Department of Public Enterprises’ SOCS performance update, with Deputy Minister present

NCOP Public Enterprises and Communication

15 March 2017
Chairperson: Mr C Sefako (ANC, North West) (Acting)
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Meeting Summary

The Department gave an update on the performance of State Owned Companies (SOCs). The presentation covered the economic policy framework and the performance review methodology followed by a performance report per SOC and an overview of the portfolio.

Despite the declining volumes and rising costs, Eskom was projected to post a profit for the 2016/17 financial year. Eskom’s operational performance has significantly improved over the past 18 months. This has allowed the company to eliminate load shedding and the Energy Availability Factor (EAF) has improved from around 70% during the load shedding period to 77% at the end of the third quarter.

Denel was a strategic defence products provider for the Department of Defence, whose capital spending has been declining for a long time. This has forced Denel to increasingly relying on foreign business for its sustainability. Over 60% of Denel’s revenue is derived from exports. The downside of this strategy was that the foreign governments expected technology transfers when procuring from external suppliers. This resulted in Denel cannibalising its own long term future.

For SAFCOL, the group’s revenue of the quarter under review has been reported below budget and forecast. It points mainly to the stagnant growth being reported on sales volumes. The reported of R19 million symbolises a year-on-year increase of 123%. This was due to delayed expenditure on key operational activities.

In terms of skills development, since the inception of the National Skills Accord in 2011, SOCs collective enrolled 25 484 trainees in various core scarce and critical skills. Localisation initiatives showed that Alexkor has to date in the 2016/17 financial year, incurred a procurement spend of R94 million with 95% (RR89 million) spent on local companies in the Northern Cape. Furthermore, contract revenue paid out to BEE compliant companies amounted to R195 million, which included R51 million paid to 100% black owned companies for 12 months that ended March 2016.

The Deputy Minister said the Department had targeted certain professions for radical socio-economic transformation, one being the auditing profession. All the SOCs except Alexkor and SAFCOL were audited by black owned audit firms. The Department had also identified the legal profession for transformation. It had assisted legal graduates to get their articles by providing employment.

Members noted that there were only six black owned suppliers out of a total of 30 and this was a challenge in terms of radical economic transformation. Members said there was no detail about the beneficiation mentioned in the presentation as being impressive and they queried the status of the proposed merger between South African Airways (SAA), SA Express and Mango Airlines and what the Department was doing about the deep financial troubles at SA Express. The shareholder compact signed with SA Express should have enabled the Department to know that SA Express was having financial challenges.

Members had serious concerns about the spatial economy that SOCs operated in. Members said the process of rapid economic transformation needed to be accelerated. They asked about Denel’s financial position, the intention of the Department regarding big forests owned by foreigners and whether Alexkor and SAFCOL were still viable.

Members asked if there was research that could enhance local raw materials to favour beneficiation by local communities. Members felt that the presentation should have given an analysis of SOCs liquidity. Members raised the issue around the outsourcing of the deep sea mining vessel used by Alexkor and wanted to know what percentage of the diamonds the owner of the vessel got. Members also queried whether BEE provisions were being complied with and suggested the Department should find a way to have its own vessel there. In addition, it was also noted that the Alexkor report did not reflect the benefits accruing to the community. Members wanted a written response which would convince the Committee that the shareholders of Richtersveld had a fair share of what was mined there. 

Meeting report

Department of Public Enterprises (DPE) update on the performance of State Owned Companies (SOCs)

Mr Mogokare Seleke, Director-General, DPE spoke only to aspects of the presentation which Members had indicated were of concern to them at a previous meeting. In the case of Eskom’s geographic spread, it was generally where there were areas of economic activity. Eskom had also been the essence for the establishment of a new town in Lephalale. In terms of development at the SOCs, he mentioned Transnet where artisans had threatened to strike after completion of their training because they had not been taken up by Transnet. The intention had been to build up the skills base of the country, not necessarily to employ them after their training. He also spoke to localisation of content program at Transnet. The SOC performance assessment methodology covered financial and operational sustainability as well as good corporate governance.

Despite the declining volumes and rising costs, Eskom was projected to post a profit for the 2016/17 financial year. Eskom’s operational performance has significantly improved over the past 18 months. This has allowed the company to eliminate load shedding. Energy Availability Factor (EAF) has improved from around 70% during the load shedding period to 77% at the end of the third quarter.

The relatively weak performance of productive sectors in particular mining has had a negative impact on Transnet’s top line. However, Transnet has been able to manage it debt exposure through a number of interventions such as deferment projects that may not be viable in the short term. The company has remained profitable for the past three quarters.

