Department of Public Enterprises Quarter 1 & 2 performance

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Public Enterprises

14 November 2018
Chairperson: Ms L Mnganga-Gcabashe (ANC)
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Meeting Summary

Public Enterprises Committee Implores Department to Address Municipal Debt

The Committee was briefed by the Department of Public Enterprises on its Q1 and 2 performance reports. It was revealed that Eskom was owed a whopping R18 billion by municipalities. An SOC Bill is in the offing that will help to improve SOC oversight and hold them to account. Further, the SIU is reviewing and investigating forensic reports in line with the proclamation issued on Eskom and Transnet while the DPE is doing the same for all SOCs in order to determine and track the status on implementation of recommended sanctions.

Members sought assurances to allay fears that Denel workers might not be paid at the end of December. Others voiced strong opposition to the suggestion that municipal debt to Eskom be written off, stating that the municipalities have to pay their debts and manage their finances better.  They said this conversation has to be escalated to Cabinet because Eskom cannot be cash strapped while owed such huge amounts by municipalities.

Meeting report

Department of Public Enterprises (DPE) Quarter 1 & 2 performance
DPE Acting Director General, Mr Thuto Shomang, introduced his delegation and extended an apology from the Minister who could not attend due to a prior engagement with the Public Protector. He outlined the topics of the presentation that dealt with the period, 1 April to 30 September 2017.

Ms Makgola Makololo, DPE Acting Director General, presented the report, stating that it is in alignment with the President’s 2018 pronouncements in which the focus areas are:
▪ Review of current boards
▪ Improve operational efficiency of SOCs
▪ Restore SOC financial sustainability and reduce dependence on the fiscus
▪ Stamp out corrupt practices at SOCs
▪ Implement recommendations of the Presidential Review Committee on SOCs; in particular SOC reforms.

Mr Thuto Shomang outlined performance indicators per programme for each quarter although many were not achieved (see document). For Programme 2: SOC Governance Assurance and Performance, the SIU is reviewing and investigating forensic reports in line with the proclamation on Eskom and Transnet. DPE is reviewing the forensic reports relating to all SOCs to determine and track the status on implementation of recommended sanctions. The performance indicator for developing the SOC Reform Policy was not achieved in Q1 and Q2. DPE will finalise the development of the SOC Reform Policy for consultation. Once finalised, DPE will draft the Bill that will be tabled in Parliament. The performance indicators were outlined for the following: Governance and Risk review, appointing new boards, AGMs and board inductions; production of SOC quarterly financial reviews reports and their subsequent assessment; SOC accounting and financial policy framework ; investment policy and monitoring framework.

For Programme 3: Portfolio Management and Strategic Partnerships, the development of the Localisation Strategic Framework was not achieved for Q1 and Q2. A service provider was appointed through the CSIR and a steering committee is in place to track the finalisation of the framework. Other targets included: Enterprise and Supplier Development (ESD) strategy; feasibility study on SAFCOL processing capacity; SAFCOL strategic plan for IFLOMA; improving operational performance of sea ports and inland terminals; monitor Denel’s sustainability through monthly and quarterly performance reports.

- DPE had an overall spend of 37% (R101.8m of R273.9m) and had projected to spend 49% (R134m). The spending for the same period in 2017/18 was 43% (R114.8m of R266.7m).
- DPE has spent 40% (R69.3m of R171.4m) on Compensation of Employees and 30% (R29.7m of R97.5m) on Goods and Services.
- Compensation of Employees expenditure is R16.3m lower than the projection because of a review of planned events and delays in project implementation.
- Capital Assets: An amount of R2.4m was disbursed for purchase of major assets such as security and IT installations at the new office building.

▪ DPE has relocated to its new building at 80 Hamilton Street, Arcadia, Pretoria.
▪ The Executive Authority responsibility for SAA was transferred from the Minister of Finance to the Minister of Public Enterprises with effect from 1 August 2018.
▪ The revised Annual Performance Plan (APP) was tabled in Parliament on 8 November 2018 and this includes targets for SAA.
▪ Apart from including SAA, the APP revision was necessary to address audit findings about targets not meeting the SMART principle.
▪ The focus in the next six months will be on optimising the airline portfolio, driving the SOC reform process and ensuring financial sustainability of all SOCs in the portfolio.
▪ There is a drive to ensure the filling of critical vacancies. Two DDG positions have been advertised, one is pending cabinet approval and the other is at the short listing stage.

