Restructuring of State Owned Enterprises: briefing

Meeting report

PUBLIC ENTERPRISES PORTFOLIO COMMITTEE
13 November 2002
RESTRUCTURING OF STATE OWNED ENTERPRISES: BRIEFING

Chairperson: Mr B Martins (ANC)

Relevant documents
Presentation on Restructuring of State Owned Enterprises
Committee's Draft Annual Report
Reports Tabled by Committee

SUMMARY
Members adopted the Committee's Draft Annual Report.

The presentation on the restructuring of State Owned Enterprises (SOE's) outlined the social and economic impact of restructuring, the proceeds from restructuring as well as to the restructuring of SOE's with regard to the defence, transport, energy, telecommunications, forestry, mining and hotels and leisure sectors.

During the discussion on the presentation Members raised concern with the concessioning process and congestion problems currently being experienced at certain national ports, and the Department's plans to address this as a matter of urgency. The Department was asked to clarify the actual composition of the R12b to be acquired from the restructuring process, the manner and extent to which the disposal of the forestry assets would provide a means of funding for the local communities. The extent to which the Department has stuck to its Black Economic Empowerment (BEE) commitment in disposing of the assets was also explained.

It was proposed that Nabera be disqualified from the tender process because of its involvement in the Alexkor assets disposal, and the reasons for the Aventura Resorts current financial problems were discussed. The Department was asked to explain its plans to cover this liability via the restructuring process.

MINUTES
Draft Annual Report
The Chair drew the Committee's attention to both the Draft Annual Report and the document listing the reports tabled by this Committee (see documents attached). He noted that Members adopted the Committee's Draft Annual Report, subject to the necessary changes being effected.

Presentation on State Owned Enterprises
Dr Sivi Gounden: Director-General, Department of Public Enterprises, conducted the presentation which outlined the social and economic impact of restructuring, the proceeds from restructuring. It also outlined the restructuring of State Owned Enterprises (SOE's) in various sectors and the incorporation of organised labour in the restructuring process. (Please refer to the attached slide presentation). The following additional points were made by the Director-General.

SOE Borrowings as a Percentage of SA's External Debt
This slide clearly illustrates that the SOE's borrowing has dropped from as high as 46% in 1990 to an all-time low of 18,4% at December 2001.

Transport Sector Rail
There is currently three major entities involved in the provision of rail transportation services. The first is the South African Rail Commuters Corporation (SARCC) which provides rail infrastructure, the second is Metrorail which provides rail transportation services in the metropoles and Shosholoza Mail, which provides long distance rail transportation. The Committee has probably been briefed by Metrorail on the financial and infrastructural problems it is currently experiencing, and it is hoped that the Department of Public Enterprises (the Department) would be able to report to this Committee by the end of January 2003 on the subsidies granted this respect.

Transport Sector: Ports
It is important to note here that the three year tariff reform process that commenced in December 2001 has resulted in a 30% decrease in tariffs.

Transport: Fast tracking concessioning of Durban container terminal
The Department expects this matter to be finalised by September to October 2003.

Telkom IPO
It is envisaged that this would commence in the first quarter of 2003. The education campaign will explain such matters as what exactly a share is, the benefits and risks involved, and how they can be used to form the basis of a "savings culture" in South Africa. This education campaign will serve as a precursor to the actual registration process, and is probably the largest and most extensive education process which involves a wide variety of media representatives, as well as the IPO office.

Forestry Sector: Komatiland Forest Package
SAFCOL has responded positively to establishment of a critical mass forestry while the matter is in the rebidding process.

Hotels and Leisure
Plans were devised to dispose of the last eight encumbered assets in order to make funds available to deal with Club Prive's obligations. It has to be emphasised that there was no mismanagement of the "jewel in the crown" of these assets, but the history of the facility would clarify the matter. Before 1993 the management of Aventura Resorts, with the support of the then government, then offered a lifetime timeshare holding scheme in exchange for the payment of loans which would become redeemable after ten years, which will become operational now in 2003-2006. These creditors would have first bite at the redeemed proceeds. This scheme created a problem for the present Aventura Resort management which resulted in it not having the necessary capital infrastructure to keep the resort up to date, and it is thus clear that the current problems are not due to mismanagement by the present management structure.

