Safcol on its 2015/16 Annual Report

Meeting report

SAFCOL on its 2015/16 Annual Report
Mr Trish Pillay (SAFCOL Chief Financial Officer) said the performance of SAFCOL against shareholders compact, indicates that, the financial returns were lower than the target set,-7.8%, return on equity excluding far value movements and translation gains - 1.5%, cash interest cover - 19.5% due to non-performance of lumber higher than anticipated operating expenditure. Area of forest under management was set for 1000 hectares however only 129.03 hectares were achieved mainly due to budget not being set aside pending conclusion of feasibility studies and the drought limiting the planting process. The timber processing by Timberdola did not meet 150 000 cubes, the actual being 131 179 cubes attributed to aged equipment and frequent breakdowns. More so the actual volume cut was 82 933 cubes due to the Ringkink contract only being approved for an eight month period. Three employee fatalities were reported, one employee killed in October 2015 at Wilgebom and two in a lighting strike at Blyde March 2016.

Financial highlights were: Group equity R2 billion; biological asset value up 0.6% R3.8 billion. Revenue up 0.6% R903 million; average log selling price up by 8% R561 per cube; average lumber selling price up 5.6% R2 643 per cube; sawmill record intake volumes of 131 179 per cube and group asset value of R4.6 billion. Gross profit of R184.7 million; other income R6.5 million and loss for the year R49.7 million. SAFCOL received an unqualified audit opinion with findings.

Achievements for the year: filled CFO position; rebranding to bring all SAFCOL businesses under one brand; rolling out timber frame structures in the public sector; contract management and redefining cost centres for more transparent reporting. Processes have been put in place to curb fruitless and wasteful expenditure and a detailed audit plan drawn up to rectify all audit findings. Information about the implicated individuals was handed over to law enforcement where criminal activities were identified. The report also outlined SAFCOL's future focus which is financial sustainability; world class operations and processes; human capital and transformation; satisfied customers and stakeholder.

Mr Harvey Theron, Acting CEO, spoke on IFLOMA and the ongoing investigation. IFLOMA was placed under care-in-maintenance after identifying that IFLOMA has to be turned around. It is thus a huge priority within SAFCOL. The Minister of Public Enterprises asked SAFCOL to look at previous reports which has been done, a total of 20 reports, but never actioned and they have been concluded, where applicable they have been handed to the relevant authorities. Minority shareholding was reported in previous reports with the exception of this year. When the new Board started they requested a full report on the intent of minority shareholding and became clear that it was for SAFCOL to hold onto the shares until a place to move it to is found. Therefore, it was never supposed to be part of the asset base, revenue recorded never supposed to be reflected. It was emphasised that land claims are a big issue. However, the lease model is not sustainable. Thus they are relooking at the model and seeing how the communities can be involved in SAFCOL as well.

Ms Pillay gave clarity on the issue of minority holding and stated that, it was incorrectly classified. The intention was to hold it as trustee and not as benefiting. More so, there was a prior period errors resulting in a reduction in income of R41 million. There had to be a cumulative amount, the restatement of R431 million was not supposed to be disclosed. Apart from minority shareholding, there were a number of items that had to be looked at from the prior year due to either an accounting error or something was disclosed when it should not have been. For example, the fixed assets, a full accounting was redone to ensure that all assets were there, look at their usefulness and restate the assets based on these findings. Other items that were restated were the trade other payables, cumulative to the returns, there was a major difference between the prior year and the current year. Therefore, when looking into SAFCOL financial statements, one has to consider that there were mistakes made.

Mr Lungile Mabece, SAFCOL Board Chairperson, spoke about the resignations of the CEO, CFO and Senior Executive: Human Capital Management (HCM). On 14 December 2015, the former CEO and CFO resigned and the resignations were immediately accepted by the Board because it was established that the executive were not being honest in their dealings regarding certain matters as well as there was a lack of cooperation. The matter led to the suspension of the HCM and Chief Operations Officer (COO) who later resigned in February 2016. The Board has since appointed an Acting CEO and CFO. He noted that the Board is moving towards stabilising the company by ensuring that all executive positions are filled. Mr Mabece further reiterated the relevance of SAFCOL going forward by assuring that there is great future for SAFCOL by means of diversification, expansion into Mozambique as well as horizontal and vertical integration already under process.

Discussion
Ms L Mathys (EFF) noted that SAFCOL still dominates the industry yet there are losses in revenue which is bothering, which might be due to corruption going on within SAFCOL. More so, there cannot be a mass resignation of executives and the matter not be investigated. Mr Theron, the acting CEO, approved the awarding of a tender for about R10 million to his business associate, Mr John Duarte. She asked Mr Theron to answer this concern. Ms Mathys said that the Board has to answer for this and the resignations because state entities are not performing well due to corruption, and flawed tender processes. She asked about the purpose of rebranding and the costs involved.

