South African Forest Company Limited on its 2013/14 Annual Report

Meeting report

The Chairperson welcomed everyone to the meeting, the purpose of which was to hear the Annual Report and Financial Performance for 2013/14. Apologies were received from Mr N Kwankwa (UDM), Ms N Michael (DA) and Ms P Van Damme (DA), Minister Ms Lynn Brown and the Deputy Minister, Mr Bulelani Magwanishe.

Briefing by South African Forest Company Limited (SAFCOL)
Prof Somadoda Fikeni, Interim Board Chairperson, SAFCOL, indicated that State-Owned Companies (SOCs) played a vital role in any developmental state, as responsible to improve the lives of ordinary people. The entity had the potential to employ a large number of people, especially those located in rural areas.

Ms Nomkhita Mona, Group Chief Executive Officer, SAFCOL, briefed the Committee. SAFCOL was established through the Management of State Forests Act, and was wholly owned by the South African Government. The entity conducted its primary business within the forestry industry, ensuring the sustainable management of plantations and other assets within the Group, to enhance value for the shareholder. SAFCOL played a catalytic role in the realisation of the goals of Government in areas such as afforestation, rural development and economic transformation. The entity was in the process of deregistering new subsidiaries, including Mountains to Oceans Forestry SOC Ltd, Kamhlabane Timber SOC Ltd, Temba Timber SOC Ltd, Lakenvlei Forest Lodge SOC Ltd, and Abacus Forestries SOC Ltd, which were dormant companies that were currently undergoing de-registration.   

The strategic pillars of the entity focused on horizontal integration, vertical integration, rural development and green energy. Horizontal integration paid particular attention to growth or expansion of Government owned plantations in Mozambique and other regional areas. She reminded the Committee that it was always difficult to expand land in South Africa as the right to land was directly linked to the right to water for forestry and SAFCOL was exploring other alternatives to access land. The vertical integration plan was to focus on sawmill upgrades, products for internal market and exportation to other countries. SAFCOL was a main driver of rural development and focused specifically on agro forestry, furniture manufacturing, timber framed structures and pole manufacturing, which had a potential to create job opportunities and reduce poverty. The entity was now focusing on green energy looking at areas of biomass and there were discussions to form public/private partnership with Eskom on using biomass for electricity generation, biofuel, and coal generation.     

SAFCOL was in Kwa-Zulu Natal (KZN), Limpopo and Mpumalanga, spreading over 187 320ha with 121 000ha planted. In Mozambique, the initial IFLOMA plantations covered 31 754ha and the entity had 20% ownership and the Mozambican Government had licensed for expansion by an additional 69 360ha closer to the Beira port. It was important to note that although SAFCOL had 18 plantations in three provinces, the entity was still mandated to spend money for conservation purpose in other provinces that it was not using commercially.

The South African log industry was domestically focused with an emphasis on the production of pulp logs. The size of the South Africa timber market was R18.5 million; there was clearly an oversupply of logs in the South African market. The country imported 90 000 million cubic square of softwood lumber and 74 000 million cubic square of plywood per year. SAFCOL did not currently export any logs or by-products and owned about 8% of the South African timber market and 25% of the pine saw log market. The major producer of larger diameter logs had declined and therefore the entity was unable to realise the value invested for 30 years into the type of trees.

Core operations in the forest included research and development, nursery, and planting in preparation for planning seedlings or cuttings. SAFCOL also had core operations on logs to clients (logistics and transport, harvesting operations, value-adding activities (thinning and pruning) and tending and protection (weed control, fire management and environmental management). The core operations on processing range from logs on roadside, delivery to mill, log sorting and de-barking. The entity also focused on dry lumber, kilns (drying), sawing in wet mill, off-cuts, final lumber product and chips (sold to pulp or biofuel industry).     