Addressing concerns of organised labour
The total number of employment positions to be created via the restructuring currently stands at approximately 315 000, which is less than 3% of the total South African employment figures. These employment figures have been reviewed by the Department and the restructuring of SOE's would create approximately 150 000 positions of employment at the national, provincial and local government levels, which is more or less 1,5% of the total employment figures of the national economy. The Department is thus also contributing to the GDP.

Discussion
Mr R Heine (DP) sought clarity on the actual make up of the R12 billion projected for the proceeds from restructuring. The Telkom IPO evaluation stood at R100m, yet it now only stands at half that amount at R50m. How is this amount arrived at?

Mr Mac Gantsho: Deputy Director-General, Performance Monitoring and Evaluation of State-Owned Entities, referred Mr Heine to the slide entitled "Proceeds from Restructuring". He stated that the bulk arises from the Telkom IPO, SAFCOL, Alexkor, apron services, Air Chefs and Aventura Resorts and plans are currently in progress to complete this by the end of the current financial year. The exact amounts are not certain yet, such as the Alexkor proceeds, but it is estimated at R12 billion.

Dr Gounden added that the Department does not want to speculate on the evaluation because this would be irresponsible, and it has to be remembered that various factors impact this evaluation.

Mr Heine stated that this creates a problem because, during a presentation delivered to this Committee two weeks ago, the Department informed Members that the evaluation stands at R14b to R15b, yet today the Department states it stands only at R12b. How could this be? Furthermore, Alexkor has not submitted its financial statements since June 2001, and has in fact been a cause of concern for the past three years. They should not be allowed to bid if they do not submit financial statements. This could have serious consequences, and has to be clarified.

Mr Lucky Montana: Director, Parliamentary Services and Stakeholder Liaison, informed Members that the proper methodology is employed when conducting the evaluation, and includes the evaluation of resources and the technology available. This matter was concerning government for more some time, and resulted in the decision to dispose of those assets as soon as possible. Members are assured that there is no intention to dispose of those assets at a song because the valuation was studied extensively for issues of this nature.

The matter should not be discussed in any greater detail at this point because the bid will take place at the end of the month, and it would not be prudent to pre-empt the bid. Currently five bids have been received, and the Department is relying on strong competition to secure both a reasonable and good price.

Mr Gantsho added that liability could also potentially arise with regard to government obligations to Nabera but this would not impact the award process because Cabinet decided that the financial liability will have to be determined beforehand. All five bidders are aware of the potential liability.

Mr Montana explained that when the Department presented to this Committee approximately two weeks ago it specifically refused to include the evaluation, and thus the figures quoted by Mr Heine are not the figures published by the Department, but are instead the figures that Mr Heine himself has arrived at.

Furthermore, there is no link between the Aventura Resorts and Cabinet's decision to restructure Alexkor, and Alexkor's financial statements will be tabled in Parliament the next day and reflects its restructuring plans. The Aventura Resorts will be disposed of in accordance with the PFMA and within the framework of the law.

Mr M Sibiya (IFP) congratulated the Department on the comprehensive presentation and stated that, while he appreciated the work done by Eskom, he questioned the way in which it is dealing with its Black Economic Empowerment (BEE) focus. The slide entitled "Energy Sector continued" indicates that Eskom's will dispose of 10% of its capacity to deal with BEE but the Department needs to elaborate on this, and explain how exactly it aims to do this.

Mr B Komphela (ANC) referred to the Department's strategic plan and asked whether it is sticking to its plan to ensure 10% of the restructuring contract goes to BEE initiatives.

Dr Gounden replied to these questions by stating that Cabinet has decided that a maximum of 30% of Eskom's general capacity would be disposed of so that it can remain the dominant electricity provider in South Africa. Ten percent has been dedicated to BEE focus, but this does not preclude BEE participation in the other 20% of the Eskom assets.

