Department of Public Enterprises, with Minister and Deputy Minister, on its 2016 Strategic & Annual Performance plans

Meeting report

Department of Public Enterprises 2016 Strategic & Annual Performance plans
Minister of Public Enterprises introduction 
The Chairperson welcomed the Minister and Deputy Minister of Public Enterprises.

Ms Lynne Brown, Minister of Public Enterprises, introduced the members of the Department of Public Enterprises (DPE) delegation. She said that global economic challenges affecting the South African market had made the implementation of policies and programmes more challenging. In 2016, the economy is expected to grow below 1%. In this year, the focus would be to ensure that there is a turnaround in the growth story and position of the State owned companies (SOCs) and to drive economic recovery, and set the economy on a growth trajectory with better developmental outcomes. SOC investments had been essential to minimising the impact of the economic crisis and they would remain essential for the economy in the future. The DPE must ensure that it leveraged the SOCs to drive the industrialisation programme, accelerate transformation of the economy and support Africa's development, and its entire strategy was directed to this goal. She noted that when she took over the portfolio, there were SOCs who faced governance challenges, and she had immediately started initiatives for a  programme of intervention with a view to reviewing leadership and creating stability on the boards of the SOCs.

She made specific reference to the energy sector, saying that the success in the turnaround of Eskom hinged around four pillars, of stable leadership, execution of the maintenance plan, delivery of the build programme and financial sustainability. The last year had seen progress  in executing each one of these pillars, particularly in leadership stability. The board and management have been able to demonstrate sound performance and governance, with all the executive roles now filled. There had been significant improvement in the execution of maintenance, to ensure that this was done whilst the “lights stayed on”, which had made load shedding a thing of the past. The usage of diesel had also reduced significantly, from almost R1bn per month to R40m per month The Minister stated that the Group Chief Executive Officer, Mr Brian Molefe, had assured her that there was no prognosis for load shedding over the winter months. There had been improvements in the financial position of Eskom, particularly its liquidity, despite the unfavorable decisions from National Energy Regulator of South Africa (NERSA). Eskom had worked diligently with the DPE to ensure compliance with equity conditions set by the Minister of Finance to ensure financial improvement and compliance. There had been great progress with the execution of its build programme including the delivery of Medupi, Kusile and Ingula. Over the last month two units at Ingula were delivered, adding 666MW to the national grid. In the next year, Eskom will focus on the delivery of the additional units, achieving cost cutting measures, strengthening the transmission grid to support the Independent Power Producer (IPP) programme and electrification expansion. The Minister stated that this turnaround approach could be replicated at all the other SOCs, even outside of the DPE, as a dashboard for operational performance and sustainability.

She then spoke to the industrialisation effort of the DPE in regard to Denel. The incoming Board of Directors reviewed the SOC strategy and this had led to a new acquisition strategy, driven by a need to build strategic capabilities, in turn informed by the 2014 Defence Review, being pegged back to preserve resources. The focus of the Board in the medium term will be on improving cash management, improving working capital management and opening new markets through strategic partnerships in identified markets. The cash situation at this SOC had stabilised and the R850-million note brought to the market in Quarter 4 of 2015/16 by the SOC was over-subscribed, showing the market confidence in the interventions at the SOC. Denel also embarked on an aggressive product portfolio augmentation programme. Notable programmes were the launching of the SARA regional aircraft to address African air travel requirements, and the midlife upgrade to the Rooivalk attack aircraft. The launch of the Rooivalk upgrade programme is a product of the deployment of the helicopter in a peacekeeping mission in the DRC, where it acquitted itself quite well. She noted that these development showed that Africa is playing its role in giving the world complex technological products.

The Minister then noted that Alexkor was continuing to show pleasing progress in its recovery and the operations are being maintained, contributing positively to the socio-economic recovery of the Richtersveld region. The land restitution programme, through the implementation of the Deed of Settlement, is coming to an end and the focus for the future will be on assisting the community to utilise proceeds from mining for development of agricultural and industrial enterprises, in order to ensure economic activity beyond the life of the mine.

The South African Forestry Company Limited (SAFCOL) Board had also reviewed its strategy and it was placing greater emphasis on beneficiation, without compromising sawlog security of supply to SMME sawmills. SAFCOL had developed plans to upgrade the Timbadola Sawmill in Limpopo and re-establish the Sabie Sawmill complex. This will have a positive impact on the SOC’s plans to stimulate the furniture manufacturing and timber-framed building industries in these rural regions of the country.

