Department of Public Enterprises on its 2013/14 Annual Report

NCOP Public Enterprises and Communication

26 November 2014
Chairperson: Ms E Prince ANC (Western Cape).
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Meeting Summary

The Committee expressed disappointment at the continued absence of the Minister and Deputy Minister, who had not appeared before the Committee for the past six months. In future, the Committee would not accept any annual performance plans and annual reports of the state-owned companies (SOCs) in the absence of the Minister.

Key performance areas for the Department of Public Enterprises (DPE) in the 2013/14 financial year were that all invoices had been approved and settled within 30 days; an accurate asset register had been maintained; the vacancy rate had been reduced from 10% to 1.8%; a performance monitoring and evaluation policy had been approved and implemented; consultants’ use had been reduced by 38.5%; and fraud detection and prevention mechanisms had been put in place. It had incurred R711 000 of irregular expenditure, and fruitless expenditure of R530 000. The performance of the economy had had a profound impact on the SOCs’ operational environment, in particular that of the airlines.

The DPE was urged to consider offering bursaries to students and then to contract the graduates to work for a certain number of years, as was done by the Department of Health for medical practitioners, so as not to complain of capacity constraints. When asked if the DPE had further plans to reduce consultancies, it replied that it was a professional service department and its shareholder oversight role required that from time to time it used external expertise it did not have internally. Therefore, DPE would not stop using consultancies.

It was asked if it was possible to return Fly SAA to Transnet, given that Transnet boasts of its capacity beyond the borders, and its credit worthiness being above that of the banks. The DPE replied that Fly SAA could not be transferred to Transnet as this would not be solving the problem, but treating the symptoms of the disease. The real problems in the aviation sector were finance, network and leadership. Finance issues were a weak balance sheet, the high cost of borrowing, inadequate capital injections since 2006, high operating costs, including an ageing fleet, and labour intensiveness. Network issues looked at how it could optimally operate a route network that enabled it to migrate to financial sustainability. It had submitted recommendation to the Ministers of Finance and Public Enterprises on loss making long haul international routes, and engagements were continuing on where it could co-share and where it could fly directly. Lastly, leadership involved having the right people in management, customer service, baggage handling, executives and the boards. All this was being looked at by an inter-ministerial committee, and the Minister of Public Enterprises would be tabling a proposal on Fly SAA soon to Cabinet.

Eskom had announced its interim financial results and the municipal debt was scary, with Soweto owing R4 billion alone. An inter-ministerial committee consisting of Ministers from Cooperative Governance, Energy and the DPE, as well as representatives of the National Energy Regulator of South Africa (NERSA) and Eskom had been meeting to find a long term solution to municipal debt. The major problem was a culture of non-payment. At the technical level of DGs, it was looking at ways to entice people to go pre-paid, or use solar and other renewable energies. The culture of non-payment could not be condoned. There was a need to confront a tough decision that some of the municipalities were just non-viable, and that money that was supposed to be paid to Eskom, was being used for other services.

 

Meeting report

Opening remarks

The Chairperson welcomed Members, officials from the DPE and visitors to the meeting.

Ms C Labuschagne (DA) said that the Committee had never seen the Minister and Deputy Minister in the past six months, which meant that the NCOP was not a priority to them.

Mr M Rayi (ANC) said the Chairperson must write a letter to the Chairperson of the House, saying that the Committee had not seen the two in the last six months. The annual report must be presented by the Minister, as it was the one who signs it.

Mr E Mlambo (ANC) said the letter must state that the Committee will not in future accept an annual performance plan and annual report in the absence of the Minister, and that the Minister was the one who must present them.

Department of Public Enterprises (DPE) Annual Report 2013/14

Ms Matsietsi Mokholo, Acting Director General, DPE, explained that the DPE is the government shareholder representative in state-owned companies -- Eskom, Denel, South African Airways, South African Express, Safcol, Transnet and Alexkor. In the period under review, DPE strategy focussed on:

·         Maintaining a robust shareholder oversight practice within the framework of the shareholder management model that the Department had adopted;

·         Stabilising and repositioning of SOCs, looking at funding options;

·         Recognition that SOCs are key instruments with regard to the developmental state in driving investment and leveraging procurement to support industrialisation;

·         Gearing up shareholder oversight, to lead in capital investment, with emphasis on strategic integrated projects;

·         Capacity building, to enhance the Department’s ability to execute its strategic plan;

·         Creation of a supportive policy environment to support the sustainability of SOCs

Key performance areas were that all invoices were approved and settled within 30 days; an accurate asset register was maintained; the vacancy rate was reduced from 10% to 1.8%; a performance monitoring and evaluation policy was approved and implemented; consultants’ use was reduced by 38.5%; and fraud detection and prevention mechanisms were put in place. It incurred R711 000 irregular expenditure, and fruitless expenditure of 530 000. The performance of the economy had had a profound impact on the SOCs’ operational environment, in particular that of the airlines. The DPE had received a clean audit opinion.