Dr Z Luyenge (ANC) asked for more clarity on the resignation of the executive as well as the view of the Board in order to prevent wrong precedent. He expressed concern since the person who had done wrong, was investigated, remunerated and then employed as a civil servant again. Mr Luyenge addressed land claims and noted that it is not supposed to stall development. There has to be understanding by the claimants, involvement of the community and beneficiation which is a constitutional obligation not only in monetary terms but as owners. The Board has to be decisive, take the organisation where it has to be, which means that the Board must address what has happened. He asked if SAFCOL is able to empower the under privileged service providers to produce quality and be equally competitive, if there is asset management and inventory holdings as well as disposal of assets.

Ms T Stander (DA) expressed condolences for the three employees and asked if SAFCOL has any specific interventions for health and safety. In respect of the resignation of the executive, SAFCOL was asked to provide more details without going into the merits of the case. SAFCOL suffered a loss of R49 million and she asked if there are any checks and balances to address such issues. More so, only 60% of targets were achieved, explanations given relate to reduced lumber sales yet the report shows increased selling price, revenue and intake. SAFCOL was asked to explain how it monitors contracts with minor stakeholders. She noted that SAFCOL is lacking in terms of economic transformation. Government enterprises were faced with lack of planning and she asked for ways SAFCOL is addressing such issues. It was also noted that, she does not see SAFCOL being in charge of care-in-maintenance of IFLOMA, which was not the core responsibility of SAFCOL. Ms Stander suggested that SAFCOL indicates percentage in its set targets as opposed to mere numbers, so that the Portfolio Committee can provide oversight. SAFCOL was asked if they are merely selling raw materials. Moreover, this question relates to economic transformation since the land claimants can benefit in the long term, if SAFCOL processes its raw materials. She asked if Human Settlements had been approached for diversification. She asked for the reason behind the moratorium on filling of vacancies.

Ms G Nobanda (ANC) asked how SAFCOL is dealing with its fruitless and wasteful expenditure as highlighted in the audit report. So much money is being spent on repairing and she asked if is not cheaper to replace the machines.

Mr R Tseli (ANC) asked for specifics on the impact of SAFCOL’s work in the communities, in light of South Africa government objective for job creation, which SAFCOL should contribute. He appreciated the number of disabled persons in the organisation and asked if such persons are in positions to influence policy direction. The report indicates that the budget was approved late in the year; Mr Tseli asked what had led to such a situation. The report says nothing on social responsibility and asked for specific interventions in the communities. Lastly, the shareholder representative was asked to give a general overview of the performance of the company.

Ms D Rantho (ANC) asked about the involvement of SAFCOL with provinces, given that rural provinces were not involved in SAFCOL business. For example, the huge forestry potential in Eastern Cape, which the municipality had given up due to lack of skills. He asked the role of SAFCOL in such a situation. She asked about the outreach programmes that SAFCOL has to teach people about the importance of trees and the difference between trees meant for consumption and those meant to be sustained. Lastly, she asked if the new Board had received a legacy report on the investigation.

The Chairperson asked for clarity on vertical integration, particularly job creation, and their vision taking into consideration that the National Development Plan emphasises job creation by Public Enterprises.

Mr Lungile Mabece, SAFCOL Board Chairperson, indicated that he would respond to questions addressed to the Board. He clarified that vertical integration is related to forestry industrialisation as well as identifying infrastructure development and other enterprises. On industrialisation, SAFCOL’s focus is on areas that have a lower threshold of entry, facilitating wood culture in the country that is faster, green and cost-effective. More so, SAFCOL is looking into influencing the construction industry to look into wood as an alternative to bricks. A forum on forestry industrialisation is being organised in February 2017 to discuss and identify the opportunities. The job opportunities are endless, 20 000 people already are benefiting from SAFCOL. Support to small enterprises is available as well.

Mr Mabece indicated that when the new Board was appointed, they asked the ex-Chairperson to give a report in August, which was never given and that they have had to discover information for themselves, which they are acting on. In respect of relationships with the provinces, Mr Mabece indicated that with the assistance of the shareholder, they are in the process of establishing relationships with the provinces.

In addressing questions raised by Ms Stander on diversification and Human Settlements, he said that they have not approached the specific department. Nonetheless, SAFCOL had communicated with the shareholder and a meeting was held with the Independent Development Trust.

On the matters referred to the relevant authorities, Mr Mabece noted that the matters were referred to the National Prosecuting Authority (NPA) and Hawks and that names cannot be disclosed until they have been arrested and appeared before court.

