State Owned Companies reform: progress report by Department of Public Enterprises

Meeting report

State Owned Companies reform: progress report by Department of Public Enterprises
Mr Mogokare Seleke, DPE Director General, said the purpose of the presentation was to give an update on progress on the work done to reform the SOCs, highlighting the current state of the economy and its influence on policy choices around state ownership, and achievements on the key indicators for the SOCs.

The government announced a Nine-Point Plan in 2015 as part of re-igniting the South African economy. Priority is been given to strengthening the SOCs to advance developmental goals. This plan recognises that the current structure of the economy needs to be changed to maximise the developmental outcomes. The SOCs have seen increased demand from the shareholder as it pursues the Developmental State agenda. However dependency on the State is increasing in the short term to ensure that the implementation of the National Development Plan (NDP) commences in order to achieve its national vision. The implementation of the Cabinet Lekgotla Resolution has commenced and interdepartmental structures to support it have been established. The resolutions and state of progress on implementation of these were outlined:

- Develop the overarching shareholder policy defining the criteria for state ownership. A draft shareholder policy has been developed and consultations with government coordination structures commenced in February 2016 and will be tabled at Cabinet by end of the current 2015/16 financial year.

- Determine the appropriate shareholder ownership model. The shareholder model forms an important component of the shareholder policy. Four models have been identified and two are being intensely interrogated. A proposal on the model has been completed and awaits a consultation process.

- Establish an Inter-Ministerial Committee (IMC), led by the Deputy President, comprising of DPE, National Treasury, Department of Energy, Department of Transport and Department of Telecommunications and Postal Services, to promote prioritisation, alignment and coordination across focus SOCs to achieve government’s objectives. The IMC has been established.

- Establish an Inter-Departmental Forum to support the IMC. The Inter-Departmental Forum has been established.

- Support the proposal to separate the functions of shareholder, policy-maker and regulator across SOCs where applicable. The shareholder model will determine the interface of the three functions performed by the state. This will also be part of the Shareholder Policy. This has been completed.

- Develop and implement a standardised approach to the appointment of SOC Boards. The draft Board Appointment manual has been developed and will be submitted to Cabinet by end of the current financial year.

- Develop a robust private sector participation (PSP) framework. Options for the PSP have been developed. The key principle of the PSP is that it must not result in the state losing control of its strategic assets.

- Develop the framework for the disposal of non-strategic assets to fund critical SOCs with the first list submitted to the IMC by June 2015. Principles for the disposal of assets have been developed. However further engagements are required on the approach to follow.

- Separation of the developmental and commercial mandates. There is currently no progress on this and this will be incorporated into the shareholder policy.

- Training and skills development to be part of developmental mandates.

- IMC to reconsider proposals to empower boards, this will form part of the SOC Bill.

- Linking of remuneration to SOC performance, the draft Remuneration Standards have been developed and tabled with the Cabinet Committee. Further consultations are underway. This will be submitted to Cabinet by end of the current financial year.

The provinces are complaining of the non-employment of locals by independent power producers (IPPs) in the execution of their projects. These skills, being imported, are readily available and a framework is being worked out to address this. The economy, in general, has been significantly challenged and this is affecting both the State Owned and Privately Owned Enterprises. Some of the SOCs have been worst affected and others have managed to withstand the tough operational environment. However, this challenging environment has been leveraged to suggest a different approach to State intervention in the economy which may erode its capacity to implement the current economic policy framework. Therefore, the SOCs reform must ensure that:

– SOCs are stabilised in the short term and introduce an optimum institutional framework.
– Enhance the SOCs’ contribution to the transformation of the South African economy, and
– Fundamentally change the perceptions of the society towards SOCs through implementation of aggressive outreach programmes.

In the last two years, there were problems associated with some SOCs and drastic measures had to be taken by the Department to address these. At the end of 2014, SOCs such as Eskom, SAA, SAX, SABC and and others needed urgent attention. This prompted the Minister of Public Enterprises to roll out some interventions which were implemented to stabilise the SOCs. These interventions can be broadly classified into four broad areas: leadership stability, financial support, operational sustainability, and future strategies.

