills were more critical than the others?
-  There is lack of legislation to empower the Department to exercise its unique shareholder management responsibilities;
-  There were consistent delays in the construction of the Medupi and Kusile projects, mainly caused by labour unrest, contractors’ non-compliance with labour legislation and contractors who did not meet performance targets.

Mr Tseli noted that there was a need to enforce compliance in the Department by stating, for example, the consequences of non-compliance.

The Chairperson noted that up until the Committee had the shareholders’ agreements, Members would not know what the issues were in order to exercise their oversight.

Ms Michael had submitted an application to get the contracts for everyone working for the DPE, including all subcontractors.  Eskom had asked for an extension of time, but had later agreed that they could give her some contracts.  The Committee was aware that there were compliance and penalty clauses in the contract agreements, but they did not have access to the documents. Their hands were tied, as they were unable to enforce what they did not know. Once they had those contracts, they would know what the penalty clauses were and would ensure that DPE enforced them. 

The Chairperson stated that one of the implications of the delays was that more money would be spent on the project itself than allowed for in the initial budget. It was suggested that a formal request should be made through the office of the Secretary, or as a Committee, for all the necessary documents.

It was agreed that at the next meeting all Members should be provided with these documents so that they could study and discuss them.

Another issue raised was the absence of the Electronic Communications Licence.  This had adversely impacted on Broadband Infraco, and the entity had been unable to deliver on its mandate to roll out broadband to under-serviced and rural areas.

Mr Morapela asked where the Department was getting this licence from, and what the problem was.

Ms Michael explained that the Department is supposed to get it from the Department of Telecommunications. She suggested the DPE should work with the Department of Communication, to speed up the process of granting a licence. This was given a timeline of three months. It was also agreed that the Chairpersons of the two committees should meet and fast track the process, and report back to the committees.

Ms Michael further noted that Broadband Infraco should fall under the DPE, as it belonged in telecommunications.  It was an entity in the wrong place and did not get the attention it deserved.

The Committee recommended that the Minister of Public Enterprises should ensure that the Department of Public Enterprises:
-  Review the salaries of executives of state–owned companies, in line with the recommendations of the Presidential Review Committee.
-  Consider introducing over-arching legislation to empower the Department to execute its shareholder management responsibility and oversight over state-owned companies.

Mr Tseli moved a motion to adopt the report, and it was seconded.

The meeting was adjourned.