Department of Public Enterprises on its 2016 Strategic & Annual Performance Plans

NCOP Public Enterprises and Communication

04 May 2016
Chairperson: Ms E Prins (ANC, Western Cape)
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Meeting Summary

The Department of Public Enterprises (DPE) noted that the downturn in global and local economies, greater dependency on commodities that were vulnerable to changes in global economics, past over-reliance of the mining sector and investments falling below predictions in the National Development Plan had all meant that government would have to play a leading role in boosting investment. The comparative figures for public and private investment were presented over the last ten years. It was noted that the total value of assets of the State Owned Companies (SOCs) that fell under the Department of Public Enterprises stood currently at R908 million, while the liabilities stand at R637.689 milion. It was clear that the SOCs would have to play a major part in boosting the economy of the country. More emphasis was now being placed on supporting re-industrialisation and strengthening inter-government relations. DPE was engaging more actively both with provincial governments and with civil society, as part of building confidence in the State and its institutions. SOCs were capable of funding their own operations, through effective ongoing commercially viable operations. The shareholder compact set out interventions that enabled the institutional model to perform effectively, whilst supporting core outcomes and greater collaboration.

DPE's priorities for 2016/17 included finalising the SOC Shareholder Policy Concept paper, exploring funding options for the SOCs, developing  intergovernmental relations, developing the black industrialist programme, optimising SOC skills development programmes, with a focus on scarce and critical skills, and implementing interventions to strengthen the financial position of the SOCs.

A brief financial report was presented, which focused on the extensive R40.9 million reduction in the budget for compensation of employees. The DPE was consulting with the Department of Public Service and Administration and National Treasury to try to manage it expenditure within the reduced allocations. Over the next five years, the DPE would continue to explore programmes that will improve the stability of the SOCs and contribute to economic development, through projects positively impacting on the economy, and building partnerships.

The DPE finally spoke to some specific issues of the SOCs. It was explained that whilst DPE provides the overarching directions for the SOCs, the sector departments set policy, and the regulators played their part.  DPE appoints the boards and ensures the driving of strategic busines management and funding but cannot interfere in the sectoral performance. Transnet and Eskom had huge assets that enabled them ideally to borrow against their own balance sheets without getting State approvals. Eskom should shortly be in a position to be a major role player on the continent. The SOCs would be in the best position to change the economy because they would work where the private sector would not, and this must be remembered when assessing their overall effetiveness. There had been considerable concern about the grounding of the SA Express over the last weekend, which was largely due to miscommunication between the Civil Aviation Authority and SA Express. Had the DPE known about this in advance, it would have been in a position to take action. The operating licence was withdrawn but was then re-issued, although the Authority was apparently under pressure to do another audit. The SA Express faced a lot of competition on routes that it had taken the initiative to open up, and it was investing substantially in training black pilots.

Members recommended that the customers of SA Express should be specificaly informed that the grounding of the airline was not because of safety concerns. Members also wanted to know how the DPE was avoiding another under-spend of the budget in this year, asked for clarity on the stakeholder compacts and the progress in providing a legislative backing for that. They also queried why the key performance indicators had been reduced from seven to two points and also asked for the rationale for revising the performance plan.One Member did express concern about the state of the fleet of SA Express, and wondered if the grounding was not worthy of referral to the State Security Agency, as it could be an attempt to undermine the economy of the country.  They asked if the DPE engaged with all entities on energy management and how overlapping mandates would be addressed, as well as how the government would carry out industrialisation drives in Eskom, as also how it was maintaining the balance btween environmental concerns and its mandate to provide energy. One Member wondered if international countries would be putting investgment into helping South Africa move away from its reliance on coal. They expressed concern that Eskom was heavily reliance on one private supplier for its coal. They asked how the DPE was intending to address the fact that the majority of the economic activity was still confined to Gauteng, KZN and Western Cape, and what would be done if the SOCs fell below desired performance levels, and whether they were economically viable. One Member asked why the strategic plans had been revised, and questioned why the document presented made no mention of the possible closure or merger of SOEs, nor the Denel operations. 
 

Meeting report

Department of Public Enterprises: 2016/17 Strategic plan and Annual Performance Plan briefings
Mr Mogokare Seleke, Director General, Department of Public Enterprises, noted the background to the Department of Public Enterprises (DPE or the Department) and its work. The current state of the economy presented a major challenge that needs to be actively addressed by the sate. 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 had 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 (NGP) 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.

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 State Owned Companies (SOCs) then being required to invest more and to achieve 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  million.

He noted that the spatial distribution of economic activities has not changed significantly since 1994 and a greater portion of the economy is still concentrated in Gauteng, especially the manufacturing and financial services. Provinces such as the Northern Cape and Free State have the lowest contribution and this needs to be changed and support extended to these provinces. The collapse in the commodity prices had a devastating impact on commodity dependent provinces such as the North West. In the Northern Cape the implementation of the Renewable Energy Programme had profound impact on the Province,limiting the impact of the collapse in steel prices production.

