Department of Public Enterprises on its 2015 Strategic and Annual Performance Plans, Minister in attendance

NCOP Public Enterprises and Communication

20 May 2015
Chairperson: Ms E Prins (ANC, Western Cape)
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Meeting Summary

The Department of Public Enterprises (DPE), with the Minister of Public Enterprises also making input, presented its 2015 Strategic and Annual Plans. The Minister stressed that DPE fully acknowledged the degree of work that needed to be done and was taking an active and positive step in addressing the challenges. She noted that South African Airways (SAA) had been moved under the financial ovR740 billion from the total of R770 billion of assets under the DPE, and were not only main pillars of the asset base, but their work was vital for the future development of the country. A War Room, comprising input from various departments, had been established for Eskom, where stages 1 to 3 of its revitalisation were costing around R20 billion to R80 billion per month. A five point plan had been approved by Cabinet for Eskom which would look at plant performance, maintenance, generation, delivery of the build programme and increasing private sector participation. The main problem with the SOCs was that they had been under-capitalised for many years whilst consideration was given to privatising, and this led to skills drains as engineers moved to private sector firms that were investing and building. Turnarounds were desperately needed, and the main focus of the country was to push for capital infrastructure that will stimulate job creation and economic growth. Whilst there were continuous debates around privatisation, DPE maintained that large SOCs such as Transnet and Eskom could not be privatised, as they fulfilled a dual commercial and development mandate. Instead, the DPE would work alongside the private sector with a strategic public / private participation framework, to access markets and develop skills without losing shareholding. This had been done with Denel, which was showing excellent order books, and could be replicated elsewhere. The DPE's main focus was to stablise leadership and finances of the SOCs, to grow public confidence, and to enable them to advance the plans of the developmental state.

Members asked for more explanation on the public / private partnerships and funding gaps. They raised logistical problems at SAA that gave rise to long queues, and asked if DPE was addressing this. Questions were asked about the impact of the Eskom policy on procurement from Black Economic Empowerment companies at higher prices than were available elsewhere, and asked if it was true that South Africa was exporting its best coal, and how it was addressing problems with coal quality. They were not happy with communication from Eskom. Members would have liked to heard a more provincial-focused presentation, particularly for companies like Safcol, and asked what was being done about transformation in this company. They asked how DPE ensured that it got the best candidates on the Board, how it was addressing risks raised by the Committee earlier, and what the timelines for the turnaround was, and how exactly it would assist in making the SOCs more effective, efficient and profitable. They asked when a permanent Director-General appointment would be made, and asked for a breakdown of the plans into time frames, and stressed the need for DPE to be proactive rather than reactive. They asked how far the review of Board remuneration had gone. Some questions stood over for written responses.

Meeting report

Department of Public Enterprises  2015 Strategic and Annual Plans
Ministerial introduction

Ms Lynne Brown, Minister of Public Enterprises, said that she would be brief. She spoke of the context in which the Department of Public Enterprises (DPE or the Department) operated, that it supervised several State Owned Companies (SOCs) and noted the significant shift of South African Airways (SAA) to National Treasury for financial oversight. SAA came out of the Transnet stable under-capitalised and required an injection of investment. Mango, the budget operator, formed part of the commercial arm of SAA. The DPE had a 2% shareholding in Airlink too. South African Express (Sax) was currently not making money. She noted the establishment of a War Room to deal with the problems at Eskom, and to make sure that all the departments were working together to solve the issues. The DPE had been focusing on the expansion of Denel , with a much larger order book. State Enterprises formed the bedrock of this country and were thus vital. However, it should not be assumed - particularly with Eskom, that building larger and larger always implied that something would be better, and she pointed out that the rest of the world had gone smaller. South Africa was currently building two of the largest power stations in the world. Turning around these "big tankers" of State Owned Companies (SOCs) was going to be difficult.

Departmental presentation
Ms Matsietsi Mokholo, Acting Director General, Department of Public Enterprises, noted the establishment of the Department for Small Business Development (DSBD), which it was hoped would stimulate new growth.

She noted that a five point plan had been drawn up for Eskom, which had been approved by Cabinet, and it was to be monitored by the War Room. This would look at plant performance, maintenance, delivery of the build programme and increasing of private sector participation. The Minister of Public Enterprises had been "putting out fires" in all the SOCs.

