South African Forestry Company Ltd (Safcol) on its 2014/15 Annual Report

Meeting report

Mr Lungile Mabece, Safcol board chairperson, introduced the delegation of board members and executive.

South African Forestry Company SOC Limited briefing
Ms Nomkitha Mona, Safcol CEO, said Safcol employed about 5000 people, including contractors. It supported over 20 000 individuals in rural areas. Safcol had an unencumbered balance sheet, which meant it had no debt. It had a competitive advantage and high value asset because of its trees which were grown at a 30 year rotation. Safcol’s footprint was spread over South Africa and Mozambique. The company had 18 plantations in South Africa and four plantations in Mozambique, in partnership with the Mozambican government which owned 20% of the company.

Land claims however threatened the viability of current operations, with 61% of plantation area being part of land claims. There were over 50 claimant groups for Safcol land in three provinces; Mpumalanga, KwaZulu Natal and Limpopo. Land claimants were not trained in the management of the forestry they would inherit and the land claims process was cumbersome and slow to resolve. In the interim, illegal occupants were taking up residence on Safcol land. Some of the mitigation steps which needed to be taken were that land claimants needed to be trained to ensure the successful usage of the land. Safcol has undertaken to cooperate fully with the Regional Land Claims Commission (RLCC) to speed up the land claim process. Safcol operated its forest business on land parcels described as state forest land in terms of the National Forest Act. The Department of Rural Development and Land Reform (DRD&LR) played a pivotal role in the management and resolution of land claims. To date the land claims have been as follows; 14 in Limpopo, 17 in Mpumalanga, one in KwaZulu Natal, 32 in total. Of these six have been resolved. Safcol has developed a proposed settlement model which was deemed suitable for settling land claims which affected the state forest land on which it operated. Safcol was working with the DRD&LR to hold workshops with all relevant stakeholders on the proposed model through which the land would be transferred to its rightful owners.

Safcol’s core operations for farming were research and development, nursery, planting/establishing, tending and protection, value adding activities, harvesting operations and providing logs to clients. With regard to processing, she said SA-Timbadola owned one sawmill and contracted two. Safcol sold 75% of its raw materials and processed 25%. Safcol’s strategic pillars were:
- Horizontal integration: Growing and/or expanding government owned plantations in South Africa and elsewhere
- Vertical integration: Building new sawmills and upgrading existing ones, building manufacturing plants as part of beneficiation
- Rural Development: Agro forestry, Safcol community partnerships etc
- Green Energy: Co-generation, biomass and biofuel.

Financial Performance 2014/15
Ms Zoliswa Mashini, Safcol CFO, said that Safcol met 83% of its Key Performance Indicators (KPIs), an increase from the 73% achieved in the previous year. The KPIs which needed more attention were around youth owned enterprises and those owned by peoples with disabilities. These targets were not met. Revenue generated in 2014/15 was R898 140 000, a 0.4% negative variance from the R894 374 generated in 2013/14. Revenue was positively influenced by KLF plantation valuation, the increase was due to the impact of increased prices, discount rate and volume growth on the fair value model. Safcol’s assets in 2014/15 increased by 5% to R5 098 671 million. The Group generated positive cash from operations, R17.3 million more than the prior year. The company received an unqualified audit opinion. Some of the significant findings were that an updated detailed asset register was not uploaded and maintained in the current Enterprise Resource Planning system; goods, works or services were not always procured through a procurement process which was fair, transparent and competitive as required by the Public Finance Management Act (PFMA).

The accounting authority did not take effective steps to detect and prevent irregular expenditure and fruitless and wasteful expenditure as required by the PFMA. Fruitless and wasteful expenditure incurred was R366 000 - an improvement from the R16 million incurred in the previous year. R72 million was incurred in irregular expenditure, R22.8 million for the current year while R49.4 million dated back to 2006. The R22.8 million was mainly due to transactions with suppliers who had not submitted tax clearance certificates. The situation was being monitored. With regard to procurement, a monthly report was run to check suppliers whose tax clearance certificates have expired or were close to expiring. Tenders were reviewed prior to finalisation and award and Safcol was embarking on a process of reviewing its entire procurement process, structure and policies.

Human Capital and Transformation
Ms Julia Mphafudi, Safcol Senior Executive: Human Capital Management and Transformation, spoke of the company’s corporate social responsibility, saying more than 130 community projects had been completed. Over R40 million had been spent in the last four years on communities and 13 social compacts had been signed with communities. Some of the benefits of the social impacts signed with communities were around education and early childhood development, access to science and technology skills, business training opportunities, cultural and heritage facilities and sports and recreation facilities. Safcol also implemented a number of community enterprise development programmes, with the aim to provide opportunities to rural communities; these were primarily in Mpumalanga, Limpopo and KwaZulu Natal. Another project by Safcol was furniture manufacturing which was a drive towards rural development through the creation of sustainable jobs; 40 unemployed youth were trained in Limpopo and in KwaZulu Natal. Safcol has invested more than R2 million in the furniture manufacturing project. 120 bursaries were provided to youth studying at various universities in the last three years, 60% of the bursaries were awarded to community members. The bursaries were mainly towards engineering and forestry related qualifications. All bursary students were absorbed as Safcol employees on the completion of their studies. Safcol also had an internship programme running, a total of 54 students and graduates accessed the Safcol workplace in 2014 and 2015. The duration of the internship placement was 12 months.