Secondly, Mr Komphela congratulated the Department on its success in reducing the SOEs' borrowing to 18,4%, and urged that this rate be lowered even more so as to enable South Africa to be able to live on its own physical assets.

Thirdly, Mr Komphela referred to the concessions mentioned on the slide entitled "Ports". He asked whether the Department, when considering the restructuring of the Durban, East London and Port Elizabeth ports, looks at the empowerment of the people. It seemed that Rennies continues to enjoy a "lifetime marriage in concessioning" with the Department. This was not acceptable.

Dr Gounden assured Members that the Department "is not married to anyone in the concessioning process", and the bulk of the work and operations are done by South African Port Operations. The current process places a strong emphasis on BEE, especially the participation of regional players who have not been able to participate to date. This is an integral part of the evaluation criteria for the concessioning procedure.

Fourthly, Mr Komphela stated that in the KwaZulu-Natal rural areas the white communities are provided with electricity whereas the black areas are not, because it is too costly and they cannot afford it. Has the Department devised any plans to address this issue? It appeared that the provision of electricity is based on cost instead of need, especially in those areas that need it most.

Mr Montana responded that this falls within the responsibility of government and not the Department. It also has to be noted that it is difficult to access certain areas in order to provide electricity, and Eskom has made great strides in providing this service, but it is now the responsibility of government. Government's objective is to achieve universal access by 2010 with an annual expenditure of R1b dedicated to the provision of electricity. Government is therefore actively engaged in providing these services to the public and there is no intention to privatise the provision of these basic services, instead the opposite is true.

A Member referred to the last point on the slide entitled "Forestry Sector" dealing with the KwaZulu-Natal transaction and sought clarity on the rentals as a means of funding for communities.

Secondly, the Member sought clarity on the actual monetary equivalent of the 9% set aside for community trust, as indicated in the last point on the slide entitled "Forestry Sector" dealing with the Eastern Cape North Transaction.

Dr Gounden responded to these questions by stating that 10% of the transaction would be set aside for community participation, which is approximately R150m in total excluding the Komatiland Forest Package, and the communities would thus have a share of more or less R15m in these entities. This amount has been tagged but the model to be used for delivery and implementation has not been defined yet, and the Department is focusing on finalising this model in 2003.

There are two aspects involved in the negotiations on this transaction. The first is the price to be paid for the leasing of the forests and the second is the actual payment by the lessee, which stands at R5,3b. The rent for the leasing will accrue to the community as an integral part of the community trust structure.

Mr L Nzimande (ANC) asked whether the SOE employment figures provided indicates the intakes as well.

Dr Gounden replied that the Department is currently compiling these figures and they could be made available to Members in early 2003. There is an intake because of the employment opportunities introduced by SOE, but it is important to note here that the job market is increasingly demanding a new type of technically skilled worker, with the result that there is a shedding of services of unskilled and semi-skilled workers. This development is not unique to the public enterprises market, but to the entire national economy.

Secondly, Mr Nzimande sought clarity as to whether the Department has stuck to economic imperatives in disposing of the assets with regard to representivity and empowering the previously disadvantaged.

Dr Gounden explained that a set of criteria relating to socio-economic objectives accompanies every transaction, and strong emphasis is placed on BEE. The disposal process is not without risks, and the progress reports on the Komatiland project indicate that the Department is consistently committed to restructuring. The Department's tender adjudication process is based on two factors. The first is ensuring that the process and outcome is free, equitable, fair and transparent, and the second aims to ensure empowerment concurrently. There is thus no trade-off between the first and second objectives. The first is vital in ensuring the second, and the Department believes that both can be achieved simultaneously.

Thirdly, Mr Nzimande sought clarity on the actual Aventura Resorts deal itself, and asked whether the decision as to who would ultimately receive the tender is primarily market driven or whether community participation is taken into account.

