Minister of Public Enterprises update on State-Owned Companies; Repeal of Overvaal Resorts Limited Bill

Meeting report

Minister of Public Enterprises, Pravin Gordhan, said the overall revenue generated by the six entities (Eskom, SAFCOL, SA Express Airways, Denel, Transnet and Alexkor) amounted to R284 billion while assets were worth R1.1 trillion. Losses were standing at R1.6 billion. The focus going forward would be on reviewing the current boards, improving efficiency, reducing the SOE dependence on the fiscus, and stamping out corrupt practices at the entities and ensuring the mandate of the entities is aligned to the state's development agenda.

The Minister touched on the key challenges facing the entities. Internally, there was limited direction, oversight and leadership from the board and shareholder. There was negligible board and executive fiduciary accountability for poor performance, and there were no consequences for corruption. There was unavailability of funds for day-to-day activities. Creditors and salaries were not paid on time. There was failure to keep pace with technological improvements in order to generate more revenue. Externally, there were policy gaps, misalignments, uncertainty and weak regulation. There was limited clarity on the roles of various stakeholders. There were no clear criteria defining where the state should own SOEs. The state has limited resources to invest in SOEs whilst meeting all its other priorities. The new boards have to deal with the past and current challenges.

The Minister stated that the basic theme in the past five months was about dealing with the past while addressing current challenges in order to create a sustainable future. The boards have been directed to appoint permanent executives urgently where there are vacancies, ensure the entities are stabilised financially and operationally, deal decisively with corruption, and submit turnaround strategies with viable business models that respond to economic and developmental mandates.

ESKOM
Although the group recorded improved operational profit (EBITDA), a net loss was reported. Financial ratios were declining and indicating a risk to financial sustainability going forward. There was stagnating electricity demand. Growing costs included manpower and primary energy costs.The 2017/18 Eskom audit was qualified on the basis of incompleteness of information required  by the PFMA, irregular expenditure, fruitless and wasteful expenditure and losses due to criminal conduct. Irregular expenditure increased to R19.6 billion from R3 billion the previous year due to non-compliance with the PFMA and other regulations. The majority of irregular expenditure arose from items of the previous financial year due to clean-up processes that the board was executing.On governance clean-up, 10 implicated senior executives exited. The finalisation of outstanding disciplinary hearings for senior executives was being accelerated. Eleven criminal cases were opened, five of which involved nine senior executives. A total of 1 049 outstanding disciplinary cases were attended to since April 2018, of which 628 have been finalised, and this resulted in 75 employees exiting. 239 whistleblowing cases were investigated, 122 of which have been concluded. A disciplinary process was under way for 67 confirmed cases. Lifestyle audits of senior management were in progress. There was effective declaration of interests.  All irregular supplier contracts have been investigated. So far, five were no longer doing business with Eskom. The amount spent with these companies in the past three years was R2.3 billion. The entity recovered R902 million from McKinsey.
Improvement in liquidity has been recorded. The board would submit a new strategy for the next five years at the end of September 2018. Eskom is still engaged in the finalisation of the wage settlement for the next three years.

Transnet 

The Minister reported inefficiencies across the freight logistics system (i.e. poor levels of efficiencies and productivity levels in ports performance against MTSF targets, low railed volumes and declining pipeline volumes. For the year ending 31 March 2018, Transnet’s performance against the Shareholder’s Compact was 57%. Irregularities and wasteful expenditure have increased exorbitantly from 2016/17 (R600m) to 2017/18 (R8.1 billion). There was poor contract management and deviations, and poor internal controls leading to procurement challenges.

Interventions in the last five months included rebuilding and strengthening governance in Transnet. A new board was appointed in May 2018. This was followed by the appointment of Acting CFO (Mr Mohammed Mahomedy) in May 2018 after the resignation of Mr Gary Pita in April 2018. There is improved oversight on contract management and deviations. Forensic investigations instituted included the 1 064 locomotives. Board members have been removed from the adjudication of procurement contracts. Criminal charges and forensic investigations were opened with the SAPS, Special Investigating Unit (SIU) and Hawks. There has been a review of procurement processes and strengthening of both internal and external audit functions.