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. In addition there is also greater joint planning and execution between the Department and its SOCs. There is an active engagement with the 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, it was noted that SOCs were 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 had been 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.

Mr Seleke 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 partnerships with provincial Departments of Economic Development
-Development and implementation of the black industrialist programme
-Optimization of SOCs・ skills development programmes, focused on scarce and critical skills
- Implementation of interventions to strengthen financial positions of SOCs.
-Positioning the  SOCs to be able to pursue African markets.
-Supporting the implementation of the Black Industrialists.

Mr Seleke then reported on the financial matters of the DPE. The Department痴 budget for compensation of employees had 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.

Specific issues relating to SOCs
Mr Seleke wanted to expand on the role the Department plays with respect to the SOCs. He talked about the policy departments within the SOCs, specifically using the Transport sector as an example. These dDepartments provide policy directions for the SOCs, but it is therefore very difficult for them to act as policy makers and business units at the same time. This is where the DPE comes in, as a shareholder representative of the government, ensuring that the strategic business management of those companies is driven by the DPE. The board members of the SOCs are appointed by the DPE and they ensure they adhere to all obligatory settings. Secondly the DPE interacts with the funding environment, from time to time looking at the best financing packages. The DPE also works within the shareholder compact and from time to time evaluates the performance of the boards.

Transnet was different from other companies due to its huge assets, which gave it the ability to borrow against its own balance sheet without getting State approvals. He cited Eskom as another example and stated that though the company was presently generating energy from debts, he believed the situation would be different very soon, especially when the Medupi power station had been completed.

Mr Seleke expressed the opinion that only the SOCs can bring about the desired changes to the economy because they are the only ones who can go to places where the private sector will not dare to go. Any attempt to break down the SOCs will not mean well for the economy because other parts of the economy where the private sector is not participating will then not grow. He referred to Eskom again, and solicited for encouragement for this company so that it can continue to grow and possibly sell energy across the African continent. He believed this would be a big boost to the economy.

Mr Seleke then spoke to the SA Express incidents of grounding its flights over the last weekend. He made the point that although the DPE is the shareholder arm, the Department of Transport is the policy arm, and the Civil Aviation Authority (CAA) is the regulatory arm. The CAA carries out safety audits and certain protocols are followed where they are mandated to submit certain reports. Two weeks ago, SA Express was supposed to have submitted some information to the Aviation authorities but failed to do so. The miscommunication between the company and the CAA led to the total grounding of the airline and the withdrawal of its operating licenses. There was also no communication between the Department of Transport Department, the DPE and the CAA, and this was a very unusual situation. Certainly, if the DPE had known about this earlier, it would have intervened. However, the operating license of SA Express was restored the next day, after the CAA  had satisfied itself on the issues. He stated that the private companies would be happy to see SA Express out of the market, but  government agencies should not make decisions which could be harmful to its credibility and its revenue drive. He added that SA Express had invested a lot in black pilots, unlike the private airlines who would rather bring in foreign pilots who had already been trained and experienced.

Discussion
The Chairperson recommended that the customers of SA Express be informed specifically through a campaign that the grounding of the airline was a result of certain regulatory issues and not because of safety concerns.

Ms C Labuschagne (DA, Western Cape) referred to the previous budget of the DPE where there was an under spending. She wanted to know what the DPE was currently doing to address that issue. She asked for information on the progress made with regards to providing a legislative backing for the shareholder compact. The DPE is responsible for portfolio management and strategic partnerships, and specifically talking about energy, she wanted to know if the DPE engages with all entities concerned with energy management and if there was a platform to do that.

Ms Labuschagne noted the comments on the funding from private investors, and wanted to know how the issue of overlapping mandate was being addressed and how the government intended to carry out its industrialisation drive in Eskom, since it planned to export energy and there are few companies in the country investing in energy. Questions were also asked about the model being used by Eskom, how it was keeping its balance between addressing environmental and health issues and its mandate to provide energy. Lastly, she asked what role National Energy Regulator of South Africa (NERSA) was playing in ensuring that smaller companies intending to invest in the energy sector had the opportunity to do so.

Mr E Mlambo (ANC, Gauteng) gave his opinion that the grounding of SA Express was a very sensitive security issue, and he believed it was sabotage and an attempt to undermine the economy of the country, and he recommended that the matter be taken to the State Security Agency for further investigations. He asked, in relation to the comment that Eskom could be exploring the African market, whether there were any engagements or plans with other countries on the Continent, especially countries in the SADC regions. He also asked what was being done to address the issue of gate keepers.

Mr M Rayi (ANC, Eastern Cape) expressed his worries on the state of the aircraft in the fleet of SA Express and asked about the turnaround time of disposal of the aircrafts. He asked how the DPE intended to deal with issues raised in the analysis of its strategic context. He noted that the presentation made no specific reference to the way forward. He asked whether the fact of the concentration of the economy was still geared to certain provinces was being specifically addressed in the Annual Performance Plan of the DPE.