With regard to transformation, the company was predominantly black female at Executive Management level. Based on the company’s strategic plan, progress would be made on Enterprise and Supplier Development and Skills Development initiatives. Safcol has recently developed its Employment Equity Plan for the next five years (2015-2020) with specific measurable affirmative and transformation movements for each year.

Human Capital Management has developed and/or reviewed a total of 18 policies during the past three years and eight human capital policies were introduced at the IFLOMA operations in Mozambique. The company has successfully concluded wage negotiations in South Africa and in Mozambique.

Ms Mona said Safcol was a company in transformation and it has been improving steadily through the years. Three years ago the reports on Safcol were not good. Safcol was a company in transition and the board had come in at the right time. With regard to youth and training, even though the numbers were low, one had to consider that South Africa had about 14 million unemployed young people and this was a big issue. Safcol has adopted a bolder plan to actively work towards addressing this. Safcol’s performance has improved greatly.

Mr Mabece said the Safcol board had a responsibility to make the company successful and grow in revenue. Forestry had many opportunities and South Africa was in a position to create a lot of jobs by industrialising forestry to the extent that it was one of the biggest employers especially in rural areas.

Discussion
Dr Z Luyenge (ANC) thanked Safcol for the report and for the specific inputs made by the Board chairperson and the Executive. He said the growth within the organisation was well appreciated. Did the rent which it paid contribute towards the development of local communities? What role did Safcol play in ensuring that the utilisation of those funds was responding to the need for value adding? With regard to the sustainability of the Mozambique site, was it cost effective to run the site? On the industrialisation of forestry, the majority of South Africans were from rural areas which were mostly poor and underprivileged. What work was Safcol doing in the Eastern Cape specifically? No mention of the province was made in the presentation. How did Safcol set its priorities? The Eastern Cape had a lot of agricultural land? How big was Safcol’s staff component?

Ms D Rantho (ANC) thanked the Chief Executive for her work towards transforming the company; the task was not an easy one. Safcol was an old company and transforming it would take some time. Of the graduates and young people trained, how many of them were still part of the company? What was the company’s retention strategy? What relationship did Safcol have with Eskom with regard to the training of artisans? Did the company have enough financial capacity to absorb the trained university students into the work place permanently? Was the R20 million contribution made by Safcol towards the development of skills included in the R40 million allocated to community projects,or were these separate? Did Safcol have plans to spread the enterprise development programme, specifically that of school desks, to other provinces? How did Safcol identify which youth it would train and develop? Did Safcol consult with the Department of Higher Education and Training? Of the 15 Early Childhood Development (ECD) centres, how many were in Mpumalanga and in KwaZulu Natal and in the other provinces?

Mr R Tseli (ANC) said the Committee was pleased to be associated with Safcol and the work which the company was doing. He was happy with the company managing to achieve many of its targets in terms of the shareholder compact. He applauded Safcol for achieving an unqualified audit opinion and the Committee was pleased with the corporate social responsibility work Safcol was doing. However it seemed as though Safcol was not communicating enough about the work the company was doing and this was an area which needed vast improvement. How flexible were the social compacts signed with local communities? With regard to land claims and the illegal occupation of the land which Safcol was supposed to be operating on, what mechanisms were in place to deal with these challenges and what role were local municipalities playing in resolving the challenges?

Ms G Nobanda (ANC) thanked Safcol for the clear and informative presentation. Did the company experience any strikes within its plantations and how were they being resolved? Safcol did a lot of work in rural areas, why was this work not being publicised? What were Safcol’s timeframes for responding to the Auditor-General audit findings?

The Chairperson referred to Safcol’s enterprise development and asked if the numbers in the presentation were representative of individuals or corporations? Did Safcol have a master plan which was in line with the National Development Plan (NDP)? A master plan would enable the entity to produce industrialists. What relationship did Safcol have with other departments such as the Department of Basic Education and the Department of Rural Development and Land Reform? How far was Safcol in its plans to diversify?

Mr Mabece replied that the board encouraged the company to do more. On concerns about Safcol not efficiently marketing its work, this was an area the board was focusing on improving. Safcol needed to better market itself both within the country and internationally. On whether the social compacts were flexible, he said the board was looking at getting government assistance in an attempt to increase revenue. A school was recently opened in Nongoma, KwaZulu Natal, to accommodate about 450 learners. The school was built in two weeks and due to the timber structure, Safcol was able to build the school.