Ms N Mazzone (DA) said the Committee really wants honest answers from DPE. They are aware of the financial problems faced by Denel to the effect that Denel workers might not be paid at the end of December. Can DPE assure this Committee that Denel employees will be paid this Christmas? There were media reports yesterday that most coal-fired stations do not have enough coal left. This is very worrisome and guidance is needed from DPE on what the current arrangements are. Yesterday we read that the Masilonyana (Brandfort) municipality not only had no electricity supply but also had their water supply and sewage stopped because Eskom is rolling out power interruptions. This interruption is turning out to be full-scale outages for periods of days. We agree that the municipalities are at fault but it must be categorically stated that the municipal managers of such municipalities should be jailed for allowing what is happening in those municipalities. What can we do to mitigate the harm being caused to residents who are not to blame for the municipality not paying Eskom? DPE was here when Alexkor presented its Annual Report where we heard scary information about the benchmarking of rough diamond processes. The Committee was told that it would get the benchmarking that Alexkor is using. However, as a rule Alexkor should have given DPE the benchmark so that DPE can approve that benchmark. Even though the Committee was promised it would receive that information, it is yet to receive it. Has DPE received those documents? Has DPE had an update about the criminal charges laid in the various entities overseen by it?  How many people in these entities have been suspended? How long will this investigations last? On the loans from China, are there other loans or issues of which the Committee should be made aware? This is to allay fears of possible defaulting on those loans and that they are above board.

Dr Z Luyenge (ANC) welcomed the presentation and the opportunity to delve deeper into problems of SOE profitability. We are at the stage of making amends in the Department by playing a role towards ensuring that SOE efforts to grow the economy are realised. Is the role played by SOE executives in corruption not affecting the process of unravelling the true state of affairs? Does DPE have clear data that shows the number of SOE personnel that have cases to answer? What method should be utilised by the board and executives without jeopardising operations? In the last engagement with DPE, they indicated that the present coal reserves are enough to avert load shedding; but will the coal shortages not lead to the contrary. Is this because of laxity on the part of coal producers? Localisation of content in line with government policy is important and this component must not be lacking in DPE and the SOEs. Local producers must be empowered.

Mr E Marais (DA) wanted the true picture of the debt owed by various municipalities to Eskom which is affecting Eskom’s cash flow. Municipalities have to pay their debt and manage their finances better.  This conversation has to be taken to the Cabinet because Eskom cannot be cash strapped yet is owed huge amounts by municipalities. What is the status of South African Express (SAX)? What are the plans? Which routes are going to be stopped? It was said that SAX will cancel some routes from January 2019 and we are aware the SAX board chairperson went to an urgent meeting called by the Minister to discuss SAX. What is the true state of affairs at Eskom; we want to know if lights will be on this December. Could the Committee be updated on the assessment report on Saldanha Bay?

Mr N Singh (IFP) said the Way Forward section in the presentation is made up general statements but there are no time frames. How is DPE going to accomplish these without interfering in the operations of the SOEs? Are they here for the sake of presenting a report?  It is commendable to learn that the anti-fraud hotline is receiving calls and there have been 23 whistleblowers since it was launched in September. Who is dealing with these whistleblowing reports? Is it somebody within DPE? Is it an independent person/firm? Sometimes the accusation might be against somebody in DPE, so how is DPE dealing with this? Your report states there is a 19% reserve margin but we are hearing of possible load shedding, what is the true status? On the proposed Durban dugout port, what is the state of progress? We were told it would take another forty years; will it be extended to eighty years? Who are the tenants there? There is activity going on at the old airport site in Durban, so what is truly happening? The political responsibility for SAA was transferred to DPE from Treasury, was any staff seconded to DPE to work with the Minister? Is the DPE aware of any discussions with private partners towards forming a partnership with SAA?

