Briefing by Aventura on Financial Report, Strategies and Action Plan

Meeting report

PUBLIC ENTERPRISES PORTFOLIO COMMITTEE
21 August 2002
AVENTURA ON FINANCIAL REPORT, STRATEGIES AND ACTION PLAN: BRIEFING

Chairperson: Mr B Martins (ANC)

Documents Handed Out:
Aventura Presentation (See Appendix)

SUMMARY
The Committee was informed that Aventura, a state enterprise undergoing privatisation, had been clouded by controversy over its financial position. The Group briefed the Committee on the problems that had led to the group being insolvent. Three loss-making resorts in and around the Free State area had been sold. It was pointed out that unusual tendering procedures were followed due to the circumstances and the urgency of the matter. This raised concern amongst members, who were adamant that these kind of practices where public finance was concerned were unacceptable. Four other resorts had been identified for privatisation and in this regard the tendering process was being finalised. The guidelines of the Public Finance Management Act would be followed with respect to these four.

MINUTES
Mr McCaffery, Chief Financial Officer of Aventura, noted with that the audited financial statements were not yet finalised so those attached were preliminary and likely to be different from the final audited ones.

He pointed out that from a numerical point of view, the 2001/2002 financial results reflected a loss. This was due in part to the privatisation process. This was especially so around 1999 when uncertainty over privatisation as rife. This was then exacerbated by the floods of early 2000 in some parts of the country where damage caused meant a lot had to be done financially. The losses incurred around this period amounted to around R 7 million.

He informed the Committee that with regard to privatisation, three resorts around Bloemfontein had always been a major loss of income for the group. At one stage these losses amounted to about R 3 million, such that it was proposed that they be sold-off. Indeed this has been the case with their sale in June 2002 generating about R 23 million.
In addition to this, four other resorts have also been offered for sale and in this regard expected revenue is around R 30 million and this will greatly ease the debts and liabilities which the group has incurred.

Discussion
Mr R Heine (DP) referred to the Protea take over of Aventura. Did Protea change the computer system and incur costs of around R 600 000? Secondly, regarding the privatisation of security, was this on tender? Who won it and what happened to the staff previously employed?

Regarding the computer issue, Mr McCaffrey pointed out that indeed they changed the computer system, specifically the accounting system as a decision of the board of governors. The change was necessary because they have established that the programme previously in use is particularly good at resort level, but not as a network-wide application across all resorts around the country.

On security, he pointed out that this was a decision based on the fact that internal security was not effective, there was collusion between staff and security. There is currently no single security company operating across all their resorts, but rather, each resort has its own private service provider in terms of security. However, there were no job losses as the previously employed security personnel were either absorbed by the group or by the new service providers.

Mr J Kgauwe (ANC) asked how privatised security is supposed to improve on the issue of collusion and corruption.

Mr McCaffrey pointed out that through the surveillance system, they had found that there was collusion amongst the security personnel regarding entrance fees. Instead of retrenchments, the group felt that as part of their social responsibility, they should rather retrain these employees. They could then be used elsewhere within the group and the services of private security companies could be acquired later.

He added that a few implicated employees left fearing disciplinary action, but the vast majority remained and took up this training in other careers with enthusiasm.

Mr M Khomphela (ANC) asked what percentage of the security staff was retained? How many had resigned and what percentage is new? For those who were to be retrenched as a result of the sale, were they grouped together with new employees coming in?

In response, Mr McCaffrey pointed out that those resorts sold-off were sold as a going concern, so there were no retrenchments at all. Regarding security, these employees were not retrenched but trained and absorbed elsewhere. New employees were employed in cases where it was felt that the company lacked expertise. However, the percentages were not at his disposal.

Mr Maphalala (ANC) asked why those who were thought to be corrupt were protected when they were actually defrauding the company? Secondly, on HIV/Aids, which people constitute the 80% that is said to be HIV positive?
Regarding the R 2 million reacquired from the Bela Bela municipality, how did it come about that the council owed the group that amount?