In some press reports, there are  allegations that the CEO and CFO resigned because they were opposed to the appointment of Analytical Risk Management, which trades as 2RM, and the tender process. Mr Mabece indicated that the Board followed proper process in terms of the laws of the Republic, if the process was incorrect, the Auditor General would have flagged it. Therefore, the fact that the AG did not flag the issue, is an indication that proper process was followed. More so, the press approached the current acting CEO, Mr Theron, about his relationship with Mr John Duarte and the reasons for his failure of declaration [that Analytical Risk Management is run by Theron's business partner, John Duarte. Analytical Risk Management and Theron's company, Prospero Digital Agency, are subsidiaries of Vumela Holdings, run by John Duarte].
The press was given the correct information that there is no business relationship. In addition, the press was referred to the Companies and Intellectual Property Commission to check the records and any person who would have checked the records, would have come to the conclusion that the press was deliberately being misleading. The Board did not want to take the matter lying down. Therefore, the Acting CEO was asked to explain to the Board and the explanation given, was accepted. The Board came to the conclusion that there was no need for the Acting CEO to declare a conflict of interest.

Mr Harvey Theron addressed the questions on the market position of SAFCOL. The company supplies raw material which is not sustainable and the new Board is in the process of changing the structure. The current structure of SAFCOL, is SAFCOL holdings, Komati Land (KLF) and IFLOMA, therefore, the Board was approached about rebranding so that there is one brand and one voice to enable effective marketing.

SAFCOL sells raw materials to a third party who adds value and sells this to Eskom. Had privatisation of forestry happened they would have been the biggest forestry company in Africa. SAFCOL only focuses its energy in the provinces they operate in.

In response to the land claims model, Mr Theron reiterated that the lease back model is not sustainable and they had tasked a team to look into a new approach that involves the community. More so, that South Africa is lagging behind in terms of wood culture, therefore they are looking at other countries, to find out what they are doing. Given that, South Africa is a brick society, SAFCOL is gradually changing that perception by constructing timber clinics and schools. In respect of losses, Mr Theron indicated that it is due to the saw mills that yield less than 30%. Thus they are looking into alternatives like the oriented strand board (OSB), which is being held back by complaints to the Competition Commission.

On SAFCOL subsidiaries and structures, SAFCOL is at the top of the pyramid as an investment entity, KLF is the operating entity, IFLOMA and two other companies are still operating. IFLOMA is supposed to be above KLF. IFLOMA was a long time investment, where SAFCOL was at a different state in terms of cash flow. The problem is that investment is still being put into IFLOMA and there has been no progress. Nevertheless, a team has been tasked to address this. The Auditor-General indicated that if there is no return on the R300 million investment into IFLOMA, SAFCOL should take the loss in the next financial year.

In clarifying the reasons why there is increase in price, volume and revenue, yet there is a loss, Mr Theron indicated that the volume achieved was lower than budgeted for. The figures are market related, therefore, it achieved lower than expected volume. On the other hand there was a higher price which meant that it led to an increase in SAFCOL revenue.

On the issue of maintenance vis a vis replacement of machinery, Mr Theron indicated that, Timberdola was designed as an 80 000 cube intake sawmill. Therefore, to determine if there was loss, the first inquiry is whether the target was reasonable. More so, it is being operated at double its capacity. The intention was to upgrade in 2014/2015, however, it was uncomfortable with the feasibility study. Therefore, if concluded and they satisfied with the results, there can be upgrades.

Ms Stander (DA) suggested that each entity reports quarterly, so as to monitor the targets and that the entities should start preparing to do so.

The Chairperson noted that issues that need follow up should be focused on. She requested the board/executive to practically indicate the forestry industrialisation plan.

Mr Theron addressed questions on specific interventions. SAFCOL is taking proposals on timber frame structures to the board. Diversifying into housing is quite complex given that South Africa is a brick society. Nevertheless, they are looking into the market of people who need holiday homes. SAFCOL not planning to start a new mandate, not a construction company, but merely be a supplier.

On the vacancies moratorium, Mr Theron indicated that, as the executive they did not stop the process. The Board made a recommendation to the Minister with regards to the CEO position and still awaiting feedback. The Minister has also enquired if the SAFCOL executive needs the COO position and this is still under review. The only pressing matter at the moment is the Senior Human Resources Manager. The moratorium was placed on the vacancies because for the last five years there has been a PWC project running in terms of restructuring the entire company.

Mr Theron said that as the Acting CEO, he has been struggling to get information, there is lack of transparency within the company. More so, from a practical point of view, there is a forestry division, responsible for planting and cutting, then processing, therefore, conflict between the two, thus resulting in losses within the company. Additionally, the company is split into four regions, which obviously results in structural implications. Nonetheless, they will be able to benchmark the divisions against each other.