For leadership stability,
- The review of all Boards was completed.
- The appointment of new directors to strengthen SOC Boards as part of refocusing SOCs was done.
- Executive leadership at the SOCs was strengthened with appointments of CEOs and/or CFOs (Eskom, Transnet, SAX).

For financial support to the SOCs,
- Eskom was given a R23 billion support package and the conversion of its R60 billion debt into equity.
- Guarantees were extended to SAX of over R1 billion to ensure SAX secured its going concern status.
- Denel’s R850 million bond re-issuance successfully raised and over-subscribed to.
- US $5 billion was secured for Transnet through the China Development Bank.

For operational sustainability,
- Eskom maintenance programme was optimized resulting in reduced load shedding. The success of this programme so far has been a result of the injection of fresh graduate engineers into Eskom.
- The Build programme is progressing well with the first Unit at Medupi already commissioned.
- Securing agreement with the Department of Defence on Denel’s role and strengthening of the order book.
- Industrial relations were stabilised, particularly, at Eskom construction sites.

For the future strategies of the SOCs,
- An inter-departmental task team was established in 2014 to facilitate the implementation of SAA/SAX turnaround strategies. Some progresses have been achieved with some of the action plans - joint strategic direction required from Minister of Public Enterprises and Minister of Finance.

As a result of the intervention of the Minister, at the end of the third quarter, the performance of some of these SOCs improved and moved from the “urgent attention’” region to the “close monitoring” region, especially Eskom and SAX.

Some progress was made on the pre-determined objectives as defined in the Medium Term Strategic Framework (MTSF) (see document). Examples include:
• With regards to investment in the economy, Transnet spent R17.9 billion on its capital investments programme in Year To Date (YTD) Q3, 1% lower when compared to the same period a year ago.

• Eskom invested R40 billion YTD with the two units at Ingula targeted for synchronisation in the next financial year. On the reserve margins, Eskom purchased 6 525 GWh from IPPs for the nine months to 31 December 2015 at a cost of R11 billion. The commissioning of Medupi Unit 6, coupled with lower than expected demand, contributed to the improved system status and reduced the risk of load shedding during the third quarter. Eskom has stated that nuclear energy is the cheapest in terms of cost of operation followed by coal and hydro and diesel, lastly followed by the IPPs. According to the Director General, renewable energy is currently the most expensive with respect to operation.

• On port productivity, by end of quarter three of 2015/16, the Gross Crane Move Per Hour (GCM/H) for Pier 1 and Pier 2 Container Terminals were both 27 moves per hour, while a year ago they were 23 and 24, respectively. The quarter also saw the Ship Working hours at Durban Container Terminal (DCT) Pier 2 improve by 10.3% compared to the previous year. For the third quarter of 2015/16, the Q3 YTD target was missed by 4%.

• The tough operating conditions in mining and low commodity prices are having an effect on the volume moved by rail. Transnet is focused on the road to rail strategy so that trucks can be taken off the road and this will impact positively on the cost of road maintenance. Transnet is actually giving concessions in prices and this has reduced the revenue of the company.

DPE provided a financial report for the third quarter, showing spending on compensation of employees (68.26%); goods and services; transfer payments (150% spending) and capital assets. Of the total DPE budget, 58% had been spent as at the end of Q3. The under spending on compensation of employees was as a result of delays in filling vacant positions, mainly due to the verification process. A transfer payment in the amount of R15 billion was disbursed to Eskom during July and December 2015 respectively.

The current vacancy rate is 10.76%; the Department is continuing to fill the vacant positions. Furthermore, the Department is assessing its current structure.

Discussion
The Chairperson commented that the Director General was being too defensive in many aspects of the presentation.