Transnet, in the wake of slow and declined economic growth, was continuing to drive a counter-cyclical investment strategy. This company is re-drawing its investment plan to a longer-term plan in order to better align capacity creation to expected demand. Transnet is also shifting its focus towards capturing greater market share in the domestic market and extending its footprint in the wider African market. This will also see Transnet diversifying its commodities more, to increase the amount of general freight traffic that is moved to support the road-to-rail strategy. In order to increase its revenue opportunities and support local and regional economies, Transnet Engineering has increased its focus on developing the second prototype of the Trans-Africa locomotive. This is over and above the locomotive acquisition programme that is already being implemented to support the road to rail strategy. In March, Transnet Engineering delivered the first batch of coaches to Botswana Railways and continues to grow its business in the Continent.

SA Express (SAX) is working towards achieving financial sustainability in a very difficult operating environment in the aviation sector, as well as a generally weak global economic environment. As announced in the budget vote speech, the Minister reiterated her proposal in collaboration with the Minister of Finance to explore the possibility of merging South African Airways (SAA) and SA Express to create better opportunities of leveraging on these state-owned assets in support of government’s strategic objectives. 
 
The Minister then noted that the DPE aimed to expand market opportunities and grow the market share of SOCs, and was thus pursuing the African market as a potential growth area in response to the regional integration. She stated that the SOCs would be pursuing opportunities in several countries. Transnet had identified Tanzania, Kenya and Burundi. Eskom's focus would be on the DRC, Mozambique and Uganda. Denel will be looking at Egypt and SAX would be looking at Ghana. These would form some of the continental engagements that the DPE and the SOCs would be prioritising in the new financial year.

The Minister concluded her remarks by talking about skills development in the SOCs. There is a deliberate effort by the SOCs to develop scarce and critical skills that are required to support the economic growth, including training in artisan, technical and engineering skills. The SOCs would all train for their current and future operational requirements as well as for the broader economy. The Transnet and Eskom new build programmes had developed a critical skills base that could be leveraged on to develop new businesses and economic development centres.

Discussion
Ms T Stander (DA) asked the Minister to clarify  the stakeholder compacts. She wanted to know when these would be given and the delays in releasing them. She noted the comment from the Minister on the improvements in leadership of the boards of the SOCs, but she was of the opinion that there was merely a “recycling” of members of the boards of these SOCs. She highlighted that there were many vacant positions and acting personnel, in the DPE especially. She wanted to know what was preventing the Minister from having a fully constituted board across all the SOCs. On the issue of merging the SAA, SA Express and Mango airlines, she asked for more detail, particularly if the Minister would prefer  a merger of these entities or putting them under a holding company. If and when these entities were merged, she also asked under which department they would fall.

Dr Z Luyenge (ANC) asked how far the proposal of merging SAE with other entities had gone.
Ms D Rantho (ANC) asked the Minister if the DPE was affected by the reduction in budget by the National Treasury, also pointing to the fact that there were vacant posts. She made a special request to the Minister to give an outline on the strategies of the SOCs to link their social development mandates directly with the 9-point agenda as announced by the President.

The Chairperson mentioned the issue of industrialisation. She appreciated the fact that efforts were being made but stated there was nothing strategic to show for this process taken into account the current global economic challenges. She wanted to know why there were no big projects being executed. She too spoke to the proposed merger, asking if there were plans to cater for the low income earners in the merger process. She asked the Minister to give some clarity on the suspension and resignation of some key officials in DENEL, as this would seem to affect stability of the management.

The Minister noted that the main reason why the shareholder compact is not put into the public space is that the companies are also acting as commercial companies and they have policy agreements with the DPE that could not be published. She promised to speak to the Department's legal advisers about the possibility of making the non-commercially sensitive part of the shareholder compact a public document but reminded the Committee that even fully private commercial companies would not publish certain information. She noted that there was only one instance in which she had “recycled” a board member. One Director General had just been appointed who had  a background in economics, and there were processes in place to fill all the vacant positions. In only two portfolios were there acting Directors General. In answer to the questions about the merger options, the Minister would prefer to see a merger rather than placing he companies under a holding company. She stated that there were no special arrangements for the low-income earners in the proposed merger. Mango was still the airline which primarily catered to this market. The problem with the airline industry remained that there were very few private companies ready to venture into the industry because of the high overhead costs involved. There would be a presentation to the Portfolio Committee separately, on the nine-point plan. Finally, she assured Members that  the Department would continue to work according to its mandate, within the approved budget.

Department of Public Enterprises (DPE) briefing
Mr Mogokare Seleke, Director General, Department of Public Enterprises, noted that the Minister had covered some general points and he would now go down to specifics. He agreed that the current state of the economy presented a major challenge that needs to be actively addressed by the State. The poor performance of the global economy had exposed weaknesses in the domestic economy and this could be attributed to the over reliance on the mining sector, which has experienced a sharp decline in revenues. There was also a greater dependency on commodities that are vulnerable to changes in the global economy. Investments in the economy had remained below the National Development Plan (NDP) targets .The productive sectors of the economy had been worst affected, with investments into both mining and manufacturing leveling off. This had presented a major challenge for the investment driven growth approach presented by Government in the New Growth Path and National Development Plan, with the result that government would have to play a leading role in boosting investment in the short to medium term.

