Department of Public Enterprises 2019/20 Annual Performance Plan; with Minister and Deputy Minister

NCOP Public Enterprises and Communication

17 July 2019
Chairperson: Mr T Matibe (ANC, Limpopo)
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Meeting Summary

Led by Pravin Gordhan, Minister of Public Enterprises, the Department presented its 2019/20 annual performance plan, and provided Members of the Committee with insight into the wide-ranging challenges facing the seven state-owned entities (SOEs) in its portfolio. The Minister said SOEs had been a crucial part of the state capture project, and the Department was still trying to calculate the total loss over a six to eight year period, which could run into hundreds of billions of rands. Over the last 18 months, government had tried to put in place the necessary governance institutions to protect entities. State capture processes had ensured favourable boards who would not oppose managerial appointments that facilitated the extraction of funds from the SOEs.

The Minister described the considerable challenges, especially the financial problems at Eskom and Denel. Alexkor, the state mining company had also been impacted by state capture and corruption over the years, and was trying to get back on its feet. South African Airways (SAA) had had difficulties over many years, and the government had to make tough decisions on how to manage it, and a year ago, SA Express had been grounded, but was now back in operation.

The Minister referred to an earlier incident, where an EFF Member had left the meeting in protest over the presence of Mr Gordhan, who she accused of being a “constitutional delinquent.” He responded that beating corruption was made difficult by the “external fight back,” as seen earlier. Calling people “constitutional delinquents” was one thing, defending the corrupt was another. People wanted to see if the government was serious about beating corruption, restructuring SOEs, and making them financially viable.

Discussion centred on the need for Transnet to expand its rail network to relieve the stress on road infrastructure, and reduce the costs of doing business in South Africa. Members also requested details on how the Department was planning to clean up the government departments and SOEs involved in the state capture.

 

Meeting report

The Chairperson welcomed the Minister of Public Enterprises, Mr Pravin Gordhan, the Deputy Minister, Mr Phumulo Masualle, and their delegation from the Department, which was led Mr Thuto Shomang, Acting Director General.

After apologies had been recorded, Ms N Koni (EFF, Northern Cape) excused herself from the meeting in protest over the presence of the Minister, who she accused of being a “constitutional delinquent”.

Mr A Nyambi (ANC, Mpumalanga) argued that if Ms Koni did not wish to be present at the meeting, she should not have come initially, arguing that she was attempting to undermine the Committee.

Ms Koni left the meeting.

Department of Public Enterprises: Minister’s overview

Minister Gordhan said that the Department of Public Enterprises (DPE) was responsible for seven state-owned enterprises (SOEs), the biggest of which was Eskom. This entity had been in the news for various reasons, including the President’s announcement about repositioning it, rescuing its finances, and operational issues on the generation side. He referred to issues regarding the payment culture at the municipal level which impacted on Eskom. At some stage, the Department would ask the Committee to look into these matters, particularly where illegal connections were taking place.
Challenges at the community level -- illegal connections, non-payment and damage to infrastructure -- impacted on the DPE and Eskom. The debt of R420 billion was also a major issue.

The Minister said the second entity, Transnet, was a crucial logistics operator in South Africa. Railway facilities were absolutely crucial for transporting minerals to beneficiation or export locations and for moving commercial goods, as well as the operation of ports (where there was currently a go-slow affecting progress). Transnet also operated pipelines, most notably the Durban-Gauteng pipeline.

The third entity under DPE control was Denel. Founded in 1992, it was an arms company at the heart of a number of firms that supply components and technology, as well as having its own intellectual property. Denel had its fair share of financial difficulties, especially surrounding liquidity. The Minister remarked that Denel’s finances were an interesting contradiction, in that it had an order book of R30 billion, but not enough liquid cash to get the business going.

Alexkor was the state mining company in a complex joint venture arrangement with the Richtersveld community, arising from a restitution claim. It had also been impacted by state capture and corruption over the years, and was trying to get back on its feet.

The South African Forestry Company Limited (SAFCOL) was a reasonably stable entity that dealt with forests and the commercial supply of lumber to milling plants.

The final entities were the two airlines, South African Airways (SAA) and SA Express. A year ago, SA Express had been grounded, but was back on its feet. SAA had had difficulties over many years, and the government had to make tough decisions on how to manage it.

The Minister referred the Committee to the Department’s presentation for a summary of its activities over the preceding year.