Ms Mona indicated that SAFCOL’s main subsidiary, Komatiland Forests (KLF) managed 187 320ha across 18 plantations in Mpumulanga, Limpopo and KZN. The entity owned and operated the Timbadola mill in Limpopo and rented two sawmills on the Highveld. 22% of SAFCOL saw logs were processed internally and 64% of the available land was commercially planted with the remaining 36% comprising conservation areas such as wetlands, grasslands, thickets and indigenous forests. The planted areas were 93% pine with 7% Eucalyptus and Wattle and the growing stock was managed over 30 year rotation for saw logs and 6-12 years for other products. SAFCOL covered 121 000ha with a turnover of R0.86 billion, processed only 22% of volume, while York Timbers had 61 000ha but had a turnover of R1.2 billion and was fully up to retail. Mondi covered 554 000ha of plantation with a turnover of R63 billion and was fully operational in areas around South Africa, Swaziland, Europe and the USA. Competing forest owners were fully integrated and had higher turnover while SAFCOL processed only a small proportion of production internally.

On the 2013/14 Annual Performance Plan (APP), the first strategic objective was to ensure that there was financial and commercial sustainability. The Key Performance Indicator (KPI) used was to have higher return on equity excluding fair value movements and translation gain (losses) and creditworthiness. The entity only received 1% of 3% of the annual targets and the reason for the negative variance was linked to depressed markets and due to losses incurred as a result of lower revenue than budget. The KPI used for creditworthiness was gearing ratio and cash interest cover. The entity achieved 1% of 50% targeted and the reason for variance was related to lower capital expenditure, resulting in lower than anticipated utilisation of asset-based financing.

The second strategic objective was to prioritise on sustainable forest management, as this was the major source of revenue. The KPI used was to expand plantable areas of forest under management in South Africa and Mozambique (IFLOMA). SAFCOL managed to increase its total gross stocked area to 121 667ha of the targeted 121 100ha in South Africa. The target was exceeded and the reason for variance included the provision of 500ha for delineation and excisions as agreed upon with the shareholder. The total gross stocked area in IFLOMA was 12 178ha of the targeted 16 411ha and the target was achieved.

Ms Mona emphasised that the third strategic objective was very imperative for SAFCOL as it focused on socio-economic transformation and all the SOCs were mandated by the National Development Plan (NDP), the State of the Nation Address (SONA) and part of corporate responsibility to address poverty, unemployment and inequality. The KPI used for skills development was on the number of Management Trainees (internship), number of Artisans Trainees in the programme and number of Sector Specific trainees such as foresters and forestry workers in the programme. SAFCOL managed to recruit 34 interns for Management Trainees out of the 15 targeted. The target was exceeded through intake of forestry graduate trainees through the External SAFCOL bursary scheme. The entity also managed to offer funding to 10 Artisan trainees out of the 6 targeted, therefore, the target was exceeded as more funding was received from the Sector Education and Training Authority (SETA). SAFCOL offered funding to 120 trainees (e.g. foresters and forestry workers) out of the targeted 20 and the target was exceeded as more funds became available from SETA.

SAFCOL increased the number of black management to 84 out of the 70 targeted; the target was exceeded, as the qualifying applicants in management positions were mostly black. The number of black management females was 21 out of the targeted 21 and the target was achieved. The entity was proud to have employed 20 of the targeted 7 black people with disabilities. The target was exceeded following an awareness campaign where after several employees declared their disabilities. SAFCOL prioritised on Small Medium and Micro Enterprises (SMMEs) and Broad-based Black Economic Empowerment (B-BBEE) and the targets were exceeded. SAFCOL increased the number of women service providers and empowered more black-owned enterprises.    

Ms Zoliswa Mashinini, Group Chief Financial Officer, SAFCOL, stated that the forestry industry had not yet recovered from the slump brought about by the recession. SAFCOL had a challenging year given that the building industry remained muted; however, it managed to increase revenue by 5% year-on-year. There was an increase in the cost of sales mainly driven by an increase in land lease rentals, and operating expenses decreased as a result of lower spending. As a result of the increase in the cost of sales, gross profit margins decreased by 4%. There was a significant increase in the Net Profit Margin driven by fair value on biological assets (9% for 2013 to 57% for 2014). In the previous year profit included sale of property assets, resulting in a 4% profit ratio against -4% in the current year.

