State-owned Companies performance: Department of Public Enterprises update on implementation of Auditor-General recommendations

Meeting report

Acting Director General, Ms Matsietsi Mokholo, and officials from the Department of Public Enterprises briefed the Committee on the performance of State Owned Companies (SOCs) in response to how the Department was addressing challenges raised by the Auditor-General. Ms Mokholo said that the performance of the eight State Owned Companies had to be seen in the context of revenue, profit and asset value. The briefing shed light on the internal and external factors which impacted directly on the functioning of the SOCs.
 
Overview
Key points raised were that the Department was the sole shareholder of some of the country’s largest SOCs in the country, including Eskom, Denel and Transnet. The collective asset value for DPE’s SOCs was over R770 billion, with Eskom and Transnet accounting for R740 billion of that. The SOCs played a critical role in shaping the outcomes of the Medium Term Strategic Framework and ultimately the National Development Plan. Subsequent to Presidential Proclamation, SOC’s Broadband Infraco (BBI) and South African Airways had been transferred to the Department of Telecommunications & Postal Services and National Treasury respectively.
 
Red flags had been raised over the financial sustainability of Eskom and SAA. This had required intervention and the issuing of government guarantees.
 
There continued to be a skills shortage and an exodus of highly specialised personnel from the public sector to the private sphere. A skills audit had to be undertaken.
 
Attention had to be paid to improve corporate governance in respect of Supply Chain Management, irregular and wasteful expenditure and criminality. There had to be a focus on consequence management and a commitment to improving a culture of accountability and responsibility and minimising abuse of power.
 
Risk management had to be the responsibility of all structures within the companies and not the sole responsibility of a particular department.
 
Shareholder management practices required attention with a view to strengthening the policy framework of the model.
 
Observations on audit outcomes and financial performance of SOCs over last two years
1)    All SOCs except South African Express Airways (SAX) had successfully complied with the Public Finance Management Act and tabled their annual reports
2)    All SOCS except SAX held AGMs and signed the compacts
3)    Relatively low levels of operational efficiencies  had resulted in high wastage
4)    There was limited functional and managerial skills for the highly complex environment within which the SOCs operated
5)    Ineffective performance management measures
6)    Ineffective governance mechanisms and policies.
 
Auditor-General observation
AGSA Senior Manager, Mr Sybrand Struwig, said the presentation had been complementary to the issues raised by Auditor-General. The crux of the problems experienced by SOCs had to be seen in a broader perspective. Mr Struwig said Denel could be used as a positive example. This was because Denel had sorted out its administration and was able to perform in its operations and sustain that performance.
 
Discussion
Ms N Mazzone (DA) asked for an update on the Department’s in-depth study into Eskom’s maintenance plans for Medupi and Kusile. She requested feedback on discussions and interaction between National Treasury and the Department regarding SAA which had been placed under administration. Considering the massive guarantee to assist SA Express Airways (SAX), would the department be requesting a detailed analysis of how it intended to use it?
 
Mr R Tseli (ANC) asked for details on any specific interventions to assist in a turnaround at South African Express (SAX). What were the challenges? To what extent was the use of consultants affecting the SOCs, considering the substantial financial amounts involved?
 
He asked for more detail on SOCs, Eskom and Transnet, which cumulatively had an asset base of two percent. He had expected this to be higher. More clarity had to be given on how the department planned to address fruitless and wasteful expenditure and recoup losses.
 
Mr Tseli asked what the implications of the two Presidential Proclamations were for the Department.
 
Dr Z Luyenge (ANC) said it appeared that State Owned Enterprises (SOEs) seemed to be a bit reluctant to follow the same recruitment processes and framework as the Department. Had this perhaps resulted in the exodus of senior and executive Department?
 
He inquired if there was a broad asset management policy for all the SOEs or whether they had their own different asset policies.
 
Dr Luyenge asked if the Department had considered blacklisting employees found to be involved in wasteful and fruitless expenditure. Did the Department have the legal power to access their pensions before they left the Department’s employ in order to recoup losses?
 
Mr P Morapela (EFF) asked for more information on what was needed to improve the performance of Transnet.
 
He asked for an explanation of what the relationship was between SAA, Department of Transport and the Department of Public Enterprises?
 
Mr Morapela said the Committee had continued to sing the same song about Shareholder Compacts. Details needed to be given.
 
Ms D Rantho (ANC) wanted to know if the department attended its entities’ management audit committee meetings. Did the Department know when the meetings were? Answers had to be given to account for the relatively low levels of operational efficiency resulting in high levels of wasteful expenditure. Who was responsible, the Department or the SOCs? What was being done to correct the low level of efficiencies?
 
Ms Rantho asked why SOCs were not complying with the Public Finance Management Act as legally required. SAX in particular was not complying or tabling its annual reports. When was this going to be done? Had the Department given SOCs a deadline for the tabling of the reports? Was the Department insisting on this? What were the Shareholder Compacts?
 
Other questions posed by Ms Rantho related to the DPE’s managerial skills base; its training of staff; the retention of skilled employees and unfilled positions. She wanted to know if employees could be asked to sign a contract which stipulated that they had to stay in its employ for at least three years.
 
Ms Rantho asked the Chairperson if was possible to schedule a meeting wherein both the Department and the relevant SOCs would be in attendance.
 
Ms P van Damme (DA) noted that from the presentation the situation looked depressing. Nothing had changed; it was the same broken record. She charged that the Minister had not appeared to account to the Committee on the state of affairs in the SOCs.
 
She said the profit versus the revenue base was quite low. Was this a concern? SAX was in ICU; it had not submitted its annual report, there had not been an AGM. Should SAX be submitted to National Treasury as well?
 