He pointed out that SOEs were a crucial part of the state capture project, and the DPE was still trying to calculate the total loss over a six to eight year period, which could be in the hundreds of billions of rands. Over the last 18 months, government had tried to put in place the necessary governance institutions to protect entities.

Governance was a major component regarding the external challenge to SOEs. State capture processes had ensured favourable boards who would not oppose managerial appointments that facilitated the extraction of funds from the SOEs. From March/April 2018, several entities had been given new boards. In two instances, the boards had been carried over -- SAA, which was under review, and the Eskom board, which had been appointed in January 2018 and also had vacancies at the moment. Boards, and the level of governance offered or not offered by them, had been a crucial area of attention.

The pattern was that boards ensured managers were placed to ensure that companies like Trillian were given fees for work not done, or certain contracts and tenders were awarded to facilitate the extraction of money. In Transnet, it had taken the form of the locomotive deal. The Minister said that management teams had been consolidated in some instances, and in the case of Eskom/Transnet, new executives had been appointed. The DPE aimed to ensure better relations between the entities and the DPE, which was the shareholder department.

Minister Gordhan said the focus of each of these entities under state capture had been how to extract money from the entity, not how to run the entity. This had harmed the operation of rail, power station management, et cetera. Once operations declined, finances declined. This necessitated the borrowing of money to relieve financial pressure, especially in the case of the Medupi and Kusile power stations. Eskom today had over R400 billion of debt, compared to a very small profile ten years ago. Liquidity was also an issue, especially the lack of cash to operate and pay salaries. The entities concerned often had to borrow money from South African banks and get it guaranteed by the National Treasury.

The Minister referred to corporate governance challenges, and said that internal audits -- which were supposed to give assurance that processes were working -- had been corrupted or sidelined, which weakened the entity. Clarity was another challenge, as highlighted by the President in three State of the Nation Addresses. Many of these businesses could not trade their way out of issues, so if operations continued in the current way, the SOEs would not make enough money to pay off their debt. Where that problem was obvious, immediate solutions had to be found, as well as new business models. In the overlap between operations and finance was the question of procurement. The most severe form of corruption was in procurement, not just in South Africa, but globally. The Minister quoted a common phrase: “corruption was the name, procurement was the game”.

He said it was the job of the DPE and the Committee to stabilise SOEs at the operational, governance and financial levels. Where turnaround, repositioning or rescue was required, they had to work with the boards to restructure these SOEs to where they could survive on their own. The aim was to reach a position where no SOE needed a bailout -- that they became self-sustainable. Given the current financial climate and weakness at the SA Revenue Service (SARS), South Africa had a financially constrained government. In the case of Eskom, the government could not ignore the challenges and had to help the entity get back on its feet.

Minister Gordhan argued that this job was made difficult by the “external fightback,” as seen earlier in the Committee. Calling people “constitutional delinquents” was one thing, defending the corrupt was another. People wanted to see if the government was serious about beating corruption, restructuring SOEs, and making them financially viable. The Committee would hear many narratives about personalities, processes and institutions intended to mask the process of cleaning up entities. It was important for the Committee to join the Department in cleaning up the entities. Culture had also begun to suffer at SOEs – “the fish rots from the head”. If the chief executive officer (CEO) was guilty of corruption, other employees were likely to follow suit.
           
Eskom and Transnet played a crucial role in the economy. It was essential to get Eskom back on its feet. Money that had been stolen could be tracked down. The key questions were: how much had disappeared, where had it gone, and how could one get it back? It was within the capability of the financial and judicial systems to recover funds.

Department of Public Enterprises: Annual Performance Plan

Mr Thuto Shomang, Director General (DG): DPE, outlined the Department’s structure and proposed that the Deputy Director Generals (DDGs) would give context on the specific goals of the annual performance plan (APP).

The DDG: Transport, interjected that the Minister had referred to looking at governance institutions, and an issue the DPE was considering was a bill or act on SOE governance. The Department planned to follow the standard processes used to develop legislation to be put out for public comment, starting with a White Paper, so that by 2021/22, a bill could be adopted into law.

The Director General continued to outline, page-by-page, the structure and titles of the departmental presentation.

The Chairperson thanked the presenters, and opened the floor for discussion.

Discussion

Mr C Smit (DA, Limpopo) asked how the Department was planning to position strategic public enterprises like Transnet in a way that they would contribute to economic growth, in line with the different strategies for growth by industry. This was specifically salient in his province, Limpopo, and especially in his municipality of Mokgalakwena. Given the resources, the agricultural and touristic potential of this municipality and neighbouring Tubatse, how would one use, for example, Transnet to grow these areas? He highlighted the intense strain on road infrastructure because of the lack of rail infrastructure. In the most successful economies in the world, rail was the spine of the economy. Maintenance of road infrastructure was highly expensive and not sustainable. He felt that the government had been operating in silos, whereas cross-governmental strategic operation was important.