Mr J Parkies (ANC, Free State) expressed his appreciation for the manner in which the performance of the economy was being addressed. He stated that the security of the economy was supposed to be a matter of national importance. For this reason, he was not happy with the situation that a private company was responsible for the supplies of coal to the Medupi power station, which was reputed to be the fourth largest station in the world. He felt it was dangerous to allow a private company be the sole supplier of coal to Medupi and expressed the opinion this should be reviewed and revisited.

Mr Parkies commented on the state of the SOCs, and disagreed that the SOCs, as constituted presently, could survive without government intervention. He asked what could be done to intervene where the SOCs were operating below the desired performance level. He asked whether the SOCs were really economically viable at the moment. He also asked for a follow up on the shareholder policy paper, and also demanded an explanation on why the performance indicators were reduced from seven to two.

Mr J Julius (DA, Gauteng) asked for an elaboration on the interventions within the segment of the strategic outcomes to resolve core capacity challenges, how these interventions are being carried out, and the various associated problems. In relation to Transnet, he agreed on the need to revitalise the energy lines, especially for agriculture and manufacturing, but pointed out there were no tangible actions from the DPE in this regard. He also made comments that the document presented did not match the National Treasury template, since there were no measurable outcomes in the document. In relation to the revised Strategic Plan presented, he wanted to know what criteria were followed in developing this, and the reason for revising the plans in March 2016.

Mr Julius commented that there should always be a streamlining of plans within the budget plans of the Minister of Finance, but there had been no mention of the possible merger of the SA Express and the plans in place for the merger. There was also no mention in this document of the possible closing down of the SOCs that were a liability to the State. Finally, there was no report on the political, financial and strategic implications on the operations of Denel Asia.

The Chairperson responded that Denel had already been asked to come to give a report to the Select Committee.

Mr O Sefako (ANC, North West) asked if there was any commitment from the developed countries to give financial help to developing countries, especially to South Africa, which is coal dependent, to develop green and clean energy.

Mr Seleke, in his response to comments arising from issues surrounding SA Express, expressed worries about the perceptions on the credit worthiness of the company. He told the Committee that the Chief Executive Officer of SA Express called him over the weekend to say the authorities in the aviation sector were planning another audit visit, because it seemed there was pressure from some quarters from certain people who were not happy that the license of the airline was restored. SA Express wanted to recapitalise much earlier but its application to do so had been rejected. The airline had opened routes which were non-existent before now and this has caused the airline to incur certain loses. As a result of SA Express opening up such routes, the private airlines had then also ventured into such routes, thus creating stiff competition for SA Express. It must be understood that the company is also facing a lot of challenges. A full report will be presented after due consultations on what really transpired that led to the grounding of the airline and withdrawal of its operating license over the last weekend.

He noted that in relation to the shareholder compact, a concept paper is currently available but this is still a classified document. The document sets out plans for how the SOCs can be restructured through a process of rationalisation. The delay in the introduction of the legislation is a result of the process involved, and the Deputy President is currently heading an inter-Ministerial committee, looking into this.

Mr Seleke noted that in relation to energy, the SOCs under the DPE are classified into manufacturing and energy. The Department of Public Enterprises was not involved in dealing with policy matters and regulatory matters in their particular sectors, but was mainly concerned with restructuring the SOCs to make them more economically viable and to safeguard their interests.

On the issue of exportation of electricity, he believed Eskom should be able to trade like any other company and be profitable, which should imply that it could trade by selling and buying electricity according to its needs. Eskom had also signed bilateral agreements with some of the countries in the region. With respect to the issue of co-funding, the Independent Power Producers were a good example. Participation of private players is very important and they play a very important role.

Mr Seleke then addressed the concerns about the security of the economy with respect to the power station. At the moment, the IPPs and their technology were still very expensive and the best decisions have to be taken. Discussions are being held at the moment. The issue of keeping the balance between the economy and the environment is a vital feature, and it was agreed by all that a proper and correct balance would have to be found. The SOCs are also encouraged to support one another in the various areas of their businesses.

The performance of the SOCs is another very important point for the DPE. The DPE sometimes it has to carry the burden of other SOCs that fall under other departments. The most important aspect for the Department s management of manpower. Motivation is a key factor in this regard.

He clarified that the public consultations referred to engagements with the provinces and municipalities. They are needed to identify certain areas where there can be investments. In cases where there was no capacity, the Department would help to provide this, particularly to the municipalities.

Mr Seleke spoke briefly to the Denel report, and noted that in the past, Denel used to  employ agents for its transactions but things did not go well under that arrangement. On advice received, it had therefore now gone into strategic partnerships instead.

He commented on the changed targets, and said that new initiatives had been introduced to ensure that the scope of the SOCs would be broadened, including skills development and recognising the need to have more international engagements.

Mr Julius asked for a detailed report from the Department on the capacity challenges facing Eskom and the other SOCs.

Mr Sefako asked about funding from the developed countries.

Mr Seleke responded by saying such funding was available but it would generally come in the form of loans. He assured Members that the report of the inter-Ministerial committee would be sent to the Committee.

Minutes
The minutes of the last meeting were adopted.

The meeting was adjourned. 

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