SA Express Airways (SAX)

Operationally, on 24 May 2018 SA Express was grounded by the South African Civil Aviation Authority (SACAA). The suspension of the Air Operator Certificate was lifted on 26 June 2018 with only two aircraft to operate. SA Express, however, has not resumed operations as a result of the preparatory work to design the flight schedule and load it with the International Air Transport Association (IATA). When operations resume, the airline has planned to continually build its flight schedule. Financially, SA Express was continuing to face liquidity and solvency challenges. The government has provided SA Express with a government guarantee of R1.74 billion, but immediate recapitalisation was required. The airline was in the process of finalising its Annual Financial Statements (AFS) for the 2016/17 and 2017/18 financial years due to going concern challenges. The high cost structure and lack of revenue generation due to the grounding of the airline has exacerbated the challenges of the airline. There was a high level of corrupt and dubious contracts around fuel, baggage, parts etc.In the last five months, the newly appointed board of directors met with the Minister on 18 May 2018. An intervention team was appointed on 18 May 2018 to strengthen and support the executive management team until permanent appointments could be made. Investigation and forensic reports on the last five years were received from the SAX Board for the Department to assess the recommendations of the reports. The Department has reviewed the recommendations and action was taken by the SA Express Board to deal with all outstanding cases.

For operational efficiencies, there was a need to identify quick savings in the SAA/Commercial Agreement. It was decided there should be renegotiation of unfavourable contracts with suppliers. SAX was not getting the best deal from suppliers, and needed to restructure its business model. Employee costs should be reduced, and explore alternatives for better fuel rates. SAX has received the Airline Operating Certificate from the Civil Aviation Authority and would resume a flight schedule shortly.

The first step of consolidating SA Express with SAA has just been concluded which was to place both airlines within one Shareholder Ministry. SAA has been transferred back to the Department of Public Enterprises (DPE). The transfer was signed by the President on 25 July 2018 and gazetted on 1 August 2018. The boards and executive leadership of SA Express and South African Airways have to identify quick-wins for stabilisation of both state owned airlines e.g. technical, fuel, route rationalisation. The SA Express Board has to submit a bankable business model for commercial recovery and long term sustainability.

Alexkor

Interventions since February 2018 indicated that an appropriate governance model for Alexkor should be put in place at the AGM. It was not clear if it was appropriate to have two remunerated boards: Alexkor and Alexkor PSJV, and if the Alexkor management should have direct responsibility for the Alexkor Pool Sharing Joint Venture (PSJV) operations. The procurement arrangements for Alexkor PSJV had to be brought in line with PFMA requirements. The forensic investigations at Alexkor PSJV would inform further actions that the SOC and the Department would need to undertake.The Department of Rural Development and Land Reform (DRDLR) has been engaged to intervene to normalise and rationalise the community entities created by the Deed of Settlement. This process would inform the distribution of the R145 million to the Richtersveld Community beneficiaries. The DRDLR, through the SIU, would be following through on incidents of corruption linked to funds and assets that have disappeared. Alexkor has had allegations of wrongdoing reported to the Department. The awarding of a diamond sales and marketing contractor which has limited diamond industry experience. The integrity of diamond chain of custody was being violated. There has been a complaint by mining contractors on the diamond prices realised for Alexkor diamonds. There has been arbitrary termination of mining contractors. The Department has commenced with the process of sourcing a legal firm to investigate the allegations.

DENEL

The entity is reported to have experienced liquidity challenges with unpaid creditors at R1.1 billion resulting in suppliers withholding supplies and further putting operations under pressure. As a result, Denel is likely to realise significant lower revenue than planned in the 2017/18 Corporate Plan. A temporary reprieve was received from National Treasury to the tune of R580 million in the third quarter. The culture of performance was negative with major contracts running well behind schedule and with significant cost overruns. Projections showed the entity was likely to post a record loss.

During 2017/18, the board was depleted and the individual members did not have the requisite skills to manage an organisation of Denel’s type. Key areas such as audit and risk, contracting and stakeholder management were not optimally covered. The management was weak. It lost the confidence of the workforce, clients, suppliers and funders. The dispute between Denel and the external auditors on irregular expenditure for 2016/17 has not yet been resolved, six months after the AGM. Irregular expenditure across the entity was pointing to lax internal controls. Corruption allegations and forensic reports reviewed by the Department revealed the existence of rampant corruption at the highest level of the organisation. Irregular expenditure for 2016/17 was R116 million. The newly acquired division Denel Vehicle System was responsible for R83 million of this. Disciplinary hearings were held for 144 cases but no criminal charges have been laid yet. No instances of criminal proceedings were instituted.

Pertaining to the clean up progress, a new board with diverse skills ranging from engineering, finance, legal, business and stakeholder management was installed in May 2018. The Group CEO resigned in May 2018 after investigation by the new board. An acting GCEO is in place. The Group CFO has been put on special leave pending the outcome of a disciplinary process.  There is an acting incumbent. The board was getting to the bottom of all the forensic reports to ascertain if more disciplinary action could be taken. Lifestyle audits are yet to commence. The board has revised the 2018/19 Corporate Plan with more emphasis on turning around the entity and improving the governance processes and structures in Denel. This would be finalised during September 2018.