Ms W Ngwenya (ANC, Gauteng) thanked the Minister for his presence, given that many ministers did not come to committees, especially in the National Council of Provinces (NCOP). She asked how long the boards had been “acting,” and what the Department’s plan was in this regard. Regarding the APP and Departmental budget, what was the timeframe for the implementation of shareholder management, adding her desire for a shareholder management bill to be tabled within the financial year? She was encouraged that the Special Appropriations Bill would be introduced before the end of July, and asked whether the Department was ready to implement it. As regards spending on consultants, did the DPE still enlist consultants, as the Auditor General (AG) had taken issue over the utilisation of consultants by departments? In the seven SOEs, how many had permanent CEOs? What were the plans of the Department to create more Black industrialists, and how did the DPE reach rural communities to make available the opportunities it offered?

Ms L Bebee (ANC, KwaZulu-Natal) applauded the Department and Minister for the early delivery of documents to the Committee. She asked the DPE to identify the non-core assets earmarked for disposal in the documents. Had all the SOEs signed shareholder compacts, and were there repercussions for failure to meet targets? She closed by asking about the SOEs’ utility in job creation.

Mr M Nhanha (DA, Eastern Cape) commended the Minister and his team for the bold acts undertaken in exposing state capture, which required “people with a spine.” Only those with “smallanyana skeletons” in the closet needed to be worried when accusations were levelled. He understood the damage caused by state capture. He expanded on Mr Smit’s comments on rail infrastructure, saying there were complaints from the community of Cradock in the Eastern Cape. Cradock linked Port Elizabeth and the Northern Cape. All the heavy trucks drove through Cradock. The residents complained of noise and infrastructural damage. He said there was a lack of detail in the core of the presentation. For instance, the President had mentioned the unbundling of Eskom as an entity -- to what extent were unions posing a risk to unbundling? Furthermore, how had Eskom been allowed to build up over R400 billion of debt? If Eskom was unable to meet its financial obligations, it had to be near insolvency, if not in insolvency already. To what extent was the DPE prepared to consider private capital, in principle? He commented on the bizarre timing of load-shedding before the election, and its damage to investor confidence. When the President and the Minister had come down hard on the matter, it had stopped. Was the Minister in a position to share with the Committee what had caused this load-shedding?

He stressed the importance of setting targets for the Department’s anti-fraud and corruption hotline. Regarding the SAA CEO’s resignation, he had said he had experienced a lack of political support. He did not want to cast aspersions – but asked whether the CEO had been asked what he meant by this statement. He observed that SA Airlink, despite being privately owned, continued to use same colours as the two national airlines, and the same booking platform -- what benefit was derived from the relationship with Airlink? Would Medupi and Kusile ever function optimally, or should one count one’s losses and move on? He commented that if anyone had no clue about the damage caused by state capture, they needed only to visit Denel. Eight years ago, it was doing very well, but today it could not pay salaries. Would it be able to pay salaries in the coming months?

Mr A Nyambi (ANC, Mpumalanga) stressed the importance, when the delegation came to the NCOP, of including consideration of the Department’s impact on provinces. He noted with concern the 16% vacancy rate in the Department, and asked for a timeframe to fill the posts. What might be causing the resignations from the Department in the face of challenges, given that the Committee was genuinely of the view that those appointed were committed to making SOEs work? How many targets in the current APP were dependent on external service providers? To what extent had the Auditor General’s recommendations been taken on as a measure within the DPE? He asked for an update on the various turnaround strategies across the different entities.

Ms T Modise (ANC, North West) asked whether there was a tool to monitor money transferred to entities, and if not, what could be done about this. What was the Department’s plan to prevent corruption in SOEs?

Mr A Cloete (FF+, Free State) wanted the anti-fraud hotline’s number, saying that a preponderance of cases needed to be reported in his constituency. How would unbundling be executed practically in the next three years?

The Chairperson highlighted the issue of shareholder management, and asked what the challenges were. What was the Department’s performance in budgetary expenditure? He asked for some form of plan for the recovery of money.