Ms N Mazzone (DA), in her reaction to the presentation, told the Director General that things were not as bright and beautiful the way he made it look because the President during his State of the Nation Address stated there was a need to re-look at the SOCs and he spoke extensively about the Presidential Review of SOCs. Talking about privatisation, the Minister last year in his review the Auditor General’s audit report explained that when the DPE was initially established, it was done to be a catalyst to privatisation and over the years this has changed. She wanted a closer look taken at privatisation, semi privatisation or public-private partnerships. She is a big fan of privatisation but there were some SOCs that could not be privatised because they are national assets. She cited Eskom as an example but she would not mind if Eskom goes into public-private partnerships with IPPs or other private companies, but the grid must be kept since it is a national asset. There has to be a defined context in which privatisation is discussed. Ms Mazzone agreed that nuclear energy is cheaper than coal but not for the first 20 years of its operation. According to her, nuclear energy is the most expensive in terms of initial investment and a lot of countries are already veering away from the plants they began building or planned to build. Comparing renewable energy, she stated that it is not as big or dangerous as nuclear energy. Eskom is presently excluded from the proposed nuclear deal, which implies that the nuclear plants will sell energy to Eskom as IPPs. In her opinion, it was not a fair deal for South Africa. She insisted that nuclear energy was far more expensive. What should be looked at is how the cost of electricity can be reduced, and increase job creation and development of the economy.

Talking about the Key Performance Indicators (KPIs), Ms Mazzone said that to get the right level of performance in the State Owned Entities there has to be the right KPIs and with the current set of KPIs, it was just too easy for the executives of State Owned Companies to achieve their targets. She was of the view that these KPIs had to be reviewed and the contracts signed with the executives reviewed because the current status is not beneficial to South Africa.

The State Owned Entities are supposed to be profitable but presently they are surviving on bailouts and hence undermining the developmental state because they put pressure on the people.

She asked the DG to give an update on the merger of the leadership of the SAA and SA Express. She asked if the merger was still going to happen. Lastly, she was against the idea of benchmarking everything done in South Africa against what happens in the BRICS nations as most of them have already gone into junk status. She was of the opinion that best practices from countries all over the world should be looked into and not just the BRICS nations.

Ms T Stander (DA) commented about retention. She was of the view that the wrong people were been paid as opposed to the experts that were supposed to be doing the jobs and retained. The KPIs have to be increased and performance bonuses paid to high achievers and in this way the experts and people needed will be retained. Most companies, which train people, ensure that the trained people are contracted to the companies. She asked if the Department had such a system and if not, why not. With regards to vacant positions, she disagreed with the DG when he stated that DPE had no problems with that. On privatisation, she stated that the DG sounded vague when he talked about privatisation being seen “in a particular framework”. She asked him what he meant by that. As regards sustainability, Ms Stander was of the opinion the SOCs were not sustainable because they depend on government bailouts and their profit levels were in constant decline. It is important to reassess the strategic relevance of some of these SOCs, citing SAFCOL as an example. She wanted to know the relevance of the company today since there was no CFO or CEO and there was no profitability. She asked for detailed information on land claims with respect to how much land had been sold to private individuals in terms of hectares if possible and how this impacts on SAFCOL.

Dr Z Luyenge (ANC) said the presentation gave direction on where the Department was heading. He encouraged the DG not to be shy about pronouncing on things that need to be achieved. The ANC government has made many declarations on the problems associated with the SOCs and it is now very clear the work that has been done by the IMC in tackling some of these problems. He asked what had been done about the merge of some of the boards that were supposed to be merged.

Mr R Tseli (ANC) was impressed with the improvement in the state of the SOCs but disagreed with the idea of appointing a member of one of the boards as an acting CEO and wondered why this was done since there were other senior executives who could actually fill that position. He also spoke about DPE’s outreach programmes and stated he was not impressed with the communication between the Department and the various communities. He asked what progress had been made in getting the money municipalities owed Eskom. When would the government shareholder model be shared with the Committee?

Ms G Nobanda (ANC) thanked the DG for the detailed presentation and congratulated DPE for the improvement in the status of some of the SOCs. She asked for clarity on the targets of the Department and she also expressed satisfaction with the work of SA Express as regards its increase in flight traffic to Johannesburg.

The Chairperson talked about the Eskom war room, which was no more in operation but asked about the possibility of getting a full report on its operations and its impact on its objectives. On private companies importing people with no skills instead of developing the skills of the local people, she asked if there were any targets for skill development for locals. The Chairperson was not impressed with the DG’s comments on the vacancies in the Department. She asked if the Department worked effectively without a CEO or CFO and if these vacancies were not affecting DPE’s strategic plan. With regards to the Build programme, she asked if there was a developmental plan to develop the skills of local people to meet the needs of the SOCs.