SAFCOL

SAFCOL’s overall operational performance has not improved as per the signed shareholder agreement. This was mainly due to effects of poor planning. Delays in the appointment of inbound logistics paralysed the business. Other delays were in the appointment of silviculture contractors in other regions. SAFCOL’s processing business has performed poorly compared to other industry players and competitors. The outcome of the study on internal processing conducted by the Department has shown that SAFCOL needs to improve its processing business model by reviewing both forestry and process business units.

There was one fatality and disabling injuries of varying severity which were reported to DPE in 2017/18. In the previous financial year, SAFCOL had three fatalities. The company has committed to continually engage both employees and contractors to ensure improvement of safety practices. There was continuing poor operational and financial performance. Strategic deliverables including capital programs have not been delivered.

On governance, DPE was in the process of reviewing and filling the board vacancies to ensure it is adequately capacitated with members who possess the appropriate skills and expertise to fulfill the SOC mandate. The current board’s tenure was coming to an end at the upcoming AGM. The overall board performance is summarised as:- Lack of implementation, execution and funding of the capital projects- Poor internal controls resulting in audit findings- Slow recruitment process for key executive positions- Strategy not implemented since the appointment of the Board in 2015 The CFO position remains vacant. The recruitment process is currently underway. The board is expected to provide a shortlist of suitable candidates to the Minister for consideration and approval followed by the necessary cabinet consultation. Performance information for 2016/17 and 2017/18 has not been audited. Reliance could not be placed on information submitted via the quarterly report. There has been continued payout of incentives to executives despite the poor performance.

In his conclusion, Minister Gordhan stated that in May 2018 the Cabinet approved the establishment of Presidential SOC Council to oversee the reform process in SOEs. The SOC models must be reviewed to ensure sustainability, to play an effective economic role and to drive transformation and localisation. Corruption and state capture have had a dire impact on SOCs. As a result, the role of boards in procurement must be limited. Failures of SOCs have a major downstream impact on other industries and SMMEs and on the economy. Growth in irregular expenditure signified cracks in assurance. The Minister and Department were still unpacking matters driving the SOCs.

Discussion

Ms Z Rantho (ANC) commented that the Minister’s presentation has given the Committee proper understanding of what was happening within the SOEs.  The current interventions since May 2018 seem to have improved the SOEs. However, no SOE board members were present to understand what they needed to do to better the SOEs. She asked if there was any other way for the SOEs to pull themselves out of the mess rather than always getting financial assistance from government as it was unacceptable for the SOEs to keep on borrowing and it was time they get financial assistance from other channels. She asked if the newly appointed Eskom CEO was clear in terms of expectations and mandate. She asked if increasing the number of executives since 2007 had an impact on the current Eskom crisis. Was there an investigation against Mr Singh who had resigned since he had been misdirecting and ordering the middle managers to execute his instructions? Lastly, had any SA Express Airways employees been retrenched since the airline was grounded?

The Minister replied that the aim of the presentation was to give an overview of the status of the SOEs and not to bring in their board members. The Committee had to understand what the situation was before engaging with the SOE representatives. Soon all the Board members would be engaged with on what was expected of them.  On the bail-outs, the entities have developmental responsibilities and this meant they have to be able to generate their own income for investment purposes, not for salaries or paying themselves. The entities needed to have clear strategic plans of where they want to go so that they are not a burden to lenders and the fiscus.

The new Eskom CEO, Mr Phakamani Hadebe, has a three-year contract which could be extended. The contract would be signed soon because it was still being negotiated. When it is ready, it would be presented to the Committee. He also noted that Mr Brian Molefe’s issue was idiosyncratic and has gone to the courts. There were various stories about the bloated number of Eskom executives. In the past, there were about 80 but now the number is 600 and the Board has to give an explanation for that to the Committee. Concerning Mr Singh, he reported that cleaning up the past was not going to be easy and the Board was determined to clean it while addressing current challenges. He expressed faith in the Judicial Commission of Inquiry on State Capture. Consequences would follow. The consequences of the many years of state capture needed to be understood, but eradicating it would be a big challenge. He assured the Committee no SA Express Airways employees had been laid-off. The airline was looking at ways to increase its routes. A lot of cleaning up at senior level was taking place and the Committee could make a noise that those involved in wrong-doing should start jumping off the ship.

The Chairperson reminded the Committee that specific questions should be reserved for engagement with the entities.