She referred to the government initiatives to establish the National Development Plan (NDP), Industrial Participation Action Plan (IPAP) and Integrated Resource Planning (IRP), all of which were vital policies for the SOCs, which needed to be integrated. If the DPE were to sell off assets, this would be akin to the State resiling from its responsibilities and the Department's abilities to make a real difference. The private sector could not be expected to look after development objectives.

There were a plethora of SOCs, but the performance of some of these SOCs was negatively impacting the fiscus and the economy. The DPE was therefore looking at the policy and institutional framework. The shareholder function still needed to be codified and strengthened for SOCs. Every SOC was dealing with matters differently at the moment. There had not been complete recovery from the economic recession of 2008/2009, and growth had failed to meet target levels of 3% to 5%. There had been poor capital formation and the DPE had been looking at how procurement could be used as a trigger. Unemployment was still rife. The trade balance for South Africa (SA) had been low over the past ten years. SA was currently and should remain a developmental state for many years to come. Strategic infrastructure was paramount for unlocking of growth potential, which would spread over into the wider economy. Ports, rail, power, road and communication were all key areas. Every SOC had a developmental mandate and commercial mandate; they must be good employers, increase their technology base and expand infrastructure.

She commented that for many years the public sector had faced under-investment. Eskom and other SOCs were told not to invest, as the State said it would be looking privatise these SOCs. This led to a skills drain as sufficient projects were not available for engineers to remain in the SOCs. With such delays, skills and initiative were lost. Key infrastructure projects still needed to be completed before capital costs can be recovered. There was a massive funding gap as a result of the periods of under-investment and inefficient capital development. The State needed help from the private sector to bridge this funding gap.

She noted that the DPE acted as the shareholder of the SOCs, and its primary tasks included alignment of policies, ensuring collaboration wherever possible (for example, between Eskom,Transnet & PetroSA for coal/diesel supply) and oversight. DPE had to manage and monitor the performance of the SOCs, and link SOCs to other levels of state, making sure national policy objectives are met. The SOCs that the DPE administered included Transnet, Eskom, SA Express, Denel, Safcol and Alexkor.

She moved on to describe some of the key Medium Term Strategic Framework (MTSF) imperatives. These included:
- increasing electricity generation reserve margins from 1% to 19% by 2019
- increasing tonnage moved on rail from 207 to 330 kilo tonnes in 2019
- improving operational performance of sea ports and inland terminals from 28 to 35 average GCM/H by 2019
- achieving an investment rate of 25% of GDP.

These focused mainly on Transnet and Eskom as they were the two main pillars of the economy that filtered down to the other SOCs. She noted that Denel had seen a dramatic increase in its order books.  Eskom and Transnet accounted for R740 billion out of the total revenue of R770 billion under DPE, for which it was the sole shareholder, and they therefore accounted for 84% of the revenue generated by SOCs. SOCs that were not generating positive revenue included SAA. However, in many cases the return generated by SOCs did not cover the costs of the capital investment. Many SOCs were falling into debt, which reduced hedging and increased debt servicing.

Ms Mokholo summarised the position of the various SOCs, as follows:
- Denel has a growing order book and is enhancing its defence capabilities
- Safcol is developing a new strategy around not being privatised
- Alexkor had refocused its mandate and is supporting development of rural areas,
- Transnet is enhancing its logistics capacity to support industrialisation
- Eskom is focusing on supplying electricity to meet the needs of the economy
- SA Express is aiming to be a going concern and is re-organising its state assets.

Over the next 12 months, the goal for the DPE is to turn around electricity issues and boost the capacity of Transnet. Eskom cannot be privatised entirely as the costs are too high. Eskom fits into the category of an SOC that has a significant economic impact and its service is a critical requirement across multiple sectors.

The key risks for these SOCs include a call-up of government guarantees, which could lead to the State being downgraded, the continued reliance on road transport, the possibility of further credit downgrades, continued load shedding and country wide blackouts. Stages 1 to 3 cost the economy R20 billion to R80 billion per month. Further core challenges were seen around the execution of the plans and institutional challenges.

Discussion
Mr O Sefako (ANC, North West) asked whether privatisation could really solve the social economic backlogs? He asked how the DPE was resolving the funding gap through private partnerships.

