Department of Public Enterprises on its 2015/16 Annual Report

Meeting report

Opening remarks
The Acting Chairperson requested that the Committee deal with the minutes first; as there were still some challenges with the technical support for the presentation.

Committee Minutes
Minutes dated 7 September 2016
The Committee considered and adopted its draft minutes of 7 September 2016 without any amendments.

The Acting Chairperson announced changes to the Committee’s programme for 26 October and 2 November 2016.

Ms T Stander (DA) asked if it could be included in invitations to State Owned Entities (SOEs) that there was that standing directive from National Treasury (NT) about delegation size to Parliament and cost cutting measures.

Minutes dated 14 September 2016
The Committee considered and adopted its draft minutes of 14 September 2016 with one technical amendment.

Mr R Tseli (ANC) commented that the minutes had to reflect all the resolutions from a particular meeting because it was impossible to have discussions and then to find only one resolution had been recorded.

The Acting Chairperson concurred with Mr Tseli that resolutions had to be reviewed during the consideration of minutes.

Ms Stander said in order to remind the Committee perhaps the secretariat could develop a table format matrix where resolutions from every meeting would be recorded where each new resolution would be added and could then be tracked, in terms of implementation by the DPE.

Ms N Mazzone (DA) said she would like to record the DA’s concern over Minister Lynne Brown’s absence from the briefing on the Department’s Annual Report though it understood that it was Wednesday, which meant there were cabinet meetings in Parliament as well.

The Acting Chairperson replied that it was upon the Committee’s programming to have Tuesday afternoon meetings to allow for the Minister to be able to attend AR briefings. It was saddening to hear about some routes that South African Express (SAX) had stopped operating and therefore the Committee had to invite that state owned entity (SOE) to brief the Committee whether it had concluded its AR or not.

Ms Stander recalled that when SAX had been granted the R5 Billion bailout by National Treasury (NT), there had been strict instructions from NT that SAX invoke drastic cost-cutting measures. In light of this, SAX would have evaluated all its routes and those that were not profitable enough were cut from the service. However; she wanted to know whose responsibility it was to inform the Committee that SAX had decided in a particular manner to meet NT instructions.

The Acting Chairperson said that Ms Stander would have a response to her question after DPE had presented its AR.

2015/16 Annual Performance Report: Presentation to the Portfolio Committee on Public Enterprises
Mr Mogokare Seleke, Director-General (DG), DPE, introduced his delegation.

Ms Mazzone commented that she hoped that the acting officials would have applied for the permanent positions wherein they had been acting, as that had been going on for a while. Was that so?

Mr Seleke said that it was the Department of Public Service and Administration (DPSA) policy that before attracting capacity outside, every Department had to explore internally first. That process was not only internally biased as there were competency assessments that were done by independent companies to validate capabilities of individuals.

Mr Seleke said he had effectively started in his position in January 2016 when the financial year (FY) was almost ending at the end of March 2016. The Auditor-General South Africa (AGSA) had highlighted most of the challenges that he had found at DPE. He commended Ms Jacky Molisane who had acted as the Chief Financial Officer (CFO) for DPE since her responsibilities mainly rested with the finances of the SOEs and not DPE as whole. She had risen to that challenge in the last quarter of the 2015/16 FY.

In the current FY DPE was monitoring its financial statements and reports monthly and hopefully by the end of the 2016/17 FY, it would get a clean audit.

The Acting Chairperson asked whether the DG was promising a clean audit or was that what he hoped for.

The DG said he was still reporting on the 2015/16 FY and accounting for the challenges therein. DPE had reached a point where one could say it had mechanisms in place to deal with supply chain management (SCM) matters before they resulted in irregular expenditures. He had requested Minister Brown for room to reorganise the structure of the DPE in terms of filling of positions.  Hopefully those would be filled within the next three months.

In terms of information and communications technology (ICT) which had been raised as a concern by AGSA; the matters were around the ICT license and courses offered by DPE, where its library had been a module shortage. The Acting DG had then approved a deviation for that module to be procured. The AGSA felt that the DPE should have tested the market for that service. Additionally the other issue was when an employee knew which course they wanted but attendance was poor.
To date, the DPE had performed at 84.65% compared to the 2014/15 FY which had been at 65%. It was important to highlight that the DPE had received a clean audit on its performance information.    
The concern on liabilities by the AGSA would have been a result of the pending criminal cases being pursued by DPE where some had been in the system for some time.