Discussion

The Chairperson said that the former Director General of the DPE once spoke of introducing legislation to increase oversight over SOCs. She asked if any progress had been made on this and asked how the DPE ensured that the right appointments were made to the various position in the SOCs.

Ms C Labuschagne (DA, Western Cape) asked the DPE to explain the legal framework on the shareholder oversight it had adopted. She asked how the shareholder model that DPE intended to gear up in driving capital investment looks like, separate from strategic integrated projects. She asked what role the DPE played in strategic coordination across the whole of government. When had the performance monitoring and evaluation policy been approved and implemented, and was it for the DPE only, or included all SOCs? She asked how the DPE ensured that all SOCs had an enterprise risk management policy. The DPE had noted in the presentation that the performance of the economy had had a profound impact on SOCs’ operational environment, with the state airlines most affected. If the economy was the only reason, how was it then that other SOCs such as Denel and the engineering department of Transnet, were making a profit while Fly SAA need a R5 billion bail out from government -- with Fly Mango making a profit on the other end? She asked about the progress the DPE had made in the creation of a supportive policy framework that would promote the effective functioning and financial sustainability of SOCs, the challenges it was facing and any possible solutions it had proposed.

Mr E Mlambo (ANC, Gauteng) said the DPE had made consistent reference to the New Growth Path, but had not made any reference to the National Development Plan. He asked how the DPE linked the two policies.

Mr A Singh (ANC, KZN) welcomed the overall reduction on consultancies by 38.5% and asked if the DPE had further plans to reduce it further, and whether this was possible. He asked when disciplinary proceedings against officials responsible for the R711 000 irregular expenditure would be completed.

Mr M Rayi (ANC, Eastern Cape) thanked the DPE for a clear and detailed presentation. The SOCs needed to be just as good as the DPE. If the powers of the DPE were limited to making interventions in SOCs, the NCOP would support any legislation that increased its oversight over SOCs. He asked the DPE to explain how SOCs unlocked economic growth, particularly in provinces, and the SOCs’ contribution to industrialisation. In the Eastern Cape, there had been de-industrialisation from Transnet when it closed the lines between East London and Port Elizabeth. The two were the industrial hubs of the Eastern Cape, but there was no connection in terms of a rail link, neither were there any plans to link the two via sea transport.

He asked if it was possible to return Fly SAA to Transnet, given that Transnet boasts of its capacity beyond the borders, credit worthiness above that of banks, and could even borrow for banks. Even though the National Treasury had urged entities to live within their balance sheets, it had not taken into account the external factors that the entities were exposed to. For example, Fly SAA had complained about long-haul trips, in particular to Beijing, as it loses R1 million daily to Beijing. It had made an application to the DPE to consider the routes. Similarly, Eskom was owed vast billions by municipalities. He asked how the DPE and Cabinet considered helping Eskom, and whether Eskom should consider distributing electricity to municipality or to residents -- for example, in Soweto. SA Express had also complained of competition for customers between it and Airlink.

He commended the reduction in the vacancy rate and paying service providers within 30 days, and developing strategic plans within the stipulated time frames. Nevertheless, he was concerned with capacity constraints and the continued use of consultants, even though he welcomed the reduction in use of consultancies. He asked the DPE to consider offering bursaries to students and then to contract the graduates to work for a certain number of years, as done by the Department of Health for medical practitioners. The DPE should consider helping Fly SAA, as it complained of parking fees, particularly at OR Tambo airport. He asked for clarity on the disparities regarding the delivery of four A320 aircraft to modernise Fly SAA, which was against the 20 reported by the board.

Ms B Masango (DA, Gauteng) said the DPE must be as good as the entities it oversees. Fly SAA struggled because of a dual mandate -- developmental and commercial -- and usually struggled on the latter because it had to meet the former. She asked the DPE to explain these dual mandates and what they entailed. She asked how over R200 million allocated to the Diabo Trust had been utilised.

The Chairperson asked about the role the DPE played in the manufacturing sector.

Ms Mokholo replied that most of the SOCs were performing well. She would come back to the Committee and take it through the dash board on the performance of state-owned companies. The DPE ensured that all SOCs had an enterprise risk mangement policy, as it had a governance and risk forum comprised of the DPE chief director responsible for governance, the chief risk officer of DPE, company secretaries of all SOCs and their chief executive officers, which sat and discussed various issues. It had improved on its quarterly reporting guidelines to track information coming from SOCs.