In response, he pointed out that on surveillance and security, some resorts, like Warmbaths, have on a public holiday crowds of between 6 and 7 000 passing through the gates, each paying, supposedly. The situation is that some criminal element is involved where the security does not charge these people. Where the security offence was deemed serious, criminal action has been taken, however, other employees, whilst not being involved, simply ignored such practices. As such, they had to be redeployed elsewhere, not retrenched.

Regarding the HIV issue, he pointed out that they have discovered that this situation is quite bad, affecting their employees as well. In this regard, they have started training programmes to educate employees.

The R 2 million in Bela- Bela was a result of an internal audit which showed that the local council was charging them incorrectly for certain services. For instance charging the resort as a game park instead of an agricultural entity. Secondly, the council also supplies electricity and the group have noted that they have been overcharged and currently, the council is contesting this amount in court.

Mr T Louw (ANC) asked about the transfer of people caught on camera, why did the group tolerate such practices, why are they not being fired?

Mr McCaffrey pointed out that as he has already mentioned it, those found guilty were charged, it was only those who were not involved but were aware that have been deployed elsewhere.

Mr Kgauwe (ANC) asked how did the audit arrive at the figure of R 2 million and secondly, those employed in Aventura Bela Bela, how many are HIV positive?

Regarding the R 2million, the internal audit assembled all areas of improper charging and determined what should have been charged. The group then acquired the services of a local law firm to carry forward the legal proceedings.

Regarding HIV/Aids, he noted that he was not quite sure but would have to come back with an in-depth report on the matter.
Lastly, the Chairperson rounded off by saying that as this was a first meeting on the document, he would like Members to go back and study it in detail, discuss it as a Committee in the coming week or two, and then engage Aventura and the Department on the issue.

The meeting was adjourned.

Appendix
AVENTURA RESORTS
GROUP GENERAL MANAGERS COMMENTS

FOR THE PERIOD
FINANCIAL YEAR JULY 2001-JUNE 2002

GENERAL OVERVIEW
This financial year has been a roller coaster ride for the Aventura group. The unbundling process, cashflow position and political positions in Zimbabwe, Congo, Middle East as well as the terrorist attack of 11 September all contributed and resulted in a severe impact on the companies trading results.

However, the positive impact of the Protea Hotels sales teams contribution to turnover and the continued reduction in expenses and STAFF numbers due to executive management control and the continued growth in confidence by the resort management in the decentralised systems.

It has taken a while for the resorts to get used to the freedom of empowerment, but they are now contributing positively to the company's growth by means of the effective use of the Protea Hotels three-tiered system being the marketing, financial and quality plans.

CASHFLOW
The constraints of the Public Finance Management Act resulted in severe cashflow constraints throughout the year, especially in the first quarter where we were unable to maintain stock levels in our supermarkets, petrol stations and other outlets.

This subsequently resulted in reduced turnover and income to Aventura of approximately R2 million in the first quarter.

The impact on our GUEST perceptions however lasted much longer as they continued to bring their own supplies with on their holidays in the second and third quarters. It was only in the fourth quarter that confidence in our outlets started to return and this was largely due to the outsourcing of the supermarkets.

This programme reduced the Aventura stockholding from R7 million to R4 million and saved R650 000 in overdraft interest. The damage that the cashflow problems caused cannot be underestimated. This damage was not only in the monetary sense but also psychologically in the minds of our GUESTS who did not have the confidence in the future of Aventura Resorts. It has taken a considerable effort to re-establish this confidence.

The bad publicity as a result of the cashflow problems had as a result an attack on our Holiday Club/Club Privé members by the Leisure Group. However, timeous legal intervention by Aventura managed to contain the damage but the legal cost implications were in excess of R200 000 not counting management time and effort.

OUTSOURCING
At Aventura Resorts and Protea Hotels our STAFF are of paramount importance and in the outsourcing process, their rights were protected. The process has actually created extra positions. The supermarkets are in the process of being upgraded to "Friendly Grocers", which will bring with it, controls as well as the benefit of consumer confidence.

The outsourcing had the effect of reducing our turnover by R20,5 million in sundry operated departments. However this was offset by rental income, reduced stockholding and cash requirements. The outsourced entities were also labour intensive as far as management was concerned and this time saved could now be utilised to concentrate on improving controls and marketing.