Ms N Mazzone (DA) wanted to establish why no action has been taken on the charges she laid against certain Transnet executives because she has the case numbers. She suggested the Minister and the DG should sit down, haggle over the matter and then hand over the affidavits she has compiled and submitted to make the cases stronger. She asked if the R1.1m Denel bursary money arranged for an executive’s son had been paid back seeing that the executive has gone. She asked for an update on the vandalism that took place during the Eskom strike. She requested the Committee be briefed on the loan Eskom received from China. She remarked that within the Department there were senior executives involved in state capture. There were instances when MPs engaged with these executives involved in state capture and one of these executives who, by circumstances, became an MP laughed many times when the state capture matter was discussed. Now she wanted to establish how such actions were going to be addressed going forward.

Minister Gordhan replied that more information and evidence is welcomed to help the Department in its efforts to address the problems and investigations. There was uncertainty within the Department regarding the loans and it was busy trying to get clarity from National Treasury, especially on the interest. The Department wanted total transparency to ensure loans were acquired at a competitive rate. Pertaining to wanton strikes, the Department was trying to ensure that such things do not happen again. It had informed the entity to sit down with the unions and try to resolve the wage dispute amicably so that unresolved matters do not lead to violence.

Ms Makgola Makololo, DPE Acting Director General, added that the Department has allowed the investigation into the Kusile fire to take its course. At this stage, the plant was being safeguarded to ensure the investigation was not interrupted.

Mr Kgathatso Tlhakudi, DPE Deputy Director-General for Manufacturing Enterprises, informed the Committee that the Denel Board has instituted an investigation into the R1.1m bursary award. A disciplinary hearing was concluded. The Board would provide further details to the Committee when the investigation has been wrapped up. If the bursary was irregular, the money would have to be recovered.

Mr S Swart (ACDP) wanted to understand why nothing has happened about issues raised in the Public Protector’s report which had been then reported to the Hawks. There was no progress on the R38b case reported against Eskom. He praised the Asset Forfeiture Unit which has recovered R900m from McKinsey. He asked what was being done about board members and executives who were not complying with fiduciary duties while hopping from one entity to another. He wanted to understand what could be done about the rail contracts that were cancelled in order to enrich other people. Lastly, he asked for clarity on allegations doing rounds about the reign of terror at SOEs.

The Minister reported that changes that were about to happen in the criminal justice system would ensure there was consequence management for wrongdoing. The Department was engaging with the Ministers of Police and Justice to ensure that individuals involved in wrongdoing were dealt with in the right kind of way. Concerning rail contracts manipulated, he stated the Board of Eskom should give the Committee answers because there were two conveyor belts the Department saw which were in good condition but were not put to good use. He further pointed out the allegations of reign of terror were just pure politics. They should be left where they were, and South Africans and civic organisations should do what they think was right and make their voices heard during elections. He also stated civil action matters would be taken up vigorously within the Department. Many expectations, however, should not be raised because civil cases take too long to finalise.

Mr Melanchton Makobe, DPE Acting Deputy Director-General for Legal & Governance, added that there must be a prima facie investigation on the breach of fiduciary duties to declare certain directors delinquent to the court.

Mr R Tseli (ANC) appreciated the interventions taken so far to stabilise the SOEs, including the R902m recovered from McKinsey.  The only worrying factor was the borrowed money by the SOEs, and he asked for clarity on how best to address this going forward. He also asked for clarity on why the DPE Director General was on special leave. Were there any prospects of saving Denel because at some point it had been unable to pay employee salaries and creditors? He asked what could be done to address the R145m due to the Richtersveld community because the matter has been with this Committee and DPE for a very long time. Lastly, he asked what was being done to address the challenge of executives getting incentives despite non-performance and not signing shareholder compacts in time.

The Minister responded that the Eskom Board has reduced its capital investment. That was something good and bad at the same because it was saving the entity money but it was decreasing the investment that needed to be done. Eskom had to look at new markets and enforce a culture of compliance to ensure people pay for services they were using. He assured the Committee there were prospects in Denel, but DPE has to navigate carefully to ensure there is the right management. In a year or two, Denel could be repositioned, but tough decisions would have to be taken.

Minister Gordhan noted that Mr Seleke was exiting the Department and an agreement was in place. Once the details were finalised, he would exit. Shareholder compacts should always be made available and there was a need to evaluate the entities according to these compacts.

Mr Tlhakudi told the Committee that the Committee that the Richtersveld Communal Property Association (CPA) has to be regularised. The CPA has not been cooperating and the Department of Rural Development and Land Reform was attending to the matter.

The Chairperson asked when the alignment of the two airlines would be concluded. She voiced satisfaction about the interventions the Minister has carried out with Cabinet assistance. Minister Gordhan replied that a report would be made available in the next two months. This matter was going to be discussed by Cabinet and the Presidential SOE Coordinating Council and lessons would be taken from other countries.