Responding to the development of skills for the Build programme, the Director General stated that young people were actively involved and it was a sign that the country had a great future. On the vacancies, he said it was only SAFCOL that needed a CFO and CEO and the process is being taken seriously since it is one of the key performance indicators. Talking about the importation of foreign skills, he stated that it was only an example he gave and insisted that a lot of money was being spent to develop local skills to fill positions in these SOCs. In comparison to IPPs, the SOCs invest in local content and this importing of foreign skills was being looked into. The IPPs are encouraged to invest in our local people and measures are being put in place to ensure that these IPPs actually invest in local talent. Talking about privatisation, the DG made the point that private participation had always been there in the SOCs. He gave an example of Eskom where private companies are involved in the distribution, maintenance and generation, and stated that a large amount of revenue generated is from the private sector. Tenders could also be classified as private participation because it is also outsourcing. With respect to the framework, he stated that it was a common process where everyone will have a common understanding of how things work. He refused to comment on matters raised by the Committee based on external news sources, saying he would respond only to issues that the Department presented to the Committee.

On benchmarking, he stated that the BRICS countries, especially China, have SOCs which play important roles that are key and are able to deal with developmental matters. He stated that when comparisons are done, they are done properly. With respect to strategies, he reiterated that the strategies employed so far have been productive as this can be seen in the reduction of load shedding at Eskom. For reduction in the cost of electricity, the government has looked at all measures to see how this can be made possible. This may include over borrowing in some cases. About SA Express, the DG stated that the airline business as it is today is not very viable but the goal is to make flying affordable to every South African.

With respect to paying the wrong people, the DG proudly stated that he has strong confidence in those who are heading the various divisions. They are doing well and are giving confidence to those they are leading which is key to sustainability. He stated that the people must be encouraged and given support.

On the SAFCOL land claims, he stated that this is a problematic issue but the Department is looking at it and it is being treated the same way as any equity issue is been treated. He assured them that detailed information would be provided to the Committee in writing.

The Acting DDG on Energy, Ms Makgola Makololo, talked about the difference in money allocated to Eskom, stating it was money paid in batches to Eskom.

The Director General replied about the debt owed Eskom by municipalities, saying that some provinces had helped their municipalities to repay this debt while a system was being worked out for municipalities that have challenges in paying this money.

He said the shareholder model document can be readily shared with the Committee so as to get maximum input into it.

He said the outreach programme is been looked into again so that they can have a bigger impact especially in the rural areas and support schools. Communication will be improved on using various channels. A committee is already in place for this.

The Director General promised to look into the war room report but did not commit to this.

Ms Makololo talking about the cost of energy stated that this worked on a dispatch order where the cheapest energy in terms of cost of operation is loaded onto the grid, however with the IPPs, they are self dispatching which means they automatically load onto the grid and the consumer does not always get the chance of using the least expensive energy source.

Mr Tseli responded to the DG on the municipalities owing Eskom, saying it was not fair that some municipalities sacrifice to pay off their debt to Eskom while others deliberately refuse to pay. He asked the DG to work out a plan that would help Eskom in the recovery of these funds, except where Eskom had signed special agreements with municipalities to effect a payment plan.

Ms Stander responded to the DG saying he only replied to questions dealing with information from official sources. She stated that the Committee had every right to ask any questions as part of their oversight function irrespective of the source of the information. She also asked the DG what benefits claimants have received since 1994 to date and within which period were these claims made.

The Chairperson confirmed the position of Ms Stander and told the DG he was obliged to answer any questions raised by members of the Committee. She also agreed with the position of Mr Tseli on municipalities owing Eskom. She added that the Committee was not impressed with the level of communication of the DPE.

Ms Mazzone agreed with the stance of the Chairperson on municipalities owing Eskom.

Due to time constraints, the Chairperson asked the DG to provide responses in writing to unanswered questions by Members. The meeting was adjourned.