On eco-tourism, in comparison with other forestry companies in the world who generate about 70% of their revenue from eco-tourism, which is not so within SAFCOL. Diligence is being done, specifically on tourism assets.

On the budget delay, Mr Theron noted that the problem is that everything within SAFCOL was done last minute, which has been addressed by the new management. Therefore, a late budget is a thing of the past.

Ms Pillay, SAFCOL CFO, addressed the fruitless and wasteful expenditure noted in the audit report. One of the key initiatives is to centralise procurement. In so doing, the delegation has been changed. There is more understanding of the procurement requirements which was never there, and cash flow management. Moreover, the root cause was not lack of policy but rather implementation, monitoring, evaluation and with the change of leadership, there is more stringent control. Fruitless and wasteful expenditure was limited since  the prior financial year, mostly due to VAT returns. Going forward there is monitoring, training to ensure that everyone understands supply chain and PFMA requirements. On its socio-economic mandate, SAFCOL contributed to more than ten projects in 2015/16 with over R7.5 million spent by building six timber frame structures in various communities including clinics, classrooms, early childhood development centres, community halls, drilling boreholes, and refurbishments and renovations of a training centre.

Ms Mathys expressed concern at the inability of Mr Theron to respond about his relationship with Mr Duarte. She suggested that SAFCOL should integrate industrialisation with land claims to facilitate the process of development. She asked the Board to clarify reasons for not taking into consideration media perceptions and noted tha, the mere fact that the Board accepted Mr Theron’s explanation does not imply that it is acceptable to everyone else. Lastly she asked the Board to provide names of those charged.

Ms Stander noted how many public enterprises are found to have fruitless and wasteful expenditure. Industrialisation is the core mandate of SAFCOL. She suggested that SAFCOL in its operations can; supply wood to other public enterprises such as Eskom, Transnet. The fact that Eskom buys its poles from a third party is flabbergasting. More so, SAFCOL should work on promoting itself, work with universities and promote eco-tourism. Lastly she asked for the case details which is a matter for public record.

Dr Luyenge expressed concern over the lack of responses on action taken by current Board against the former CEO, asset management, inventory holding, depreciation, disposal and effect of land claims in their activities. SAFCOL is doing nothing to market itself. He knew nothing about SAFCOL until appointed to this  committee and that there is no public awareness about the company.

The Chairperson commented that there is a sense that the shareholder not concerned about SAFCOL. He suggested that there should be a meeting with the shareholder to address the issues. More so, the audit report indicated that there was R44 million lost to fraud.

Ms Rantho agreed with Dr Luyenge that SAFCOL not doing enough to market itself. She too did not know of SAFCOL until she was appointed to the Committee. Additionally, she requested monitoring and evaluation documents. She expressed concern over the R44 million loss to fraud while there are people who need basic housing of not more than R15 000 and that a way to monitor SAFCOL is needed. The shareholder needs to be held accountable, the reports on SAFCOL are a brush off.

Mr N Singh (IFP) asked if there was a need for SAFCOL to exist. He suggested that SAFCOL should engage with the land claimants.

The Chairperson reminded Mr Singh that the questions he raised were answered.

Ms Stander suggested that there should be clarity on specific interventions as well as quarterly reports for purposes of evaluation and oversight.

Mr Lungile Mabece expressed appreciation for the feedback given and noted that they are committed to what they have presented. More so, the NPA and HAWKS will be asked for an opinion on disclosing the persons charged and report back to the Committee.

The Ministry representative, noted that the Ministry as stakeholder, had appointed the new Board to stabilise the company. More so, the Board was requested to fill the vacancy gaps, diversify, engage and be be pro-active. Although SAFCOL has an impressive balance sheet, the shareholder needs the leadership and action of the Board. The shareholder had initiated monthly monitoring meetings, which is not happening, was committed to more engagement as well as requested quarterly reports.

The Chairperson reiterated that as leadership, the shareholder has to play its role. The Ministry has neglected SAFCOL and he urged the shareholder to be pro-active. The Chairperson further noted issues that have to be followed up on: forestry industrialisation plan, diversification, benefit, targets, indicators, timeframes and a report on resignation of the executive members. In addition, the status quo on IFLOMA was needed and he urged the shareholder to deal with issues pertaining to the Competition Commission.

Ms Mathys urged that a deadline on the report on the charges laid needed to be set. There is no need for SAFCOL to wait for the next meeting with the Committee to respond. They can send a report in writing on the charges.

Ms Stander suggested that the report on the charges laid can be done by anyone in SAFCOL and sent through to the Chairperson’s office. A report back on the land claims model was needed.

Ms Rantho commented that the state shareholder should take action if meetings are not materialising and hold them accountable.

The Chairperson adjourned the meeting.