Mr Gantsho responded that Cabinet itself decided that the Aventura Resorts would have to be disposed of, and also decided that the disposal would be focused on BEE initiatives. In the early stages certain imperatives were considered, such as the financial position, and the first disposals focused on acquiring sufficient funds which would be used to solve the Resorts' current financial problems. Yet the focus now falls on BEE initiatives and to date requests have been received from "very high bidders" cumulatively instead of to a single entity, as the Department is committed to ensuring the award goes to empowerment structures such as BEE initiatives.

Mr Heine contended that if a total of R12b is expected from the six SOE projects as indicated on the "Proceeds from Restructuring" slide, there is a definite problem with the value projected, because surely R12b cannot accurately reflect the proceeds of six projects. Furthermore, Nabera should be disqualified from the bidding process because of its involvement in the disposal of Alexkor.

Dr Gounden replied that Mr Heine has to tread carefully here because a sound and comprehensive valuation process is employed here. Furthermore, no formal dispute has been declared between the Department and Nabera but, as stated earlier by the DDG, it is likely because of the extent of the difficulty. Yet the fact that a dispute is declared does not necessarily mean it is due to an illegality, nor does this preclude Nabera from tendering because, in all likelihood, there will always be disputes between government and other entities. Clearly the line is drawn once an actual illegality is in fact proven, in which case Nabera would be disqualified.

Secondly, Mr Heine contended that the Durban port is losing millions in export and import revenue because of the delay caused by the congestion. The Department's assertion that it hopes to resolve this problem by September 2003 is unacceptable, and there is thus a need for greater urgency.

Dr Gounden responded that the Department could do a presentation on this matter, and stated that part of the solution here would be to conduct a review of the Durban port. This has to be done in the proper manner and would include a valuation of the assets and the creation of a legal and regulatory framework, with the latter being particularly important because it will guard against a private monopoly when the private sector is involved. This process would take some time as the legislative framework would have to be considered and approved by Parliament.

This involves a hybrid sequence of events and, as far as the timeframe for the concessioning is concerned, the Department has met with the National Ports Authority (NPA) and Transnet and asked them to inform it of the strengths and weaknesses of ports. This includes the possible shifting of resources from certain ports to those ports in need of assistance, and this is aimed at improving productivity. Yet this process will not operate in isolation but rather focus on issues specific to the Durban port.

Thirdly, Mr Heine referred to the replies offered by the DG in response to his questions on the Aventura Resorts by stating that the investigation had been conducted, and it is a case of clear mismanagement. Mr Heine had himself requested that a forensic audit be conducted but this was denied. He stated that he is certain that if one is conducted it would become clear that it is not Club Prive but rather the management of the last eight years that has resulted in the current problems.

Mr Komphela stated that the Department said that members of the public were offered a lifetime timeshare contract in exchange for a payment of R10 000 which could be redeemed after ten years, but this does not make sense. This is clearly a case of mismanagement, because it essentially amounts to offering timeshare for free.

Dr Gounden replied to these concerns by stating that the Department does not wish to enter into a dispute regarding the cause of the problem with the Aventura Resorts. Members should "let the facts of the matter speak for themselves", and these indicate that the Resorts presently have a R64m liability which impacts the ongoing operations of the company.

Secondly, Mr Komphela asked whether the Department, when disposing of the assets, is looking means to ensure they are accessible to the public.

Dr Gounden responded that this is being done as part of the disposal strategy.

A Member asked whether there is any legal avenue by which the validity of the Club Prive contracts could be challenged.

Dr Gounden responded that the Department's legal team investigated this possibility but arrived at the conclusion that the contract could not be voided, and the timeshare creditors would receive the first bite at the cherry.

The DDG added that the Department's legal team verified that the actual extent of the liability stands at R68m and not R64m.

Secondly, the Member stated that recent media reports have dubbed the Department's restructuring process as privatisation. Is this the case?

Dr Gounden replied that the Department has consistently been stating that this is a restructuring process and privatisation is a subset of the overall structure, and this depends on an assessment of how restructuring would contribute to the country as a whole.

The meeting was adjourned.