Mr R Tseli (ANC) said that the matter of defaulting municipalities to Eskom must be handled with care so as not to set a bad precedent. The understanding is that municipalities honour the commitments they made to Eskom. If the debts were to be written off, we will soon end up with a situation that no one pays for electricity so the need for follow-up is important. This issue goes beyond Eskom and DPE must get involved. It is good to hear that DPE is the process of revising the targets for SOE contribution to skills development. The Committee would like to have a briefing on the Government Shareholder Management Bill because it has been outstanding for a while.  Could the Committee get a briefing on last week’s reported violence in the Richtersveld community over mining opportunities? The issue is more serious than earlier thought. He pointed to DPE’s unachieved targets and asked what interventions are in place to change that? Such interventions will help the Committee to monitor progress in changing the status quo. He asked for the overall percentage for the DPE vacancy rate. The SAA handover report should be made available to the Committee because no entity can be incorporated into another department without such a report on the true state of affairs of the entity. 

The Chairperson said the media reported this morning that the total debt owed to Eskom is R17 billion, and the municipalities are not only owing Eskom. If Eskom is owed this much, it is surely going to collapse. The media reported possible load shedding and blackouts. Eskom will hopefully give clarity on these reports when they present to the Committee next week. The Committee expects to meet with the Minister and SAA on 27 November, if all goes well. DPE should ensure that the targets of some of its entities are clearer.

Ms Makgola Makololo, DPE Acting Deputy Director General: Energy, replied that the municipal debt to Eskom at the end of October 2018 stood at R18 billion and that is only what municipalities owe Eskom. Debts owed to Eskom by direct customers is R12 billion. These numbers are significant. In 2012, the debt owed by municipalities to Eskom was R2 billion. The rate of escalation is what is of the most concern to DPE. The growth of this municipal debt is very concerning, it says much about the payment culture in South Africa as a whole and the compliance to the user pay principle, and this is the same for the other services offered by government. Dealing with this problem goes beyond Eskom. She noted that municipalities themselves are owed R12 billion by various government institutions.

Ms Makololo said the Minister of Cooperative Governance and Traditional Affairs (CoGTA) leads a task team that is looking at resolving municipal issues driven by systemic challenges at the municipal level. In the court judgement last week, the judge ruled that government has mechanisms to intervene but has not done so and some of these municipalities should be under administration. Investors are asking at what point a cap can be placed on the municipal debt and if the political appetite at all exists to tackle this problem head on.  The constitutional mandate of Eskom also has to be looked because the municipalities are arguing that they have no control in the areas Eskom supplies electricity. An advisory panel has been appointed to establish the appropriate body to provide services to municipalities and work is being done on debt restructuring. There is the view that Eskom should consider writing off some of the debt because in some areas the interest exceeds the capital debt. Eskom does not have a problem with this but it surely hinders its growth, so debt write-off will offer no fundamental solution to the problem.

There are also challenges with tariff structures, where municipalities do not levy sufficient tariff to cover their cost thus tariffs are lower than what Eskom charges them. In this case, they are not in a position to recover even their costs. Therefore, a process is in motion to assist municipalities both structurally and through consequence management for defaulting municipalities. In the short term, Eskom is applying its credit control measures through disconnections but recent judgements are making it difficult for them to do so. The positives to be derived from the judgement last month is that customers can now pay directly to Eskom and note that the switching on and off have negative consequences for the infrastructure. Brandfort is an example of this. Government has to go on a massive campaign to encourage citizens to pay for services received such as Eskom, e-tolls and others.

In explaining the reserve margin, the reserve margin measures the adequacy on the system on the day we have highest peak versus the capacity that is available; that is adequacy at a point in time but not adequacy of supply all through the day nor year. That is how a medium term system outlook is measured the National Energy Regulator of South Africa (NERSA) asked for. On the medium term system outlook, Eskom will be able to meet demand on the condition that their plants are performing on a 75% availability margin. Since late last year, we are seeing deterioration in Eskom’s performance with availability hovering around 70% and even lower.  This because of an increase in unplanned breakdowns and inadequacy of coal supplies and this is an added risk. This is from where the reports about concerns of impending blackouts/load shedding and Eskom ability to meet daily demands are emanating. This matter is concerning even though Eskom has put in place mitigating measures to cover coal supply. There is a positive outlook that they will recover output by March 2019. There are still risks as we go into the rainy season shortly.

When SAA was moved to Treasury no resources were moved with it and so it came back the same way. As for the structure of the Chinese loans, DPE is aware of transactions at Transnet, there are about two transactions with the Industrial and Commercial Bank of China (ICBC) and China Development Bank (CDB) and another transaction at Eskom. The loans are structured so that should a default occur, there will be an acceleration just like other loans we have. In the case of a government guarantee, the entity and government will have sixty days to raise the funds to settle the loans. In cases of default, the company would be wound down for payments to be made and no securitisation of assets. DPE recently became aware of a locomotive loan, but the terms of the loan are still being studied.