Minister Brown had written to the Speaker of the National Assembly (NA) concerning SAX - this correspondence would be availed to the Committee. Issues therein included the AGSA being unable to pronounce on SAX as a going concern unless matters relating to the guarantees with NT had been resolved. At the following meeting with Chief executive of SAX the DG would get an update around the routes that would no longer be serviced by SAX and the reasoning behind those decisions. 
The Committee would know if it travelled SAX regularly that there were services on board the flights that were no longer offered in terms of the cost cutting measures that SAX had presented to DPE in the first quarter of the 2016/17 FY. Government was at an advanced stage regarding the merger of SAX with South African Airways (SAA) bar the delay with NT and guarantees.
DPE had demonstrated with Eskom and loadshedding because 2015/16 had been a year of many serious strategic challenges. Alexkor was challenged with adapting to a new strategy because of the co-ownership with communities in the Richtersveld. DPE was working closely with Alexkor to find ways of establishing immediate community projects so that those communities could start seeing benefits through employment.
The DG said Ms Molisane headed a Committee where she sat with CFOs of all the DPE entities every quarter to look at all matters related to finances and he chaired the Committee of all CEOs of the SOEs under DPE. Those direct interactions would assist oversight so that it was not only at ministerial level or on a dashboard only.  
The DG said that for the short period he had been at the helm of DPE administration there seemed to be greater willingness on the part of the CEOs to interact as they realised the impact of negative media attention on the companies especially whenever the SOEs had to go on the market for funding.

The DG encouraged the Committee to have direct interactions with the situations at SOEs during oversight visits.

Mr Gcina Hlabisa, Director: Strategy, DPE, said that the subdued economic growth of SA affected the performance of some entities under DPE. That had then created a need for DPE to intervene by providing support to said SOEs to implement the counter- cyclical policy framework of government to kick-start the economy.

Investments by Transnet and Eskom had continued to expand the capacity of the economy and also boosted demand for the private sector. For example, the two SOEs combined had spent about R90 Billion in the 2015/16 FY on infrastructure whereas in the next five years the very same companies would spend just over R350 Billion on the SA economy. If the SOEs were to maintain or increase their domestic investment the policy environment had to be supportive of that as there were areas that presented challenges for SOEs. Additionally the SOEs had to grow into the continent before competitors from other countries moved in and DPE was working on a strategy to create a market as Eskom had excess energy to sell. 

The delivery of the first batch of passenger coaches manufactured by Transnet for Botswana Railways was very important for Transnet’s build programme on rolling stock, improving SA local content and developing new capabilities for SAs economy.

Mr Seleke said that DPE had moved from using consultants to working with universities for analysis of the performance of the SOEs.

Discussion
The Acting Chairperson lamented the fact that SOEs created markets that became taken over by the private sector for example the routes which SAX no longer flew whereas private airlines continued to fly.

Ms Mazzone said that privatisation had become an ideological struggle where there was no need for such. It did not help all the time to fight about whether there was privatisation versus nationalisation. There were many examples where nationalisation worked well with privatisation. An example was SAXs rental of Solenta airlines where one still bought an SAX ticket though one would be flying on a private airplane. The private sector had not taken over in that regard. 

At what point would DPE step-in to say, there was no way Eskom could ever fund the nuclear build programme as had been reported in media that Eskom would be running that programme.  

It had to be every South Africans nightmare that the country could be downgraded because junk status meant that every time SA lent money it had to pay at least three times on repayment.
There was also a serious problem between Denel and NT and hopefully when the two bodies came to report to the Committee on that challenge DPE would be invited to. What mediation had DPE undertaken therein seeing that Denel reported to the Department?

Ms Mazzone had been to the Alexkor area in the Northern Cape where she had seen the devastation of the mining operations as there had been no rehabilitation to date there. What environmental knowledge and impact had been undertaken there?

Ms Stander asked what the strategic objectives were for SAFCOL and Alexkor seeing that they suffered losses annually. Where they ever going to be financially sustainable? What was the contribution of the two SOEs to DPEs legislative mandate? What was the current progress with the R45 million settlement payout for the Richtersveld communities by Alexkor?  What did the irregular, fruitless and wasteful expenditures relate to that SAFCOL and Alexkor had incurred. What intervention had DPE planned into the two entities?

Ms Stander noted that the AGSA had discussed the setting of reasonable and realistic targets by the DPE. Was this done? Were there performance management agreements in place? To what level had those been set?

Ms Stander also wanted to know the dates and positions of the individuals that had received performance bonuses without having achieved their targets.