The net profit for 2014 was R510 780 million compared to R73 819 million in 2013, resulting in a variance of R436 961 million (592%). The Group generated cash from its operations and there was improvement since the 2010 financial year from a negative R136 million to a positive R83 million.  On cash and equivalents since the 2011 financial year, there was an increase in cash resources of more than 100%. The Group achieved the highest revenue (R894 million) in 5 years; R511 million net profit and the cash flow grew by R69 million year-on-year. The biological assets of SAFCOL, which were previously undervalued at R3 billion, were revalued to R3.67 billion.

The Group received an unqualified audit opinion for the 2013/14 financial year. Material losses of R1 million were incurred as a result of fraudulent activities at IFLOMA, remedial action was taken and R800 000 recovered and criminal process instituted. The Auditor-General South Africa (AGSA) found that there was non-compliance to Treasury regulations, as liability management in respect of existing credit cards that were not cancelled. Remedial action was taken with engagement with National Treasury (NT) on card alternatives. On strategic planning and performance management, findings were that the corporate plan was not aligned to the shareholder compact. Remedial action taken was alignment of the corporate plan and shareholders compact for the subsequent period. She mentioned that disciplinary process was still underway and policies and procedures relating to irregular, fruitless and wasteful expenditure had been developed. The procurement policy review was in the process of finalisation and the ERP system functionality to detect instances of missing documentation (e.g. tax clearance certificates).

SAFCOL had over 500 employees and a number of Human Capital Management (HCM) programmes were implemented in 2013/14 including 250 jobs profiled and graded, and succession planning for females and core positions. In addition, there were also programmes around the accelerated development of black managers and professionals in core positions, a new Performance Management System (PMS), a health and wellness programme for employees, and 15 HCM policies were developed. In terms of socio-economic development, R6.6 million was invested on Corporate Social Investment (CSI) initiatives in 2013/14 and 13 social compacts to foster community development of neighbouring communities. Community infrastructure development projects included building market stalls, school desks, farming equipment and community halls. SAFCOL was proud to have established more than 15 Cooperatives which provided sustainable jobs and assisted two enterprises to purchase 8 trucks, and thus allowed them to participate in the multi-million transportation of log business. A desk Manufacturing Factory was established with 20 youths producing school desks, creating employment and encouraging entrepreneurship.

61% of the SAFCOL’s land was under claim and the settlement model was being discussed with claimants and the Ngome land claim was being fast-tracked. A number of challenges were identified in the land claim process and these included unlawful land occupation, lack of communication with claimants and progress by responsible departments, which often led to disputes between the claimants and forceful land grab.

Ms Mona took the Committee through the risk and challenges identified that included:

§  Inability to sell log volumes

§  Unresolved land claims

§  Changes in external environment

§  Incorrect business model

§  Skills retention strategy

§  Future role of SAFCOL

§  Old sawmill equipment

§  Increasing operation cost

Discussion
Dr Z Luyenga (ANC) welcomed the presentation by SAFCOL and congratulated the interim Board Chairperson for his vision in terms of ensuring that there was progress for the time being. He asked about the governance model plan to be employed by the entity in terms of justifying the existence and applicability of the Board. He also asked whether SAFCOL had any retention strategy to deal with the loss of critical skills. What strategy was in place to deal with job creation as emphasised as the priority in the NDP and SONA? There was a need to transform the forest industry especially at management level, and also to deal with the appalling conditions of employees. Was there a guarantee that prices charged by SAFCOL were based on the global standard?

He asked whether there was anything that hindered the objective in terms of existing land claims, as land claim should not affect the operation of the entity. SAFCOL was commended for introducing the health-wellness programme for employees. Was there an asset management and evaluation policy? What was contained in the asset register? What strategy was in place to ensure that 75% of the services were local content? 