On rentals, Ms Mona explained that Safcol paid rent to the Department of Agriculture, Fisheries and Forestry (DAFF) which was instructed by a statute to open the Kabelo Trust for the rentals. DAFF has the jurisdiction to distribute the money. Once Safcol paid the rentals, it had no obligation to oversee how the money was distributed or how it was used. This however was a challenge because communities did not know that Safcol paid rent. However Safcol has been told unofficially that some monies have been paid to communities over the years.

On IFLOMA, Safcol has conducted a feasibility study, and a business plan which showed that if there was enough capital a business could be turned around. Safcol was therefore in the process of going back to the board with a tight proposal on the viability of IFLOMA. This was something the board would decide on in the next three months.

On Safcol’s communication with the public and its marketing, she said the board has taken the matter very seriously and various performance management sessions have been held with the Safcol Executive. On the question about other provinces, the Committee needed to remember that Safcol used to be a national organisation until Cabinet took a decision to privatise. Some pockets of the company were privatised and because of that Safcol moved away from some provinces, such as the Western Cape, Eastern Cape and other provinces. By jurisdiction, Safcol only operated in KwaZulu Natal, Limpopo and Mpumalanga. However Safcol took a decision that the company would assist in all provinces, because it is a state owned company. There have been discussions with the relevant people in the Eastern Cape where 100 000 hectares of land was available for forestry. However the 100 000 hectares was not in one area; it was the total amount of land across the province which made it difficult but not impossible for Safcol to be involved. Safcol has been involved in awarding bursaries to the Western Cape and to other provinces. On the question on the master plan, Safcol made a presentation to the board, particularly about timber frame structures which was a great area of opportunity for the company. There was a R90 million project Safcol would be involved in with respect to timber frames in all provinces. However the company would start with a pilot. On the diversification of products, Safcol was not fully vertically integrated, and the company sold 75% of its products. As part of the strategy, the board has already given an in principle agreement that Safcol should develop a diversification strategy, one which the Executive would be able to report on within the next six months.

On the timeframe to clear the audit findings, Ms Mashini replied that in any financial year Safcol ensured that by the time of the next financial year, all gaps have been closed and/or improved on. In the previous September quarter, the Executive reported to the board on progress made. The key one is on procurement. By January 2016 there needed to be a lot of progress made in addressing the audit findings.

Ms Mphafudi replied about Safcol’s staff component which had 1700 employees in the country and about 500 in Mozambique. As Safcol operated in a scarce skills area, the retention strategy for students given bursaries was that they were absorbed into a learnership programme which lasted for a year. Immediately afterwards, entry positions were created for them until they could be absorbed into senior positions. Absorption, however, was dependent on the capabilities of the individual. For processing, Safcol took in artisans, which were also part of scarce skills and the learnership programme was for three years. Safcol has always recruited from universities over the years, this year the focus was mainly on timber and construction. She explained the R40 million was the budget for socio-economic development and R20 million was for skills development, about R7 million came from Safcol’s budget and R13 million was from the Sector Education and Training Authority (SETA) grants. Youth were identified through media publications and through the social compacts signed with local communities. When vacancies were available, adverts were made available to the local communities and the local high schools. On desk manufacturing, Safcol had an abundance of raw material available to start a desk manufacturing factory in all provinces. However the Department of Basic Education needed to be an active participant. On the question around communication, most of the projects were opened by the Deputy Minister. He was very supportive of the work of Safcol and most of these stories were broadcast on radio and reported on in national newspapers. Policies and strategies have been put in place to bring in more black industrialists into forestry, however the biggest challenge has always been funding. The equipment needed for forestry was very expensive.

On the involvement of local leadership in dealing with illegal occupation of Safcol land, Ms Mona responded that in the past Safcol has consulted either local chiefs or municipalities as a multi-disciplinary team to ensure that locals were involved in all processes. On Safcol’s relationship with Eskom, she said Safcol retained its own artisans. However under the auspices of the Deputy Minister, the Enterprise Development Forum has been established for information sharing and opportunities for collaboration.

On the industrialisation of forestry, Mr Mabece replied that research indicated that there were over 150 products which could be produced by forestry. Companies all over the world were using forestry for many things. In South Africa, Safcol’s target had been very limited. Therefore the industrialisation of forestry has since become feasible, through making components which were even stronger than steel. Currently in Europe and in North America there were plans to build sky scrapers using cross laminated timber which is stronger than steel. The time now was therefore right for industrialisation. On IFLOMA, the board’s view was that money was being paid towards care and maintenance and IFLOMA needed to be self sustaining. One of the challenges identified were the same challenges experienced by Safcol which were around strategies for marketing the business and the products. The plant’s capacity needed to be improved.

Ms Mona replied about land invasions, saying all land was demarcated. However people did not wait for the finalisation of the land claims process and they moved onto the land illegally.

Dr Mbiji Mhlangu, Safcol board member, thanked the Committee for its engagement with the presentation. He asked that the Committee assist Safcol in educating communities on the use of timber to build houses, to build bridges, to build schools and many other structures. Timber structures did not require a lot of water and they took less time to build.

The Chairperson thanked the Safcol board and executive for the leadership they provided.

The meeting was adjourned.