The Department had started doing an independent verification process -- Eskom’s build programme was an example of this, and the report could be shared with the Committee. The report confirmed the challenges South Africa was facing. Eskom had not built a single power station since 1986 before engaging in Medupi, while Transnet had not built a pipeline since 1982. Within this period, it had lost a lot of project management and engineering skills, as these professionals had left the country to utilise their skills elsewhere. The decision on high drive built programmes had thus started on the back foot. The study had also identified the risk of fast tracking the building of Medupi and Kusile. Multi-pipeline projects had been fast tracked when they should have been given a long term schedule. If it was going to engage in further new builds, there were certain things it needed to get right, such as the kind of policies, the timing of policies and the role of each stakeholder, and who was going to fund the programme. The study had found that it was impossible to make a build decision without taking into account these factors, especially payment issues.

She said that the Diabo Share Trust was a residual process that had come out from the privatisation of Telkom. When it was privatised, there was a condition for benefits to the then Telkom employees. The Diabo Trust was to compensate those that left Telkom at that time, and those that were retrenched, and Treasury had transferred funds to the DPE and Department of Communication to do that work. It had been compensating employees since 2004 and had opened the last cycle with the help of a company that specialised in verification so that benefits did not go to bogus employees and beneficiaries. It had placed an advert calling for direct and indirect beneficiaries, and this would be closed in the next financial year. Any money not paid by then would be returned to National Treasury.

The dual mandate commits the SOCs to pursue commercial objectives as well as assist the state on the developmental mandate. The general problem of this was the policy that the SOC must borrow on the strength of its balance sheet to pursue its commercial mandate. The developmental mandate was that Eskom must provide free basic electricity to households. If Fly SAA must fly some routes that were strategic -- to advance the strategic developmental mandate of the state, linking it with the region and BRICS -- the state must have a policy decision to fund this. The issue of having a clear regulatory framework was important not only in the aviation space, but across all SOCs as it set a path on how to drive SOCs to do more. Discussions were being held at the ministerial level between the DPE, the Department of Transport and National Treasury, looking at the remodelling of the aviation space, with a technical task team from the ranks of directors-general.

Fly SAA could not be transferred to Transnet as this would not be solving the problem, but treating the symptoms of a disease. The real problems in the aviation sector were finance, network and leadership. Finance issues were a weak balance sheet, the high cost of borrowing, inadequate capital injections since 2006, high operating costs, including an ageing fleet, and labour intensiveness. Network issues looked at how it could optimally operate a route network that enabled it to migrate to financial sustainability. It had submitted recommendations to the Ministers of Finance and Public Enterprises on loss-making long haul international routes, and engagements were continuing on where it could co-share and where it could fly directly. South Africa was at the end of the hemisphere where every flight goes up. There were fuel costs and extraneous factors such as the exchange rate. Lastly, leadership referred to whether it had the right people in management, customer service, baggage handling, executives and the boards. All this was being done with the inter-ministerial committee, and the Minister of Public Enterprises would be tabling a proposal soon to Cabinet on these issues concerning Fly SAA.

The issue of parking payments was because of the Airports Company of SA (ACSA) and Air Traffic and Navigation Services (ATNS), which introduced a fundamental principle of competitive neutrality. If they considered Fly SAA and SAX favourably, there were other privately-owned enterprises that operated within this space and the state must balance how it treated those within the state and those not from the state, so as not to create an unfair hegemony on state-owned airlines. The delivery of four, as opposed to 20 Airbuses, was a legacy contract that had been staggered.

The DPE had a competitive supply development programme. For instance, when Transnet entered into an agreement with an international company on procurement, the agreement must have a provision that a certain number of locomotives must be assembled locally. It had a partnership with China Railways, so that a certain number of engineers had been sent there to learn the assembling of locomotives, thereby transferring skills. Expenditure on maintenance by Denel, Fly SAA and SAX served as a financial muscle to stimulate the manufacturing sector.

Ms Yolisa Makhasi, Deputy Director General: Corporate Management, DPE, replied that the DPE was a small department and was expected to comply with everything, just like big departments such as Home Affairs. She wished that people who set the laws understood that the DPE could not afford to have all the committees required, as it was so small. The performance evaluation policy had been approved in June last year. It was the department’s policy to guide performance management and performance reporting. This touched on SOCs, as the DPE was required to evaluate certain SOCs’ projects on an ongoing basis. The DPME had issued a directive that state departments with an oversight role had to evaluate their own programmes independently, as well as the entities that reported to it. The emphasis on the New Growth Path was because the skills development programme was linked to the skills accord. The NGP evolves into the NDP, and the current financial year and the medium term strategic framework was linked closely to the NDP.