He noted that in 2005, investment by the public sector amounted to just over R80 billion per annum. Over a period of ten years this had increased to R261 billion while private sector investment still represented a greater proportion of total investment in the economy. In 2013, the private sector invested R412 billion. However, this declined between 2014 and 2015, falling below the R400 billion level. The implication of this was that the implementation of government plans will be more challenging, with the SOCs required to invest more and to better results, and support the diversification of the South African economy. The total value of assets of the SOCs in the DPE stands at R908 million, while the liabilities stand at R637  689  000.

There is now a greater emphasis on supporting the re-industrialisation programme of government while strengthening intergovernmental relations. The Department is actively engaging the provincial governments, and there is better joint planning and execution between the DPE and its SOCs. There was furthermore more active engagement with civil society to make SOC and the Department more accountable to the public, as part of building confidence in the State and its institutions. Capacity building programmes will support other spheres of Government.

In terms of financial sustainability, he noted that SOCs are entirely capable of funding their own operations, without requiring State intervention. There were commercially viable operations ongoing that were efficient and effective and desired operational target levels were achieved, which allows for expansion of operational capability. With capital project delivery, capital project targets are met, in line with strategic and policy expectations, thereby enabling the rest of the economy to prosper, driving up investment, GDP and exports. The shareholder compact set out interventions that enabled the institutional model to perform effectively, whilst supporting core outcomes and greater collaboration.

He then highlighted some of the priorities for the 2016/2017 year. This included:

- Finalisation of  the SOC Shareholder Policy Concept paper
- Exploring funding options for SOCs
- Development of the intergovernmental relations programme and formation of strategic partnership with provincial Departments of Economic Development
- Development and implementation of the black industrialists programme
- Optimization of SOCs’ skills development programmes focused on scarce and critical skills
- Implementation of interventions to strengthen financial positions of SOCs

Ms Matsietsi Makholo, Acting Deputy Director General: Energy, DPE, talked about the performance targets of Eskom, commenting firstly on its financial stability. Its current debt to equity ratio target is 60:40 and its expected revenue is R180 billion. Its plant capacity loss factor, that represents the maintenance of its plants, is targeted to be 10%. There is a target of 65% expenditure on local content and R8.4 billion expenditure on skills development. The target of the government is to ensure that there is a total electrification by 2030, but Eskom was targeting to reach this already in 2026.

Ms Kgomotso Modise, Deputy Director General: Transport, DPE, spoke to the performance targets of Transnet. Its debt to equity ratio is 50:50 and its return on total assets on rail target is 4.3%. In relation to operational performance, there is a target of 230.8 metric tonnes for rail volume and it plans to spend R22.8 billion in the next year.  75% of this fund is targeted at local content. She added that both Transnet and Eskom are operating in tough business environments, having to sustain level of capital expenditure while revenue remains stagnant This requires careful balancing of the targets being pursued by both businesses. She noted that SA Express had made losses in the last five years and continued to borrow to fund its operations. It planned to spend R150 million on loans repayment and there was a target of R272 million for cost containment savings. The financial position of SAX remains significantly constrained and the targets are focused on accelerating its turnaround.

She noted further that Denel had targets to generate R685 million from cash-generated  operations. There is a target of R2 billion on value of new orders. Its research and development expenditure is targeted to be  R740 million or less. There is a target of 70% local content spending and for 75% spending on  broad based black economic empowerment (BBBEE).

SAFCOL had a target of 5% revenue growth and a target of 2 898 total direct employment by jobs created. It further had a target to spend R802.7 million on the BBBEE procurement spending.

Alexkor had a 80% local content target.

She further spoke to the financial matters of the DPE. The Department’s budget for compensation of employees has been reduced by R40.9 million for the 2017/18 and 2018/19 financial years After consultation with the Department of Public Service and Administration and National Treasury, the Department will finalise, develop and implement a plan to manage its personal expenditure within this reduced expenditure ceiling.

The Department had furthermore developed a strategy roadmap for the next 60 months. It would continue exploring programmes that will improve stability of the SOCs and contribute to economic development. The DPE is building for success by repositioning itself and its SOCs onto a growth trajectory, through delivery of projects that positively impacted upon the economy and greater partnerships. In relation to enhancing its values, the DPE recognised its original purpose as a shareholder who would ensure excellence of SOCs, through delivery of projects that would ensure that overarching targets are met, that would achieve optimised shareholder function and greater contribution to economic development.