Mr Tseli said he would have wanted a situation where the Committee could say that in the last 12 months entities of DPE had contributed so much to job creation: could DPE speak to that? How many recommendations from the Presidential Review Committee (PRC) on State-owned Entities
(SOEs) had DPE been able to implement so far?  
What were the two targets on Economic Impact and Policy Alignment (EIPA) had DPE achieved?
The fact that Eskom had managed to continue supplying electricity with no loadshedding for more than a year was something to be proud of and which needed to be published repeatedly. He was concerned about Denel’s assets versus liabilities ratio where there was a 50/50 balance between the two. What implications did that have on the viability for that company?

Ms L Mathys (EFF) said that acting positions caused a lot of challenges for government departments across the board, including SOEs. What needed to be done? It was unacceptable that there were 24 vacancies at DPE?

The Acting Chairperson said that the Committee did not know when there had been a revision of the Annual Performance Plan (APP) of the DPE; therefore going forward Parliament had to be informed of such occurrences. On the litigation involving Alexkor, what was the progress therein and who had instituted legal proceedings?

The Acting Chairperson said that the Committee had recommended that board Chairpersons of all the SOEs under DPE be afforded a forum where they could share knowledge on best practises so as to assist ailing SOEs perform better. SAX had to come and account to the Committee at some point whether its AR was finalised or not and she was in support of a merger of SAX and SAA.

The Acting Chairperson asked the DPE to elaborate on the external factors affecting the productive sectors of the economy of the country. Eskom’s Chief Executive Officer (CEO) had reported in the Annual Report of that SOE that the company had an oversupply of energy: she was concerned that with more stations and units coming online that oversupply would grow; what plan did DPE have together with Eskom on utilizing that excess energy supply. Was DPE not pushing the ports to hard regarding targets?

Mr Seleke replied that there was active participation of the private sector within SOEs as around 70% of the operational business of SOEs was outsourced. An example was the operation of Grindrod at Transnet ports.

The delay in the filling of certain key positions was that DPE had been changing its strategy where the DG had instructed his managers to get honours and Masters’ students to train and to support them to PhD levels so that after studies they could be made part of the skills at DPE. Two months ago DPE had sent six individuals to China to study the governance models of SOEs in that country.  DPE would do the same with the Organisation for Economic Co-operation and Development (OECD).

DPE had been given four targets from the PRC and had completed implementing three.

Mr Seleke said that if SAX only focused on its balance sheet to make profits the airline would likely ignore its other imperatives of transformation including the airlines programme on training pilots and engineers. Transnet had recently trained and graduated 500 maritime artisans and engineers to the tune of R6 billion.

In terms of Alexkor and SAFCOLs strategic objectives, the Committee had to recall that Alexkor had been instructed by the court to award the Richtersveld community R45 million. The DG said that to avoid misleading the Committee he would require the Department of Mineral Resources (DMR) report on the environmental degradation by Alexkor as mining companies applied to DMR for approvals to mine.

Mr Seleke said that the awarding of the settlement to the Richtersveld community was complicated by a very imposing individual who seemed to be very influential in that community. The Board Chairperson and the CEO at Alexkor had written to Minister Brown about the caution they were exercising in terms of depositing the amount into the communal property association (CPA) account since it only had one signatory. To date DPE had put together a Cabinet Memorandum so that the decision could be taken at that level as to how to proceed on that matter though the lead Department was Rural Development and Land Reform (DRDLR).  

On setting targets the DG said that the process for that was quite intense as it included historical performance, the economic environment and what an SOE planned to do. For example, stakeholders complained that ships docked too long at sea because of the handling capacity limitation at Transnet ports. That then informed the strategy of Transnet to expand its handling capacity. Currently Transnet was expanding two of its ports to increase its moves per gross crane hour (moves/GCH). Performance targets were also monitored quarterly to ensure that when Minister Brown had to sign-off annually the reasons for weak performance could be justified.

The DG knew of a situation where bonuses had been paid to undeserving individuals but there were disciplinary processes which were underway with a chief director. The other individuals at Deputy Director-General (DDG) level had since resigned.

The Acting Chairperson interjected asking whether the DPE only dismissed without recovering the money paid in bonuses to undeserving individuals.

Mr Seleke replied that there were two ways in that regard: there was performance assessment that had to be taken for bonus pay outs. DPE undertook those bi-annually as set out by the Department of Public Service and Administration (DPSA); however he had started instituting those quarterly though he had been experiencing some resistance. The issue was where supervisors who had to sign-off on the assessment gave people who were not deserving, bonuses.

