SAFCOL update on impact of land claims and overall 2013/14 performance

Meeting report

SAFCOL update on the impact of land claims and overall 2013/14 performance
Ms Nomkhita Mona, Chief Executive Officer of SAFCOL quoted 2013 figures obtained from Forestry SA. She said SAFCOL was 100% state owned. Issues of importance were economic growth and creating movement in the economy. IFLOMA, a subsidiary in Mozambique, which was 80% owned by SAFCOL and 20% state owned, was almost dormant. The Board consisted of Dr Somadoda Fikeni ( Interim Chairperson) and four other non-executive directors. SAFCOL’s vision, mission and core values were all about the community and making a difference. SAFCOL’s original mandate included timber harvesting and related activities, both domestically and internationally.

The company had identified four strategic pillars (horizontal integration, vertical integration, rural development and green energy). Horizontal integration meant expanding within the same area, such as buying more land to ensure they expanded their area of operation. Vertical integration meant SAFCOL should not only plant and harvest, since this was not a sustainable business model. There was a need to create jobs. Regarding rural development, SAFCOL and forestry were in rural areas and it was very important to create jobs there. SAFCOL was using its partnerships with the communities quite well, establishing manufacturing centres and training people, inter alia: young people had produced hundreds of desks which had been given away to schools in the area. This would be a business leg, going forward. Green Energy referred to creating their own electricity by using their own sawmills (there was no sawmill in Limpopo). Using what was left over, or selling to other customers in the area, meant there was no waste; they had done studies and were moving in that direction. There was the issue of using their own bio-mass, and later on getting to bio-fuel.

SAFCOL was once a national company and then some of it was privatised.  They were present and operated in three provinces:. Limpopo, KZN and Mpumalanga. Globally they were managing 187 000 hectares of land: they were planting in 121 000 hectares in the country. In Mozambique the company owned 32 000 hectares, consisting of four plantations and another big piece of land, which had been made available by the Mozambican government for the purposes of expansion. The board was currently reviewing what could be done with this asset, which had not been profitable.

KLF (Komatiland Forests) was their main subsidiary. SAFCOL owned 93% pine; the rest were other hardwoods. It was important to note that pine was grown over a 30 year period. Because forestry was a long-term business, it was important that management did not take short-term decisions. They were the largest producers of high quality saw logs in Southern Africa. When referring to SAFCOL, she meant KLF. They were one and the same company in that KLF was their trading company. They were presently a struggling entity focussed on care and maintenance.

Moving to page 10 of the presentation, Ms Mona explained that planting was the next level. One tended to plant more per hectare than was required. Thinning meant taking out some trees as they grew taller. Knotty pine did not have such a high value, so pruning was required to produce clear pine.  The problem was that there was no market for this clear smooth high quality pine. Establishing a plywood plant was one strategy. SAFCOL also did a harvesting operation where they harvested and sold.  The ‘log’ was the round tree which became ‘lumber’ when taken into the sawmill. SAFCOL sold 75% of their raw logs – this model was not sustainable. They were at the mercy of the buyer who dictated the price.

Referring to slide 12, Ms Mona said logs were harvested and either sold at the roadside or collected by the buyer.  If logs were delivered, it became SAFCOL’s problem to take the logs to the saw mill. Some logs were taken to the wet mill, others were sold as chips, or taken to the dry mill and turned into sawdust. Otherwise the logs were cut as wet boards, into lumber. There was a problem when the construction industry was down. SAFCOL depended on one market and needed to look at how else to use the trees.

Referring to slide 13, Ms Mona continued that they received no government funding whatsoever, and had had to live within their own means. In the last five years of the business, they had achieved the highest revenue in the 2014 financial year. The whole team was new; she herself had joined just two and a half years ago. However, the Chief Operating Officer, Francois de Villiers, was the longest serving member; he had been with SAFCOL for 21 years and had much experience. It was important to look at where the highest and lowest points were. The land did not belong to them but the trees did. If they looked after their asset, the asset would go well. They had received an unqualified audit opinion in the previous year. Operating costs were high, which was a problem for profitability. They could not continue to do the same thing and produce the same result: they needed to know what to change. They were satisfied with their results; they were a leader in the socio-economic side of things. They were a business looking to grow, and for new opportunities.

Challenges and risks identified
In order to be sustainable over 30 years, 1.5 million cubic metres had to be cut per annum. It was a big issue that these logs could not be sold. They needed to look at other markets offshore, and perhaps export these.

Land claims were not within the jurisdiction of SAFCOL. They were telling the communities claiming the land they were using, to partner with them.

 The forestry industry was under-appreciated; people did not want to work for SAFCOL because they would not be remunerated at the same levels as other people.  SAFCOL had high operational costs. They had spent time and effort explaining their business model - they wanted to attract and obtain people, and make the whole industry successful.