UNBUNDLING OF THE RESORTS
The delay in the unbundling process cost the Aventura group R2,645 million in additional interest charges. The sale of the three non-viable Free State resorts was to have been concluded by November 2001. However due to delays at the Department of Public Enterprises the last resort was only transferred in July 2002.

Aside from the additional interest burden this delay in the receipt of the R23 million equity derived from the sale caused subsequent cashflow problems, which led to further losses in outlets due to a lack of stock.

In some cases petrol stations were closed due to terminated deliveries, as we were unable to pay accounts.

The sale of Aventura Resort Aldam, Aventura Resort Bloemfontein and Aventura Resort Christiana has now been concluded and tenders have been allocated for Aventura Resort Heidelbergkloof, Aventura Resort Kareekloof, Aventura Resort Eiland and Aventura Resort Pretoria.

The last eight resorts being Aventura Resorts Tshipise, Swadini, Blydepoort, Loskopdam, Badplaas, Warmbaths, Gariep and Plettenberg will be released for tender next. The prospectuses for these resorts are currently being updated and it is envisaged that these will be advertised towards the end of August 2002 by the consultants.

It has been mooted that preference should be given to a single purchaser for all eight remaining resorts as this would indeed simplify the process and eliminate minor problems, which could slow the process down considerably if done on an individual basis.

FINANCIAL
Despite all the problems that had to be surmounted for the financial year with the resultant loss in revenue, the Aventura group managed to achieve an operating profit of R5,6 million, which represents a substantial increase on the budgeted R2,49 million.

This represents a R10,486 million turnaround from the prior year. After depreciation, interest and leases, a R7, 3 million loss represented a slightly better than budgeted bottom line.

This was despite the previously mentioned extra R1,787 million interest, legal costs and subsequent loss of revenue incurred.

These numbers for Aventura are as yet unaudited but we foresee that they will actually improve slightly with the reversal of some bad debts and insurance provisions.

SALES AND MARKETING
Marketing

Marketing is now largely resort based and forms part of the individual resorts marketing plan. Brand exposure from Aventura head office takes the form of trade exchanges and joint marketing in the form of co-branding.

Sales

The Protea and Aventura sales team has this year again excelled in producing just under R10 million in sales. We are confident that this figure will exceed R10 million in the 2002/2003 financial year.

CENTRAL RESERVATIONS
The Aventura central reservations office has grown from strength to strength. Petro Lourens under the guidance of Brenda Cross, the Protea Hotels CRO manager, has exceeded expectations and now produces far more productivity per agent.

The Aventura central reservations office had 26 members of STAFF three years ago and now operates more efficiently with 6 STAFF members.

The ladies achieved R17,7 million in reservations which is R2,95 million per person.

HUMAN RESOURCES
The human resources department under the guidance of Stephen de Beer has ensured that the Aventura group experienced a problem free year.

The transition of STAFF to the new owners took place without undue problems as Stephen de Beer and Andrew Mathebula held numerous meetings with the STAFF thus ensuring that they understood the transition process.

In conjunction with Dave Gillam they are currently negotiating a two year salary package with SACCAWU. The reason for a two year package is that this will provide stability for both the STAFF and the new owners.

The relationship between Aventura and SACCAWU has gone from strength to strength through the efforts of both Stephen and Andrew. This strong relationship has also assisted the Aventura group during the course of the unbundling process thus far.

This process could usually be quite stormy, however due to the trust being built up, this has enabled us to weather the sale of the resorts in a smooth manner.

TRAINING
Andrew Mathebula has done very well in the training department as well as taking over the responsibility of human resources manager for Aventura Resorts Warmbaths. Andrew, in conjunction with Mary McGuire has undertaken the training facilitation of the entire group.

The STAFFing numbers for the group has reduced over this financial year and the permanent STAFF level is now less than 1200. This reduction has been achieved by means of natural attrition as well as the dismissal of those members of STAFF exposed in our internal undercover security investigations at various Aventura Resorts by our internal audit division.