Mr Thuto Shomang, DPE Acting Director General, replied that DPE had engagements about coal availability with the Eskom board chairperson and CEO and implored them to deal with the coal supply. A report is awaited from them on contract management. The fact that Eskom spends more than R80 billion on coal supply shows how critical this resource is to it. On SAX, as at 9 November, the airline had eight aircraft operational out of an eighteen aircraft fleet.  It is expected that by end of December that five aircraft will be added to their fleet.  The whistleblowing hotline is outsourced to an external service provider. DPE has established a team made up of four persons that look at the reports coming from the hotline. The service provider receives the calls and the team accesses the report for further action, either to be referred to SIU or the Hawks. DPE has received more than 200 forensic reports from its SOEs since 2009 and all have been handed to SIU and they are in reviewing the reports now. People are now aware of this hotline and more campaigns will be launched to widen people’s knowledge of its existence. He was not aware of a SAA handover report from the Treasury. A DPE team spent a whole day at SAA last week to understand its challenges first hand. They spent time at units such as Technical, Management, Air Chefs, Pilots, Cabin Crew, Commercial team, HR and the different unions at SAA. A report is being prepared for the Minister to that effect. No employees were seconded to SAA but to SAX. In terms of a strategic partner for SAA, the main objective now is to stabilise the airline – knowing that no company will take SAA as an equity partner in its current financial position. The vacancy rate at DPE stands at 23%. With the implementation of the realigned structure, those vacancies will be filled soon, particularly the critical posts. No information on the dugout port in Durban is available now. That information will be made available to Committee once received.

Mr Kgathatso Tlhakudi, DPE Deputy Director General: Manufacturing Enterprises, noted that the challenges faced by Denel about payment of staff salaries is related to Denel owing suppliers about R1.4 billion and an additional R800 million for invoices that suppliers have not yet issued. There are companies going under as we talk and employees are being retrenched because of non-payment by Denel. So far, Denel has not retrenched any of its staff because of these challenges. We are therefore in a moral dilemma because of difficulties faced by other companies doing business with Denel while its own staff is still sitting pretty. These are small businesses that cannot afford to be aided as Denel is. Many of these small businesses are calling us and complaining that they are owed R5000 by a Denel division and so on. The problems at Denel are purely leadership especially when you had the kind of board that just stepped out. That leadership looked only at their own personal interest rather than the business they served. When Denel comes to present their Annual Report to this Committee, Members will have to decipher these numbers.

Mr Tseli said that no company can be received from another without a handover report. If the report was not given, DPE should have insisted on one because it is standard practice. He suggested a meeting with SALGA and other Committees about the state of municipal finances. If this is not properly handled, we will have a situation where no one pays Eskom. Writing off these debts will be counterproductive and set a wrong precedent. A written report on defaulting municipalities should reach the Committee by 20 November.

Mr Singh agreed and said he understands there was a meeting the previous day at the Standing Committee on Public Accounts (SCOPA) that had the CoGTA Minister in attendance. Sources said there was talk of a possible write-off of these debts by Eskom. How could such a decision benefit Eskom? Eskom is fraught with many problems and mired in various inquiries. No entity can survive without people paying for the provision services and R18 billion is a lot of money. There must be the political will to compel people to pay. He was not convinced DPE has measures in place to ensure the whistleblower complaints are given proper attention. This must be done so they do not accumulate and lead to another inquiry.

The Chair commented that everyone must pay for services rendered. Since Eskom has already been handled by SCOPA and the Energy Portfolio Committee, it is not wise to duplicate that function rather this Committee should join them to offer our submission. On the handover report from Treasury, DPE did not give Treasury such a report when Eskom was merged with that department a few years ago; it is fair that it should not expect one in return.

Mr Shomang confirmed that indeed no handover report was given to DPE by Treasury. What has been happening is there is a joint DPE / Treasury oversight committee on SAA as a part of guarantees that were given to SAA when it moved to Treasury. On the write-off of municipal debt to Eskom, a number of proposals are on the table – one of which is the case where the interest exceeds the actual debt.

The minutes of the last meeting was adopted with amendments and the meeting was adjourned.

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