Mr Fikeni responded that once the entity had a very clear strategy going forward and the new business level, then structure ought to be informed by that. The structure where there were many subsidiaries and mostly under utilised, was usually a consequence of a privatisation process that had taken place but currently stalled. It was important for SAFCOL to build strong relationships with communities where there was potential or land claim such that competitors would see SAFCOL as a preferred entity.

Ms Julia Mphafudi, Group Senior Executive: Human Resource Capital Management and Transformation, responded that SAFCOL would not be able to provide jobs on a full-time basis and a lot of work would be created through the value-chain as it was clear that out of 5 000 employees 4 000 were contractors. SAFCOL also prioritised on ensuring that enterprises, Cooperatives and SMMEs were sustainable and that could be achieved through partnering with SETA and the Department of Trade and Industry (DTI).

Ms Mashinini responded that SAFCOL focused on biological and traditional assets; the entity had done an extensive exercise of identifying assets. More intense work was done on the biological assets as there was a need to look at the physical database to ensure that what was in the book and on the ground was complementary to correctly value the assets. The Board had discussed the strategy to deal with the loss of critical skills, which was important considering that there were scarce skills to utilise biological assets, and the Executive had assured that there were measures in place to deal with the challenge.

Ms Mona added that job creation was directly linked to the cost of doing business and the cost of labour was particularly high. SAFCOL was partnering with the Expanded Public Works Programme (EPWP) in order to create jobs, especially in rural areas.        

Ms D Rantho (ANC) suggested that the entity should submit a quarterly report on steps taken moving forward so as to see if there was an effort to change the entity’s composition. SAFCOL should also consider using rail as a form of transportation as that would likely reduce fatal accidents caused by trucks.  She asked whether there was correct material in the process of fine-turning SAFCOL especially in terms of reliability and efficiency. What was the status quo in the IFLOMA branch in Mozambique? Were there enough resources to deal with the additional allocation of land in Mozambique?

What were other regional areas in horizontal integration as that was important to identify the location for oversight purposes? She suggested that the Committee needed to visit IFLOMA in Mozambique so as to observe its operation. What was the reason for lower revenue than budget? Was there a plan in place to rectify this problem? She wanted to know whether the disciplinary process mentioned was already underway or still to begin and the time frame for the completion of disciplinary process. It was important for SAFCOL to do a proper research on belongings of land, as this was critically important in the process of land claims.      

Mr Fikeni responded that IFLOMA was part of a long-term strategy and it was important to invest in a country such as Mozambique, which had just discovered gas and had the highest growth rate in Southern Africa, which were likely to ignite the construction and mining sectors in that country. There was obviously a need to have an effective business model to execute the mandate and objectives. SAFCOL already supplied quarterly reports to the Department of Transport (DoT); the Committee would also be provided with such reports and the plan was to invite the Committee to visit some of the plants and projects.

The fine-tuning of SAFCOL was part of repositioning the entity altogether in terms of its business model improving efficiency and reliability. The utilisation of rail as a form of transportation was considered but he warned that Members needed to be aware that the utilisation of trucks was a conscious decision to empower the Historically Disadvantaged Individuals (HDIs).  

Ms Mphafudi responded that there were joint Community forums that met with community members on a quarterly basis and the communities would discuss infrastructure and job creation needs, then SAFCOL would decide on the needs based on available budget. The entity had sustainable volumes annually of R1 million and was under pressure as it was unable to sell those volumes year-in-year out.  

Ms Mona responded that the issue of land claims was not affecting the operation of the entity as it worked closely with communities to build a relationship with claimants. Other regional areas included operations in Mozambique. The first thing SAFCOL did when it occupied IFLOMA was to root out corruption and 6 managers were dismissed because of corruption, which was where the R800 000 was recovered. A feasibility study was done and SAFCOL was comfortable that it was on the right track in running IFLOMA.    