The DPE was a professional service department and its shareholder oversight role required that from time to time it used external expertise it did not have internally. For example, if it needed to look at the diamond cutting value chain, it did not have such expertise internally. Therefore, the DPE would not stop using consultancies. It could only keep an eye on its budget for consultants, and not to exceed a certain baseline. It had capacity constraints and sometime used external consultants. Treasury needed to know, before consultants were used, whether an entity had staff members employed to do such work. Lots of consultancies were used on the business programme, which was struggling with skills. Some of the consultancy costs were legal fees. Even though it had lawyers in the department, the DPE could not have lawyers for all the cases that it dealy with. In every case where an SOC was sued, the Minister or the DPE was always listed as a respondent. It worked closely with the state legal services.

Substantial progress had been made on the irregular expenditure. About 80% of the work had been done and what was left was only for the Director General to charge those found to be negligent and to recoup the money in terms of the Public Finance Management Act (PFMA) if there was negligence. Information on localisation in provinces would be submitted in writing. The DPE had never lost money through not filling vacancies in terms of the “use it or lose it” policy, by filling all vacancies within three months. Where vacancies were not filled, it was because the DPE could not identify the right people. It had a tight recruitment system, as it did security checks, verified qualifications, and checked credit bureaux.

Ms Mokholo added that the DPE had a detailed system on the process for board appointments. It was linked with the Companies and Intellectual Property Commission (CIPC), where it did experience checks. It was still the intent of the DPE to take its legislation through. However, this had been suspended to allow the Presidential Review Committee to review state-owned companies, the ability of the shareholder to respond, and the constraints in current legislation that limited the Minister’s power to intervene. The committee had completed its work and submitted it to Cabinet in 2013, and the DG forum was looking at recommendations that would be shared with the respective ministers. The report had made a recommendation that there must be an inter-ministerial committee that looked at the implementation of the report.

Ms Makhasi said the Minister and Deputy Minister had to have a programme of engagement to meet with provincial cabinets and some role players, such as businesses, to give them an overview of the work SOCs were doing in the provinces. In the Eastern Cape for example, Transnet had upgraded its plant and had manufactured a goods train that carries cars. Provinces also wanted to work closely with Safcol in creating forestry industries.

Mr Rayi asked if there were any plans to address finance and leadership challenges in the aviation industry. The developmental mandate had to take into consideration extraneous factors that affected SOCs, especially on airlines on parking fees and ATNS. The DPE must discuss problems so that when it came back to the Committee, it would be speaking about the solutions to problems affecting Eskom on electricity distributed via municipalities and to consumers directly, so that money needed to recapitalise Fly SAA may be recouped from Eskom’s debt.

The Chairperson asked if there were any plans to recover debt from municipalities.

Ms Labuschagne asked the DPE to make a presentation on the study conducted to assess Eskom practices in the implementation of its capacity expansion programme. She asked when the private sector participation framework would be finalised, and whether the Minister gave strategic guidance to SOCs only once a year in the annual report addresses.

Ms Mokholo replied that an inter-ministerial committee was looking on the sustainability of all state owned companies. It was also looking at whether the model of having a regional airline and a main airline was working, or whether they should be brought together -- with Fly SAA as the main airline, SAX as a regional carrier, and Fly Mango as a low cost airline. To make this decision, it had to look into the history of why they had been unbundled in the first place, so as not to repeat the same mistake. There were short gains that the airline must look into, such as better collaboration between SAX, Airlink and Fly SAA. The other was looking on where efficiencies could be gained by cost containment by looking at the routes they were operating. It was also looking at what was happening in the global aviation industry, as other airlines were co-sharing or flying directly to certain destinations.

The previous day, Eskom had announced its interim financial results and the municipal debt was scary, with Soweto owing R4 billion alone. An inter-ministerial committee consisting of Ministers from Cooperative Governance, Energy and the DPE, as well as representatives of the National Energy Regulator of South Africa (NERSA) and Eskom had been meeting to find a long term solution to municipal debt. The major problem was a culture of non-payment. At the technical level of DGs, it was looking at ways to entice people to go pre-paid, or use solar and other renewable energies. The culture of non-payment could not be condoned. There was a need to confront a tough decision that some of the municipalities were just non-viable, and that money that was supposed to have been paid to Eskom, had been used for other services. It was also impossible to just switch off people’s electricity.

Ms Makhasi replied that the private sector participation framework would be finished this financial year. It had been developed and the first draft had been discussed internally. There were different mechanisms that the Minister used to interact with the SOCs, including strategic statements, annual general meeting addresses, the chairperson’s forum -- where the Minister engages all chairpersons from SOCs and discusses issues of mutual interest – one-on-one engagements with chairpersons of SOCs and, to some extent, with the entire boards. The new Minister has had a lot of focus on certain SOCs that required urgent attention. She had presented the AGM addresses to all SOCs, except Fly SAA and SAX, which had not yet held their AGMs.

The Chairperson thanked the officials from the DPE.

Mr Rayi said the DPE should not come to report again on copper theft. This had been going on for some time, and the Department had to find a lasting solution to address the problem once and for all.

The meeting was adjourned. 

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