Mr C Smit (DA, Limpopo) gave his concern that at SAA, the gate controls were very poor and often people were standing in large queues to get checked in. He wondered what the DPE was doing to address and assist with this. He asked for an indication of the impact of Eskom’s policy around procurement in relation to Black Economic Empowerment (BEE). He asked why coal was being purchased from BEE companies at a higher price and not directly from the suppliers, pointing out that this was having a massive negative impact on the ordinary person.

Mr A Nyambi (ANC, Mpumalanga) commented that the Select Committee must be part of the process and not be sidelined. He asked whether the DPE could reflect upon what it is doing within the provinces, for example with Safcol activities. He asked, in relation to the Boards of the SOCs, whether the DPE would screen the candidates thoroughly?

The Chairperson agreed that the DPE did not appear to take the provinces seriously. She stated that there was a rumour that South Africa was exporting all of its best coal overseas, and asked whether this was true.

Mr J Parkies (ANC) commented that the DPE was demeaned by being "a privatising caretaker". He still held the view that there was nothing inherently wrong with monopolies. There had to be a platform to make sure that resources were benefiting the people of SA. The strategy should respond to the failures of the market. Safcol was still white-dominated and needed to be integrated and developed, and he asked what exactly was happening there. He also asked whether security risks mentioned before - for instance, with pilots of the airlines - had been addressed.

Ms C Labuschagne (DA, Western Cape) stated that there must be a link between the budget, strategy and the APP, so that the presentations were quite clear to the Committee. She asked what the timeframe for the turnaround of these SOCs was and what, for instance, was going to change to make Eskom more efficient and profitable? She suggested that it might make sense for Eskom to be separated into a transmission and generation company. She wanted to know the timeframe for the codifying of shareholders, and asked how DPE was going to ensure that the plans succeeded? The War Room plan needed to be presented to the Committee. Finally, she asked how the DPE would ensure that the SOCs adhered to the environmental issues facing the globe.

Ms B Masango (DA, Gauteng) asked about the fact that there was an Acting Director General and asked when the permanent appointment would be made. She noted that communication from Eskom was poor. She asked that the five phases of events on page 4 be broken down into a timeline, to see where they fitted into the entire picture. She wondered how long it would take to turn the DPE around from being a reactive department to a pro-active department? She also asked how long it was anticipated that SAA would remain under the oversight of National Treasury before coming back to the DPE? She asked how far the review of remuneration of Board members' salaries had gone.

Minister Brown responded that the DPE has R755 billion in state assets, so it is difficult to get into the detail in such short meetings. She asked that the Committee should set out, for the Department, the particular issues and feedback it had had from the provinces, in order to address the issues. She agreed that the provinces were often sidelined.

Ms Mokholo responded that history had shown that a strategy to privatise was not always successful. The DPE had developed a strategic private participation framework to access markets, skills and finance without losing its shareholding within Denel. This could be replicated to other SOCs, but she welcomed input into the debate around privatisation.

Ms Makholo explained that in relation to the boards of the SOCs, the DPE looked at the demographics, skills and conflict of interest of candidates. If a person served on four boards, s/he could not be considered for further boards.

Ms Makholo indicated that currently, 63% of SAFCOL land was under land-claims. The DPE was working with other departments to address these issues.

She suggested that the remainder of the questions should be answered in writing, including the issues around coal and exporting of electricity.

Mr Gcina Hlabisa, Strategic Officer for the DPE, stated that the strategy needed to be set out within the MTSF. The main focus was to stabilise the leadership and finance of the SOCs. Confidence was growing. From there, SOCs could advance the plans of the developmental state. There must be a consolidation of the plans to make sure SOCs could support the state, rather than the state trying to support them. He emphasised that the supply of electricity is absolutely critical to everything, and the five point plan focuses on the maintenance and breakdowns within Eskom. Eskom and DPE were also looking into the generating capacity around renewable energy, which would add around 1800MW, and the two new coal plants. Another strategy had to do with reducing the demand for electricity. In relation to the coal supply, Eskom was addressing the issue of coal quality, and was making investments to address the challenges on quality, which would alleviate other issues at the two plants. He agreed that there were indeed some problems with BEE, but with many of the contracts now coming up for renewal, it would be possible to re-negotiate contracts at lower prices.

Mr Colin Cruywagen, Head of Communications for the DPE, stated that 40% of the houses in SA received electricity directly through Eskom and around 60% from municipalities. There was a plan to improve the communication between Eskom and municipalities regarding load shedding.

The meeting was adjourned. 

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