Mr Melanchton Makobe, Acting DDG-Corporate, DPE, said that there was a case of one individual which was still sub judice. Certainly if a bonus was paid, the person in the wrong was the individual that had signed-off and not the recipient of the bonus.   

The DG said that in terms of job creation he was in a situation where possibly about 2400 employees from Transnet engineering and about 3000 from Eskom could be retrenched because of the difficult economic situation. To avoid that the SOEs were looking at new business; this also spoke to the nuclear build programme being given to Eskom. Furthermore the DPE was working with SAFCOL and the Department of Trade and Industry (DTI) to create a community company to deforest and supply poles to ESKOM regarding job creation opportunities. Alexkor had also tabled a business plan to the DPE on coal mining.

On EIPA, the DPE had signed Memorandums of Understanding (MoUs) with the universities in the country and the target was mostly around the research capability of the Department.

The information from Eskom and the Minister of Energy was that the independent power producer (IPP) programme would still cost SA R1 trillion in 20 years time. The nuclear build programme would cost around the same amount. The greater part of the IPP was not base load except for the announced two coal projects. There were coal power stations that were going to come of age soon and the nuclear build programme was the planned alternative. 

Ms Makgola Makololo, Acting DDG-Energy, DPE, said there were a number of considerations that had to be made in terms of choices on the energy mix in the country. 11 000megawatss were at risk in terms of the life extensions of the operational power plants online in the country.  Coal was becoming an increasingly difficult technology to support as the OECD had decided that it was no longer going to support such which then made it difficult to build coal fired power stations and diminished the market.
To date the nuclear build programme was envisaged to be online after 2025 and the country had to decide on whether it wanted to add derivatives on its energy mix; that spoke to a dollarised electricity price which was linked to crude oil because coal was not linked to anything as things stood.

The DG said DPE had realised that the public contestation around policy decisions of the SOEs were very emotional. Currently Eskom had connected about 90% of the population of SA. Beyond 2025 Eskom would have to extend connection beyond the Great Lakes region of the continent if the country wanted to grow jobs.

On assets versus liabilities of Denel, the DG was very concerned since that would affect the SOEs ability to grow, as it would be unable to take on debt. DPE had to push Denel for productivity efficiency and to increase its revenue. The DG was monitoring that quite closely.

Mr Hlabisa said that the NT guidelines provided for departments to revise their Strategic Plans (SPs) and APPs. However; the reviews were not required to be tabled to Committees to date but DPE would certainly forward the revisions in future  

Mr Seleke said that the Committee would recall that SAX had been grounded in the recent past and the airline had since lost about 20% of its market share. Additionally the airline was losing capacity because of the uncertainty over the NT guarantee.

The external factors which the Acting Chairperson wanted an elaboration mainly had to do with market changes and affected all sectors of the economy of the country.

Ms Stander asked again whether SAFCOL and Alexkor were relevant and viable.

The DG had reported that SAX trained its own capacity which it often lost to the market. There was a way to contract people to work for a certain number of years before moving on, if they were trained by SAX.  DPE could approach the Department of Labour (DoL) and the NT could tax private companies for refunds and credits for DPEs and SOEs training of people that moved into the private sector upon completion of training.

Ms Stander asked if Alexkor were to mine coal; what would happen to the economy of Alexander Bay. How many jobs would be lost or gained if that happened?  Renewable energy in the form of wind turbines only had a 20-30 years lifespan. Was the current nuclear plan of Eskom for a whole plant or just one modular reactor? DPE had to report on revising its APP to the Committee. Why had the SAX no crash record never been used to its advantage? What else apart from the quarterly review had the DG instated to improve performance at DPE?

The DG replied that SAFCOL and Alexkor were very much relevant and profitable; if the Committee were to go to the communities where the two SOEs operated it would be seeing that they were the livelihood of most of those families.  He agreed that SAX would have to come to the Committee to account for its operational matters.

The DPE did not have any further details regarding the nuclear programme but the process was still unfolding. The Department desired to move Denel to the Department of Transport and the SOEs was in an advanced stage of concluding a contract to maintain the fleet of SAX.  Additionally the company was also developing a new commercial plane concept called the SARA (South African Regional Aircraft). Alexkor would not stop mining diamonds but wanted to expand its business.

The Acting Chairperson thanked the DPE for coming to the Committee and the meeting was then adjourned.