Discussion
Dr Z Luyenge (ANC) appreciated the efforts in improving the economy through the SOCs. He asked if the boards had the necessary capacity to guide the processes, if they were sure that the different mandates of the entities are actually clear and implementable at a governance level. He talked about gaps in some of the boards, specifically mentioning SAFCOL, and he wanted to know how this affects the stability of the entity. He also noted the statistics for the filling of vacant positions across all the entities, especially at Transnet, and also wanted to know the general retention policy of the Department, emphasising that it was important for growth and development of the Department overall.

Ms D Rantho (ANC) commented on the resignation of the Executive Officer of SAFCOL, and wanted to know the impact of this on the company, particularly given its expansion plans. She  was concerned about the profits that private companies were making at the expense of SAFCOL, with no corresponding development in the various communities where they were operating. She said that during the last interaction with Alexkor, the Committee gained the impression that Alexkor would be moving into agriculture, and requested an update on this. She also talked about the developmental mandates of the SOCs, which she was not sure were being sufficiently felt or achieved. She asked why, in the previous year, there were seven key performance indicators, which had now been reduced in the current year to two, why this happened, and how the DPE would rate the performance based on these two indicators.

The Chairperson asked if the reduction in performance indicators had been the result of a revision, and if so, why that was done. She noted the performance targets of Eskom in relation to the R8.4 billion planned for skills development, and wanted to know how this would be monitored and the breakdown of the figures. She also wanted similar breakdowns in relation to the target for the local content spending. She felt that the local content spend target of SAFCOL was too low at 55%, and asked why that figure was chosen.

Mr Bulelani Magwanishe, Deputy Minister, DPE , responded to the question relating to the board composition of some of the SOCs. He stated that if something happens to a company, the board is always held liable. When the new boards in DENEL and SAFCOL were instituted, they implemented the consolidated recommendations as it affected certain members in the management of the SOCs. Some of these executives chose to resign while some  were suspended. He stated further that not all of these resignations impacted negatively on the board.

He noted that Transnet's biggest achievement was its status of manufacturing. He repeated that Transnet had successfully built and delivered about 40 locomotives to Botswana although this had not been well publicised because the government of Botswana had asked for a total media blackout on this deal. The SOCs were actively involved in a lot of projects even though there were still certain challenges.

The SOCs faced challenges in dealing within both a private and public environment and there was currently a concept paper on which government was working to address some of these challenges. The filling of positions on boards also carried certain challenges, relating to gender, disadvantaged people and race, but there was a conscious effort to have a balance of new and “recycled” and experienced people on the boards of these SOCs. All the board members appointed so far are suitably qualified people.

Mr Seleke also responded to the point of filling of vacancies. The first step in filling the vacant executive positions was to acknowledge the pool of people within the Department, to see if they could fill these positions, and this was why for a period there would be acting appointments. The DPE did try its best to recruit and retain the best talent. The reduction in the budget of the Department had impacted negatively but the Department continued to strive to spend within its approved budget.

Ms Ntsiki Mbono, Deputy Director General: Economic Impact and Policy alignment, DPE, spoke to the performance targets, pointing out that there were details on targets in the shareholder compact, which were being unpacked, and there is a proper monitoring of these targets. A verification process had been introduced to verify the numbers being reported. There was also a process to align skills and training, in partnership with provinces and municipalities, to verify the identity of those actually being trained.

The Chairperson asked if the system could really verify those in actual need of the bursaries given.

Mr Seleke responded that the necessary stakeholders were being involved in the decision process so that a greater target area could be reached.

Ms Jacqueline Molisane, Deputy Director General: Strategic Partnerships, DPE, responded to the points raised on local content. She stated that the Department had been able to show that South Africa can actually produce and provide some of the needs of the country locally. The local content procurement formed a specific target and SOCs were encouraged to stretch themselves. She also stated that South Africa could build world-class international business.

Mr Seleke also contributing to the issue of local content targets. There were concerns at the possibility of certain categories of people continually benefiting from the system, and so there were now mechanisms being put in place to ensure that companies partnered with local people to encourage those with the required skills.

Ms Stander commented that the layout of the strategic plan document was poor and recommended that it should be withdrawn and properly presented before being introduced to the public. She also pointed to some other flaws in the document. She specifically asked the DPE to take an example from the Department of Environmental Affairs on how a good  Annual Performance Plan should be presented.

Mr Seleke responded that this report was produced in haste, to meet the deadline of the Portfolio Committee but the final document would be professionally proof-read, printed and more attention paid to its layout.

Adoption of Committee Minutes
The Committee adopted minutes from its last meeting.

The meeting was adjourned.