HIV/AIDS Training
The seriousness of this epidemic cannot be underestimated. In the underprivileged Bela-Bela community it is estimated that 80% are HIV positive. This is a frightening statistic.

Two years ago Aventura Resorts like the rest of South Africa lived in blissful ignorance. This past year we have had 58 deaths ascribed to HIV/AIDS. We foresee this figure doubling in the 2002/2003 financial year.

Several projects are underway to increase awareness and training. Andrew Mathebula the Aventura Resorts national training manager has made this his priority and is initiating and investigating several initiatives. Whilst Aventura has had training programmes in place, these need to be replaced with more effective programmes that will penetrate all strata.

It is evident that we cannot restrict ourselves to only train our own STAFF. In the rural communities that surround our resorts there is in many instances, no other entity capable of taking on this role.

This is where we see ourselves stepping in to play a more positive role. We hope that with a more aggressive role in community development and training we will be able to arrest the frightening statistics.

GENERAL
The evolvement of Aventura into an entrepreneurial decentralised company with a sense of ownership being experienced by all STAFF has resulted in improved expense control.

Lateral thought processes have as in the case of Aventura Resort Warmbaths, where the financial manager investigated the local council, which resulted in a possible recovery from the Bela-Bela council in excess of R2 million. We have as yet, not received confirmation from the council in writing and therefore not been able to incorporate this saving in the 2001/2002 accounts. However they have verbally confirmed most of the claim.

The fact that they are all now part of a much larger family and that their career paths are not limited to the Aventura group alone, has had a positive influence and expanded their view of the world.

Aventura with the unbundling process to be concluded in the 2002/2003 financial year will be transformed into a solely management company, which will have to not only manage the resorts under management contracts, but also the Club Prive and Holiday Club obligations through until July 2013.

In order to be able to provide the holidays contracted to in these, we are confident that all the resorts will conclude management contracts under the Aventura Resorts operated by Protea Hotels banner, and in so doing, negate the contingent liability, which exists in the holidays we are contractually bound to provide for the timeshare clubs.

The holidays are estimated at R89 million in current values. A trust reserve will also be created from the proceeds of sale for the security deposits of R58 million to be paid on expiry of the contracts.

PROPERTY DEVELOPMENT
Aside from repairs being undertaken to maintain safety at the resorts in line with the health and safety act, developments will only be undertaken by the owners of outsourced facilities.

The new owners of resorts are in the process of planning their upgrades, as was the intention prior to the disposal of the resorts.

Outstanding issues

Aventura Resorts Swadini & Blydepoort
The Department of Public Enterprises has not resolved these land claims and this matter has now been handed over to Nations Capital, the appointed consultants.

The intention is now to rather settle the claim in monetary value rather than the previously proposed 50 year lease in lieu of.

Aventura Resort Plettenberg
1. The transfer of the property on the other side of the N2 highway.

2. The servitude requested by the proposed development on the mountain is being contested by Aventura Resorts as this would disturb the ecologically sensitive nature of the resort and destroy the tranquil atmosphere not only during the building process but the holiday makers resident in the area. This would present not only constant traffic noise but also significant additional wear and tear on the resort infrastructure.

Future development of the resort would also be negatively impacted and reduce the value of the property.

Aventura Resort Gariep
All the property and homes have been transferred into the name of Aventura Limited. A decision must be made as to the sale. I propose that all the houses be sold separately from the resort. The new owners would have to provide accommodation on site or rent in the town.

Aventura Resort Badplaas

Housing Development
The comments from the Department of Public Enterprises as to the offered price for the developing site has been passed on to the developers and no comment received. This is now also in the hands of Nations Capital.

Sasol Gas Pipeline
Sasol has made enquiries as to the possibility of a servitude for a gas pipeline, which will connect Maputo to the Sasol refinery.

As soon as a more concrete proposal is on the table we will present it to the Aventura Limited Board of Directors.

Aventura Resort Warmbaths
The management at Aventura Resort Warmbaths is investigating the property boundaries, as there seems to be some inconsistencies. Major errors in the charges of rates, electricity, water etc have been uncovered and it seems as though property previously thought to belong to the council is actually in our name.