Denel experienced liquidity challenges in the first half of 2016/17 which had an impact on the execution of some key programmes. However, between December 2016 and February 2017, Denel was able to raise R714 million from capital market with the support of the Department. In addition the entity has put additional focus on debtors’ collection – R500 million was collected in December 2016. Despite the improving financial position, Denel’s debt to equity (81:19) position remains unsustainably high. Denel was a strategic defence products provider for the Department of Defence, whose capital spending has been declining for a long time. This has forced Denel to increasingly relying on foreign business for its sustainability. Over 60% of Denel’s revenue is derived from exports. The downside of this strategy was that the foreign governments expected technology transfers when procuring from external suppliers. This resulted in Denel cannibalising its own long term future.

Alexkor achieved a higher year to date revenue of R255 million compared to annual revenue of R189 million reported in 2015/16. Mitigating plans to improve production included the employment of the services of an experienced geologist to undertake exploratory work on the diamond deposits. It also included the establishment of an integrated mine planning system that will assist management to predict the quality of diamonds.

For SAFCOL, the group’s revenue of the quarter under review has been reported below budget and forecast. It points mainly to the stagnant growth being reported on sales volumes. The reported of R19 million symbolises a year-on-year increase of 123%. This was due to delayed expenditure on key operational activities.

In terms of skills development, since the inception of the National Skills Accord in 2011, SOCs collective enrolled 25 484 trainees in various core scarce and critical skills.

Localisation initiatives showed that Alexkor has to date in the 2016/17 financial year, incurred a procurement spend of R94 million with 95% (RR89 million) spent on local companies in the Northern Cape. Furthermore, contract revenue paid out to BEE compliant companies amounted to R195 million, which included R51 million paid to 100% black owned companies for 12 months that ended March 2016.

Over the past three quarters five of the six SOCs posted profits which affirmed the strength of the SOCs business models and strategies being implemented. However, the continued constrained economic environment posed a major risk to SOCs and if no improvement was seen in the next 12 months, this will have major impact on the financial sustainability of SOCs. The Department has continued to closely monitor the governance performance of SOCs and assuring alignment at executive and non-executive levels. Establishing supportive policy framework was essential for the long term sustainability of SOCs.

Mr Gratitude Bulelani Magwanishe, Deputy Minister, said the Department had targeted certain professions for radical socio economic transformation - one being the auditing profession. All the SOCs except Alexkor and SAFCOL were audited by black owned audit firms. The Department had also identified the legal profession for transformation. It had assisted legal graduates get their articles by providing employment. Transnet was working with the South African Bureau of Standards (SABS) to get young innovators to protect their designs and products. Transnet and Eskom were assisting Technical and Vocational Education and Training (TVET) colleges and technical high schools in rural areas through providing teacher support and machinery.

Discussion

Ms Z Ncitha (ANC, Eastern Cape) noted that there were only six black owned suppliers out of a total of 30. In terms of radical economic transformation this was a challenge. She said there was no detail about beneficiation mentioned in the presentation as being impressive. What was the status of the proposed merger between SAA, SA Express and Mango Airlines? What did the Department do regarding the deep financial troubles of SA Express? The shareholder compact signed with SA Express should have enabled the Department to know that SA Express was having financial challenges and she asked these challenges not addressed earlier.

Mr J Parkies, (ANC, Free State) asked that the fluid policy framework of SOCs be unpacked. He said he had serious concerns about the spatial economy that SOCs operated in. Urbanisation should connect to rural areas because cities could not be sustainable without rural areas. He said the process of rapid economic transformation needed to be accelerated and acknowledged and appreciated the work done in the auditing and legal professionals fields. He wanted a breakdown of the 13 suppliers that had been developed and their level of education. He said the private sector should be engaged to find positions for artisans and engineers looking for jobs after their training stints. He wanted comment on the bad living conditions of SAFCOL workers which he had heard about on a radio program.

Ms E Prins (ANC, Western Cape) spoke to the limited provincial distribution of Denel’s sites. She asked if the Department did awareness programs to communities to make them aware of opportunities and how to access them, because apart from Alexkor she was not aware if any were doing awareness programs. She wanted to know the amount spent to train one pilot, what the financial situation of Denel was and if there were any plans to prevent it falling into the situation SA Express was in now.

Mr L Gaehler (UDM, Eastern Cape) said the problem was that the South African economy was only concentrated in certain provinces. He asked what the intention of the Department was regarding other big forests which were in private hands and owned by foreigners and where the trainees were sourced from. SA Express was an ongoing concern and he wanted to know if Alexkor and SAFCOL were still viable?