DPE’s response

Minister Gordhan accepted Mr Nyambi’s point on provincial consideration, and said he was fortunate to have a former provincial Premier as his Deputy Minister. He admitted that the Department would have to help SOEs get used to providing information on a provincial basis.

He said that a list of non-core assets would be provided to the Committee in writing. All SOEs had signed shareholder compacts.

When talking about entities being captured, the Minister reminded the Committee that the Department itself was also captured, and had played a key role in the capture project. The DPE was not a normal department, and it would take a long time to normalise. Half of the staff were from support services, whereas three-quarters should be experts on the various sectors. That capacity had to be built. Much of the last year had been spent on crisis management. His work had been focused on governance processes on the one hand, as well as helping with financial issues with the Treasury and understanding operational issues.

Even in terms of the shareholder management bill, which had been under consideration since 2010, much had changed. Although some general areas had remained common, especially some frameworks that had already been adopted, the idea behind the bill had to be updated. Over the following six months, the focus would on building expertise within the Department. It operated in sectors that were rapidly changing. The aviation sector changed extremely rapidly. Airline businesses were low profit, and the sector had to keep up. The energy sector was also changing very rapidly, discoveries off Mozambique and South Africa, the impact of renewables, and control over emissions, such as those from coal power stations. The recent trend towards protectionism and disruption of trade patterns would also begin to impact on logistics businesses.

The Minister stressed that Eskom and Transnet had a crucial role to play in terms of socioeconomic transformation and growth. The impact of load-shedding on the economic downturn had been remarkable in the first quarter of 2019. Consistent electricity supply was necessary for growth. The cost of electricity, water and rail had frequently been brought up as increasing the cost of doing business. If the entities could be managed well and costs could be constrained, this would reduce the cost of doing business.

Both Eskom and Transnet played a major role in fixed investment in the economy. R900 billion of investment took place over two three-year periods when these SOEs were investing in large infrastructure projects. Investment through larger SOEs had to be restored to higher levels, and private capital had to be drawn in. When money was borrowed, it was borrowed from private capital markets. Transnet was key in terms of connectivity, especially in “non-traditional areas,” so that goods could be moved and participation in the economy could be increased. He agreed that rail usage had to increase to reduce pressure on roads. SOEs had to cooperate to make rail a major player in transport.

The Minister said that the boards were all permanent, though some CEOs were in acting positions. SAFCOL and Alexkor had CEOs. SA Express had a CEO on a short-term basis. SAA used to have a CEO, but it was not in a position where it could ask Treasury for high levels of funding. Problems encountered by SOEs were a tough ride, and this required tough people. The DPE had had problems in getting permanent CEOs for Transnet and Eskom.

The Special Appropriations Bill was in the hands of the Minister of Finance. A list of non-core assets had been given to the Treasury, consisting mostly of pieces of land and small businesses owned by SOEs that could be easily disposed of without affecting their core businesses. There was a need for means other than Treasury funding to make entities more sustainable and liquid than they were at the moment.

Although SOEs created direct and indirect jobs, that there had been a bloating of the number of jobs in SOEs. At Eskom, the number of executive level posts had been reduced from 21 to nine. At the political, board and management level, there had to be intense discussions with unions so they understood constraints, but also to ensure that people were not just thrown out on to the street. There were many jobs that could be created through the new economy, which emphasised the need for a just transition.

The average age of Eskom power stations was 37 years, and the oldest stations such as Komati, which was 50, had to be shut at some point without damaging the surrounding communities. These areas usually had transmission plants, opening up scope for private investors to install new generation capacity such as solar, to ensure continued employment.

Deputy Minister Masualle acknowledged Mr Nyambi’s point on the packaging of presentation information to draw a distinction between NCOP and National Assembly submissions. In this instance, the Department had formatted the APP according to Treasury guidelines. In order to package this better, there was a need to look at the format of the APPs to reflect the provincial footprint.

He said the recovery from load-shedding required attention to minute details in terms of power plant efficacy and management, especially in respect of maintenance, which was needed to keep the system running correctly. Planned synchronisation for routine maintenance was also required to avoid load-shedding. He stressed the success of the DPE in keeping the power system functioning since the end of load-shedding. Medupi had brought another unit on stream, creating a measure of certainty as regards to power supply, although risk still existed.

The Deputy Minister repeated the unique position of Denel’s liquidity problems, with a large order book and huge financial potential. The chances of a similar liquidity problem occurring were being mitigated by the private sector’s entry into the Denel issue, which proved a measure of faith in the entity’s long-term prospects.