SAFCOL had suffered a number of fires. In the last year, since April 2014, they had counted 540 fires.

At this point Ms Mona handed over to the Senior Executive: HCM and Transformation, Ms Julia Mphafudi.

Socio-economic development
Ms Julia Mphafudi: Human Capital Management and Transformation, said that SAFCOL was running a number of BEE-related projects. In the last four years they had started cooperatives and organised community members to start a business. They were at a point where they could ensure commercial and community projects. As indicated earlier, they had started desk manufacturing and had trained 20 interns. Also, timber-framed infrastructures were to go commercial. They wanted to make sure that as many enterprises as possible were moving into bigger business. In the last five years, they had made sure that they focussed on socio-economic development. They had formed Joint Community Forums (JCF) with those communities, They had built schools, halls and ECD centres, responding to the needs of the communities, using timber frames, to assist communities, and had put a number of programmes in place to develop leadership and qualify employees.

Human Resource Management
In the last two years SAFCOL had made sure transformation was taking place, and had developed black management and professionals. There was a new health and wellness program for all employees. Clinics had been built, and mobile clinics had been provided, for the use of employees and the communities. SAFCOL was strong on learning and development and provided bursaries to the youth. They were trying to give communities skills, and teaching them, to ensure they developed the forestry industry.

Land claims
The CEO continued by reiterating that SAFCOL wished to but could not resolve the land claims. Because the communities did not make money, SAFCOL made sure that the communities did in fact benefit. There were other companies asking the communities to leave SAFCOL and to partner with them. There were currently 32 claims on the land SAFCOL operated on.

Option1 allowed the land to be leased from the community, so that the community could also benefit from the rentals. New terms could be renegotiated at the end of the second rotation or the community would later take over, so it was important that people be trained in forestry immediately, so as not to cause business loss. The lease rentals paid were at market-related rates, and SAFCOL would pay their cheque for 8 million rand, which was paid annually, on 1st April 2015.They would have to change their business model.

Financial report
Ms Zoliswa Mashinini, Chief Financial Officer, SAFCOL, said that there had been an increase in overheads in the 2014 year, so SAFCOL had been focussed on cost-saving and lower expenditure. Referring to slide 31, one could see that their net profit margin had increased significantly, but the ‘operating profit line’ had been under pressure. There had been an increase in cash flow from operating activities in 2014 – in the past five years SAFCOL had been under pressure from a cash flow point of view. National Treasury had cancelled the use of credit cards, but because they were remotely located, there was a need to transact with credit cards. After a number of engagements with National Treasury, an alternative solution had been found. SAFCOL had also revised their corporate plan, and procurement policies would be their biggest focus area, going forward.

Effect of new management and the way forward
The CEO stated that SAFCOL had spent three years cleaning up agreements and policies which had been affecting the company negatively, which had been in place before the takeover by new management. Areas of corruption, theft and fraud had now been cleaned up and SAFCOL was in a position to move forward. They had declared a zero tolerance philosophy to corruption.

Mr Francois de Villiers, Chief Operating Officer, SAFCOL, said the oldest saw mill, which was in Limpopo, had become unprofitable: there were plans to increase the throughput in that saw mill. The full value and potential of SAFCOL’s 30 year old logs was not appreciated. SAFCOL would pursue the export of these high-value logs, specifically to China, which was the largest log importer in the world. There was no value in just trees: something had to be done with the trees. The best way to extract value was to make plywood, for which there was a South African market. The type of plywood they had in mind was used for furniture production. A turbine could be erected to generate electricity. The demand for green energy was growing internationally.

Discussion
The Chairperson thanked the executive for running SAFCOL so successfully. The community itself would see and realise the improvements made. She asked where the 48 million appeared in the financial statements, and what SAFCOL was getting out of Mozambique.

Mr O Sefako (North West) commented that SAFCOL was sustainable and coping on its own. He enquired as to what model they were using in South Africa for a successful operation, and suggested that they be open to the template of the IPMS.

The Chairperson acknowledged the presence of the DDG from the Department of Public Enterprises, Mr Kgathatso Tlhakudi, who had arrived a few minutes into the meeting.

Mr A Singh (KwaZulu Natal) was encouraged by the presentation, but expressed concern for the road infrastructure getting damaged, given that the material being transported was weighty. He urged SAFCOL to consider using the rail network. He wondered how SAFCOL overcame the problem of customers not honouring their commitments to purchase – did they sell at a cheaper price because they were overstocked? He also worried that the use of machinery had created job losses, whereas SAFCOL was in the business of creating jobs.

Mr L Gaehler (UDM, Eastern Cape) was curious as to what had happened to the previous executive and what had caused them to leave. Could the CEO explain the high staff turnover, and were there any vacancies currently not filled? Could SAFCOL quantify a ‘share’? He asked what SAFCOL’s role was in management, in community development, and whether SAFCOL would close down if there was no profit. He urged them to consider new models.  SAFCOL should clarify the risks and challenges, and break down what the cooperatives were in each province. He was aware there were several settlement models for land claims, but believed there should be a single departmental strategy regarding land claims. He asked for the DDG’s response.