Repeal of Overvaal Resorts Limited Bill: DRDLR & DPW engagement outcomes 
Mr Denzel Matjila, DPE Director for Legal Services, presented responses to requests made by the Committee on the following matters:
• Purchase and Sale Agreement between DPE and Forever Siyonwaba Consortium. • Progress on land claims at Aventura Badplaas (Mpumalanga) and Tshipise (Limpopo).
• Progress on lease agreement between DPW and Forever Resorts pending land claims resolution.
 Mr Matjila said the copy of the Sale and Purchase Agreement as requested was available and would be sent to the Committee. DPE has engaged the Office of the Land Claims Commission in Mpumalanga on progress on the resolution of land claims for Aventura (Badplaas). It was advised that the land claim was not yet settled but that the Land Claims Commission was engaging with the land owner to give the Commission an offer to enable it to proceed with the settlement of the claim. The Commission could not provide a definite answer as to when the matter would be settled.

With Aventura Tshipise, DPE advised the Land Claims Commission in Limpopo that the claims that affect Aventura Tshipise were from the Nedondwe community and Nethengwe family. The research for the Nedondwe community was approved and the claim was accepted. The claim has been gazetted. However, the claimant verification still needed to be done. The claimants would still have to adopt a settlement option. The research for the Nethengwe family was approved and the claim was accepted. The family is part of the Nedondwe community. The claim has been gazetted and claimant verification was done. These claimants would still have to adopt a settlement option. The Land Claims Commission in Limpopo had explained that these claims were at a negotiation stage and were still to be settled. The Commission was not in a position to give clear timelines on the finalisation as the settlement depends on a number of factors. The main factor was that the land claimants must choose a settlement option and the Commission must engage current landowners to determine their position on these land claims. In case the claimants opt for land restoration, the Commission would have to engage the landowners accordingly.

On the progress with lease agreements, Mr Matjila reported that DPE and Forever Resorts met with DPW on the conclusion of the lease agreement in Blydepoort and Swadini. After the deliberations, the DPW agreed to consider giving long term leases to Forever Resorts in Blydepoort and Swadini. However, before long term leases were considered, Forever Resorts had to present a business case to the DPW to demonstrate its impact on the economy of the affected areas. Forever Resorts had to show what investment it has made and still intends to make in the affected areas. It also had to provide full details of its job creation programmes in these areas and how it would promote localisation in Blydepoort and Swadini. Forever Resorts would be required to make an application by way of completing a DPW assessment form which would be used to determine Forever Resorts’ impact on the economy of Blydepoort and Swadini before a lease could be concluded. The evaluation would also assist to determine the rental that Forever Resorts would be charged for the lease of the land in Blydepoort and Swadini.After the assessment, DPW would make a submission to the Minister of Public Works on the nature of the leases to be concluded with Forever Resorts. To ensure that the matter was prioritised, the Minister of Public Enterprises was required to write to the Minister of Public Works on this matter.The DPW also advised that due to the pending land claims in the affected areas, the lease agreement with Forever Resorts should take cognisance of the land claims instituted. Provision had to be made for the leases to be ceded to the claimants’ communities once the land claims were finalised. The DPW could not commit to any timeline on when the lease agreements would be concluded. However, it indicated that it would ensure the matter is prioritised. 

Discussion

Ms Rantho was concerned the process was taking so long. The Fifth Parliament would come to an end without the land claims being resolved. The Repeal of the Overvaal Resorts Limited Bill would go over to the Sixth Parliament. She had thought this matter was handled by people who knew what they were doing. It was clear the Bill would take time to become an Act.

The Chairperson requested the Department to provide the Committee with timeframes. The Committee Report on this Bill needs to be finalised by October 2018 and the Committee has been instructed by the House Chairperson to conclude the Bill before the start of the new parliament. The matter should be wrapped up before the end of the year as there might not be enough time at the beginning of 2019 because of the elections, especially on work related to the this Repeal Bill.

Ms Makgola Makololo, DPE Acting Director General, said the settlement of land claims was a problem in the country and it was taking a long time. The proposition then was to repeal the legislation while dealing with the residuals.

Ms Fatima Ebrahim, Parliamentary Legal Advisor, suggested the Committee should proceed with the repeal because the Act served no purpose and certain actions should be transferred to the relevant portfolios.

Ms Rantho proposed the Committee should get into the process of repealing the Bill.

Ms Mazzone seconded the proposition.

The Committee considered and accepted the proposed Committee Programme.

The meeting was adjourned.