Ms Van Damme asked what the timeframe was for the Government Shareholders Management Bill. When would it be before the Committee for consideration?  
 
Mr E Marais (DA) asked for the Auditor General to give its view on SAX. He asked the Chairperson to request the Minister to appear before the Committee.
 
Responses
Ms Mokholo said the issue of the Kusile and Medupi build programme had been presented some time last year. The Department had commissioned a study on the projects. What had come out of those reports was that at the time when the decision was taken for the SOCs to embark on the massive build programme, the country was already in trouble. This had meant there was a compromise: interventions needed to be made while plans were still being formulated. She said it was sometimes the case when dealing with mega projects that there needed to be forward-planning in anticipation of a problem. But, the Eskom electricity and pipeline challenges were already present.
 
There was also a lack of skilled people and because of financial constraints in-house training had been compromised. The Department was looking at lessons it could learn when undertaking future projects of the same size.
 
She said the two percent contribution to the economy by the energy sector needed to be looked at in the broader context. Eskom was the main player in the electricity sector (about 95 percent) but the energy sector had many other role-players.
 
Ms Mokholo said it was not known how long National Treasury would continue its oversight function of SAA. She said proper handover of all functions was still in the process. The Department would be engaging with SAX on the way forward but only SAA had been transferred to National Treasury.
 
She said she appreciated that there might have been a blind spot when informing the Committee as to how the transfer of SAA to National Treasury had impacted on the Department of Public Enterprises.
 
Ms Mokholo said wasteful and irregular expenditure was being looked in to at both the departmental and SOC level. Asset management policies and depreciation of assets policies were in place.
 
She replied that the matter of government guarantees for SOCs was a concern and the Department was hoping that it was an issue that the entities would be able to wean themselves off of this, provided that revenue improved so did profits.
 
Ms Mokholo said the department did not only look at the financial performance of an entity before determining whether it was performing well or not.
 
For Transnet, its profit, asset base and revenue was doing well, but the entity had gone into a massive build programme. Transnet also relied heavily on the mining sector which was not doing very well. Therefore there were unintended consequences and spin-offs. External factors always had to be borne in mind.
 
She said there was cross pollination of success stories such as Denel. Last December Denel had been invited to share its story with the Department. A request had also been put through for Denel to address the Chairpersons’ Forum in March.
 
Ms Orcilla Ruthnam, Chief Director: Governance in the Department of Public Enterprises, spoke on shareholder management and human resource management. She said legally there were two constructs: the Minister was the shareholder representative and that came through the Companies Act but the Minister was also the Executive Authority which came through the PFMA. So, one always needed to be mindful of both roles. The two roles had been merged firstly to make sure there was oversight and secondly to ensure there was no conflict but also to hold companies to higher governance levels. 
 
She said all companies were busy with their Corporate Plan and the Annual Reports and these reports would be done by the end of March.
 
Ms Ruthnam said the Department was looking at usage of consultants to the extent that it was not being abused and that skills in the company were not being transferred out. The Department trusted that the Boards were being mindful of this.
 
She said the Department was at the point of now looking at the main recommendations of the Government Shareholders Management Bill. The Department was at the point where it could present to the Minister the key objectives of the Bill. The Department had a very tight timeframe but at least by July a concept would be ready to present to the Cabinet Lekgotla.
 
She said consequence management was guided through remuneration standards. There was a template to ensure that all companies were clearly tracking incidents of financial misconduct irrelevant of the amount. Attempts were made to recoup financial losses but there were cases when employees resigned and then there was no means to recover the losses from pensions within departmental channels.
 
In terms of recruitment and employee contracts, Ms Ruthnam said the Department was guided by the Basic Conditions of Employment Act and the Labour Relations Act.
 
Ms Yoliswa Makhasi, Deputy Director General: Corporate Management, said Members needed to be cognisant that the “public sector employs but doesn’t own us”. However, the best the department could do was to try and harvest the skills and incentivise the retention of skills.
 
Department employees often resigned to go and work at one of the SOCs which offered different packages. There was nothing the department could do to prevent this. The standard notice period was one to three months depending on level of seniority.
 
Ms Mokholo said often skills were lost to the SOCs and this meant that getting skilled and specialised labour, sometimes from overseas, came at a cost.
 
Ms Makhasi said non-performance quarterly reports were being done but it seemed to be more difficult in the Department of Public Enterprises. This was because it was a small department.
 
In the final round of short questions, Chairperson Ms D Letsatsi-Duba (ANC) asked how long it took for the Department to implement what the Auditor General had said. The Department’s effectiveness in its monitoring of SOCs was queried.
 
Mr Tseli requested that the Chairperson request the Department to report back in two weeks on Shareholder Compacts.
 
Ms Mokholo replied that because of the confidential and sensitive nature of the information, the detailed compacts could not be presented publicly, but if the current information was too sanitized, the Department would see how it could expand on detail.
 
Ms Makhasi said 90% of the AG audit findings had been implemented. The remaining ten percent were outstanding because they were directly related to financial statements. These would be completed at the end of March, the financial year-end.
 
Ms Letsatsi-Duba asked the Department to send through a report on the maintenance being done at Eskom.
  
Committee business
Members adopted the Minutes of the Public Enterprises Portfolio Committee Meeting dated 19 November 2014.
 
Members adopted, without amendments, the Portfolio Committee on Public Enterprises Report on the oversight visit to Transnet Rail Engineering.
 
Members adopted, without amendments, the Portfolio Committee on Public Enterprises Report on the oversight visit to South African Express Airways.
 
The meeting was adjourned.