The idea of going from road to rail necessitated encouraging participation of the private sector with Transnet. There were a number of rail lines that had been neglected, and a number of possible lines that could be opened that could adopt the load that currently went on trucks. Branch lines had to be targeted. In addition to Cradock, a Johannesburg-Durban rail corridor was needed.

Director General Shomang referred to the DPE’s involvement in employment and the Competitive Supplier Development Programme (CSDP), and said an enforcement pact had been lacking. This had been seen with Transnet, as the entity did not include local content as a criterion in its projects. If the DPE could enforce requirements and regulations, there should be a great improvement in the job creation capacity of SOEs.

The CEO positions at entities lacking a chief executive had been advertised and were progressing. The DG noted the importance of bringing in the correct skills to the Department. He apologised that information of the dependence of the DPE on external service providers was not available yet.

The Deputy Director General responsible for Eskom emphasised the consequence of having a shareholder compact. In terms of Treasury Regulation 29, the Minister had to sign compacts every year. The performance agreement with Eskom had not been completed due to unforeseen issues stemming from the turnaround plan, but the compact should be signed within the quarter. SAFCOL and Alexkor had signed agreements. The compact looked at governance overhauls, operational performance, capital spending, socioeconomic impacts and the financial performance over the coming months.

There had been progress at Medupi and Kusile. Four units at Medupi were complete and one at Kusile, and Ingula had been completed. The DPE was working on processes to improve the reliability of plants over the medium term. There was a turnaround plan that required certain action from Eskom involving cost savings, coal costs, manpower costs and skills in the business. Issues also persisted around funding from the government perspective, and the implementation of the turnaround plan had to be monitored over the next four quarters.

The DDG responsible for the transport portfolio responded that shareholder compacts were in the late stage of negotiation. Shareholder compacts with SAA, SA Express and Denel had been difficult to sign, due to liquidity issues. Over the course of the financial year, there would be a rolling out of an executive remuneration system that required certain specific objectives to be completed before performance incentives could be paid.

Regarding Airlink’s use of SAA resources, Airlink was a feeder airline to SAA that brought passengers from smaller airports to the larger airports and improved the competitiveness of local travel. Large international airlines, like Emirates and Ethiopian, wanted to use this service to bring passengers into their international network. There was damaging competition between SA Airlink and SA Express that had to be looked at – SA Airlink’s purchase by a competitor would be bad for SAA. In SAA’s case, the long-term turnaround strategy was being strengthened, and there was a plan to look at bringing forward the benefits thereof, with a proviso over a lack of liquidity. A R5 billion SAA bailout and a R1.5 billion SA Express bailout had been received. The SAA bailout had been used to pay one loan immediately. SA Express had used the bailout mostly to pay off debt and for leases. A report on disbursement expenditure had been shared with the Treasury to see if it was compliant.

The Chief Financial Officer responded regarding consultants, and clarified that work was largely being in-sourced, despite the increased expenditure on consultants. Consultants were needed where there was a lack of experience within the Department.

The DDG for legal governance provided Mr Cloete with the hotline number.

Minister’s concluding remarks

The Minister, rounding off the presentation, said the government had intervened at Eskom to the extent of ensuring it remained a going concern. The Special Appropriations Bill to be introduced by the Minister of Finance was a part of this. Medupi and Kusile both had substantial design and delivery issues. The generation component was beginning to get on top of what it had, and to properly manage generation. When he returned to the Committee in a month’s time, he would have a better sense of all the issues.

As for the restructuring of Eskom, there had been planning within the entity and in the joint structure set-up.

Regarding the turnaround strategies, it had to be mentioned that many of these entities had come up with one every year for the past few years. The DPE was at a point where it had to be clear where these strategies ended, what kind of road had to be travelled, what the challenges and facilitating factors were, and how long the entity needed. Looking at the SOEs themselves, it was easy to design a turnaround strategy, but the issue was whether it could be implemented or not.

He said the recovery of money was not the DPE’s responsibility, but merely a statement of intent. There were laws to seize, freeze and sell assets, let alone those leading to prosecution and imprisonment. This was likely why there was such a significant “fight back” against cleaning up the SOEs.

The Director General add that as the DPE had received two successive clean audits, it did not have recommendations from the Auditor General to implement.

The Chairperson thanked the Minister and Deputy Minister for their attendance. It was not going to be an easy road, but the Ministry had the support of the Committee, who planned to go on oversight trips to the different provinces.

Draft Committee minutes were adopted, with minor corrections.

The meeting was adjourned.

 

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