Ms C Labuschagne (Western Cape) agreed with the Chair that it had been an excellent presentation. She asked whether the benefit to SAFCOL being part of the BRICS countries was direct or indirect, and whether SAFCOL had a management plan that included a maintenance schedule, given the increase in overheads. The green economy was important and exciting – how could the rest of the energy be sold to the grid? Option 2 mentioned on page 24 of the presentation had not been discussed – did the board prefer option 1? She suggested the various departments come together to explain page 27 to the Committee, given the committee’s role as overseers, and to plot the way forward. She needed clarity on pages 30 and 34, since she did not have a financial background. What was the reason for the cash flow decrease, would it continue in future, and how would the board deal with that? More information was needed on the credit card system and National Treasury’s decision. Comparing pages 37 and 29, were the old logs included? Could SAFCOL explain what had been achieved in Mozambique, and was there still a question mark around SAFCOL’s future?

Ms B Masango (Gauteng) asked how job creation was affected by the deregistering of subsidiaries, and asked how far the settlement model had proceeded, and was also interested in the move from road to rail.

Ms Mona responded that SAFCOL had done feasibility studies. By their next visit, SAFCOL would have decided which option to use. Although the Board had chosen Option 1, they were still reviewing other options or models. IFLOMA, bought 11 years ago, was a drain on profitability. SAFCOL had a good relationship with DAFF, but it was important that strategies around land reform be led by the Department. Forestry was backbreaking work. Employees had been reallocated jobs and upskilled, so mechanisation was good and getting productivity up. She agreed with Mr Singh that rail services were lacking and did not reach all necessary destinations, so trucks were needed. Restructuring had taken place in 2011 and 2012. Some of the previous staff had not wanted to be at SAFCOL. All vacancies were presently filled. Research was required to look at other products. All that SAFCOL could do was to look after the shares.

Ms Mashinini said that land lease rental was part of the cost of sales. During 2013-2014, all costs had increased. In 2014 SAFCOL had utilised more of their own resources for projects, which was not the case in previous years. Four entities had been deregistered because they had been dormant, without any activity in them. After a detailed motivation to National Treasury, prepaid cash cards had been approved. Funds were given for specific expense activities, as opposed to having an open debit card. Investigations relating to fraud had increased from 25 in 2013 to 28 in 2014. The R1 million formed part of these investigations and related to activities in Mozambique.

Mr de Villiers replied that SAFCOL had been extensively interrogated, and had given their full cooperation to questions by consumers, mainly around the fact that they processed only 25% of their saw logs (75% were sold on the open market).They were deemed dominant in the saw log industry. MONDI and SAPPI worked mainly in the field of pulp. Saw mills in South Africa were old and inefficient, and saw mill engineers were very expensive. It was difficult for a tree farmer to make money. The costs of production were too high for SAFCOL’s customers.  The prices of saw logs had been on par internationally, in 2008, but had since dropped down. Optimisation was important: it was incorrect to fell a tree to use only the middle portion. When customers reneged, they found other customers or processed the goods themselves.

Ms Mona stated that government needed to assist, or SAFCOL would not survive. Although SAFCOL ‘could see the horizon’, they were not where they wanted to be. Implementation of their strategies required R4.5 million.

Mr Kgathatso Tlhakudi, the DPE Deputy Director General, said that his concern was about SAFCOL’s sustainability and their ability to get out of a negative trend. The government had a lot of challenges to address, and encouraged all their SOCs to approach financial institutions, and they would be funded if their plans were good enough. The government needed SAFCOL’s plans before the end of the financial year. SAFCOL’s land was state land administered by DAFF (the Department of Agriculture, Forestry and Fisheries), with SAFCOL as a preferred partner. They had a task team to handle the issue, but expected the SOCs to come up with their own plans. The interim chairperson had all the powers of a full-time chairperson.

The Chairperson asked for ‘the mushrooms’ to be explained.

Mr de Villiers replied that not much money came out of ‘the mushrooms’ (honey collections, beekeeping). It was a risk to allow too many people on to the plantations.

Mr Sefako suggested an innovative solution would be to establish a cooperative that could run as an entity in provinces where SAFCOL was not planting,

Mr Gaehler suggested that the issues of ’ the mandate’, and of the role of the DPE, should be revisited when the Committee met with the DPE itself.

The Chairperson thanked SAFCOL’S management for coming, and expressed a desire for the Committee to go and see SAFCOL’s activities for themselves.

 

The Committee adopted the minutes of the previous meeting.

The meeting was adjourned.

[There was an apology from the Minister, who had left for Dubai earlier].