Mr A Singh (ANC, KZN) asked if there was research that could enhance local raw materials to favour beneficiation by local communities. He was concerned that he was using government funds to fly British Airways from Durban to Cape Town when he could have supported Mango Airlines.

Mr J Julius (DA, Gauteng) asked if the Department had aligned its programs with the State of the Nation Address (SONA), because nothing was mentioned about the nuclear build in the presentation. In addition, what progress was there on the selling off of SOCs that were not making a profit, as was called for by the previous years’ SONA. He said the presentation should have given an analysis of SOEs liquidity. The deep sea mining vessel used by Alexkor was outsourced and he asked what percentage of the diamonds did the owner of the vessel get. He queried whether Black Economic Empowerment (BEE) provisions were being complied with, because the vessel was owned by a wealthy white person. He acknowledged that the figures would not be readily available and that it could be provided at a later date. He said the Richtersveld community had to benefit and not just at the survival level - there should be a reduction in the Gini coefficient.

Ms Ncitha said the Department should find a way to have its own vessel there. The Alexkor report did not reflect the benefits accruing to the community. She wanted a written response which would convince the Committee that the shareholders of Richtersveld had a fair share of what was mined there. She wanted valid reasons why Eskom could not absorb the trainees. She asked if SAFCOL rolled out a program to raise community awareness and if the Department allowed other provinces to learn from Transnet’s locomotives program by sharing with them this good case study.

Mr Parkies asked what the calibrated strategy at the level of interventions was regarding Transnet and Denel and if the Department was .also putting conditionalities as was demanded of Denel.

The Acting Chairperson asked if there was a program to assist with conflict in communities like in Mpumalanga and Alexander Bay, because the infighting meant that communities were not benefitting. He noted that private and public partnerships were being looked at but he did not see cooperatives being looked at.

 

The Deputy Minister spoke to the outreach program and said that the Department did not go to urban areas, it went to rural areas. He said he was the chairperson of a structure that was seeking to transform the legal profession. Through IT anybody could be reached anywhere and they did not have to reside in the urban areas, they could do the work in rural areas too. The road to rail program needed to win market share.

Mr Seleke replied that the Department would provide written response where specific information was requested. DPE t itself was awaiting a report on suppliers. Transnet was offering cheaper rates and including last mile convenience to gain market share.

Regarding SOC reform, he highlighted their view on the sale of non-performing companies. He had met with a party interested in purchasing SA Express and it was a SOC from another country. The reality was that SOCs were drivers of the economy. The Department worked around the performance of the company. From a financial perspective, SA Express was really about the market and market performance. SA Express needed a new fleet so that maintenance and fuel costs could be decreased. What was important was that the market was there for the service and that management was capable to meet the demands and challenges. The private sector would not survive without the SOCs, because the SOCs absorbed the initial risk.

He said he had taken note of how to improve working with provinces and communities and realised that aftercare was very important to a project.

Regarding the Alexkor vessel, he said it was done because it had been a viable option. The vessel owner put up all the money and took all the risk and it was cost free to Alexkor, because they did not have capital to invest. There had been explorations to assess its viability but he did note the Committee’s concerns and in future, if the resource showed viability, the Department would go the other route.

Mr Parkies reiterated his question on what the calibrated strategy at the level of interventions was regarding Transnet and Denel and the legislative framework.

Ms Ncitha asked what the financial benefits were for Alexkor communities.

Mr Seleke replied that when legislation coming through was implemented, it had a direct impact on the company. The Transnet National Ports Authority (TNPA), if corporatised, would erode the percentage level of the asset base and create a financial problem for Transnet. The Department was isolating these and dealing with the affected departments.

Regarding the financial stability of Denel, he said the Department was comfortable with it. The cashflows of the company was over long periods and exposed the company to liquidity risk and 60% of the company’s revenue came from exports.

Mr Kgathatso Tlhakudi, Deputy Director-General: Manufacturing Enterprises, DPE said the Department was working closely with communities to address the issues on the Department’s mandate around Alexkor. For matters that were not settled yet, DPE was seeking a mandate to go to court. However, entities were dysfunctional and the Department’s mandate did not extend that far.

Mr Parkies proposed that the Committee be given an update on engagements around SAFCOL initiatives; on the isolated projects and progress in the different provinces; and on the policy and legislative framework and whether it affected this Department or other departments.

The meeting was adjourned.

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