Mr R Tseli (ANC) was impressed by the remedial actions put in place to deal with issues raised by the AGSA and suggested that when the Board came back it should update Members on each of the remedial actions. It was good that SAFCOL obtained an unqualified audit opinion and he hoped that trend would be maintained going forward. He commended SAFCOL for taking significant strides in prioritising employing disabled people, and asked whether there were disabled people at top management level. SAFCOL did particularly well on skills development, especially on Adult Education Training (AET). What was SAFCOL doing on the aspect of ecotourism in the forest? He echoed that SAFCOL be commended for the introduction of a health-wellness programme for employees. What were the criteria used to identify areas that required intervention?

Ms Mphafudi responded that there were disabled people at top management level; the majority of people with disability were men because of the nature of the work done by SAFCOL    

Mr K Morapela (EFF) echoed that he was impressed by the financial performance of the entity and that the needed to be commended. It was concerning that SAFCOL only made turnover of R0.86 billion while SAPPI made a turnover of R63 billion and asked if there was a way to create a fair competition for the entity. He asked if black-owned companies benefited in the procurement spent. Was there any reason for operating in three provinces? Was there a possibility to explore other provinces so as to expand the operation? The issue of land claims highlighted the need for the country to deal decisively with imbalances in terms of land access.

Ms Mona responded that SAPPI converted its own plantation and they were now harvesting and dumping in SAFCOL’s market and that made the operation even more difficult. The reason it operated only in 3 provinces was as a result of the previous decision to privatise SAFCOL.      

Mr E Marais (DA) also suggested that SAFCOL needed to consider migrating to railway as the cost of fuel was mentioned as one of the key challenges. What were the reasons for the external customer not to honour their commitment to purchase resources from the company? When could the Committee expect the update on land claims affecting SAFCOL? What was the model for the settlement of claims? He said the reason for lower turnover of SAFCOL compared to its competitors emanated from underutilisation of land. There was a need to diversify the operation as the construction and mining industry was going down and likely to further impact on the turnover. 

Ms Mona responded that SAFCOL was already exploring other alternatives and diversifying its operation in order to maximise profit and ensure that there was sustainability. The external customer failed to purchase resources from SAFCOL precisely because of the depression of the market. The use of railway was imperative and SAFCOL was already in discussion with Transnet to transport the products, considering the rising fuel price and road fatalities.       

Ms G Nobanda (ANC) asked what were the reasons for the high resignation of staff members and what strategy was in place to retain critical skills? She was also impressed by the focus on skills development and asked about the part of the province where development was concentrated. What was method of applying for the bursaries, internships and training programmes offered by SAFCOL?

Ms Mphafudi responded that currently the major focus was on the provinces where SAFCOL was operating (KZN, Mpumalanga and Limpopo) as the intention was to partner with the communities located close to the operation and the majority of the areas were rural.  

The Chairperson sought clarification on the reason for the inclusion of increasing overheads as a result of rental fees in the 2013/14 financial year. What were the internal control issues, which were highlighted by the AGSA in the Annual Report? What was the progress around the procurement process?

Ms Mashinini responded that in 2013 SAFCOL started a process of accruing for land rental and the cost was sitting at R14 million for 2013 and increased to R47.7 million in 2014. The costs increased on average in line with inflation and there were areas that still needed to be explored in order to seek opportunities. The process of procurement: within the contract management space there was a technical committee who reviewed whatever tenders were in place, that would then recommend to the procurement committees in terms of what needed to be approved.  This process was done through a scope and advertising process developed by an internal specialist.

Ms Mona added that when the entity was given the land 20 years ago, there was an agreement stipulating the amount of money to be paid until the end of 2012, which amounted to R17 million. It was only in 2013 that the entity started paying market-related rentals for the land.    

The Chairperson thanked everyone present in the meeting and particularly SAFCOL for its presentation and also reiterated that it was clear that the entity was doing well in terms of asset management and corporate social responsibility. She once again commended the entity on receiving an unqualified audit opinion and the remedial actions put in place to address the concerns raised by the AGSA as this showed effective leadership.

Adoption of minutes
Minutes of Committee meeting held on 29 October 2014 were adopted with the amendment that Mr Morapela was absent on that day.

The meeting was adjourned.