Transnet: briefing; Adoption of Resolutions

Meeting report

STANDING COMMITTEE ON PUBLIC ACCOUNTS
10 September 2003
TRANSNET: BRIEFING; ADOPTION OF RESOLUTIONS

Chairperson: Mr Beukman (NNP)

Documents handed out:
Briefing by Transnet Housing - Eskom Finance Company (see Appendix)

SUMMARY
A delegation from the Department of Public Enterprises was questioned by the Committee on the tendering process they had started for the selling of Transnet Housing properties. Members were unhappy about the process followed by Transnet Housing and felt that not enough preparations were done, especially on the valuation of properties.

MINUTES
The following resolutions were adopted by the committee:

Airports Company of South Africa (ACSA)
African Explorations Mining and Finance Corporation Pty. Ltd.
Council for Scientific and Industrial Research (CSIR)
Export Credit Insurance Corporation South Africa
Khula Enterprises Finance Ltd.
The National Skills Fund
Trade and Investment South Africa
Water Affairs and Forestry

Briefing by Transnet Housing - Eskom Financing:
The Department of Public Enterprises was represented by Dr. Mokeyane (Director-General), Mr Theledi (Chief Director: Restructuring) and Mr Montana (Chief Director: Stakeholder Liaison).

Dr Mokeyane told the committee that their presentation should broadly answer all their questions. The Department was replying to the questions as stated in the chairperson's letter to them. He emphasised their willingness to discuss this matter at great length. He was aware of concerns that were piling up. The first concern was the possibility of job losses and people losing their homes. Secondly the possibility that tenders were excluded because of the R40 000 fee for the tender documents. There also seemed to be a perceived lack of ministerial oversight. If they could not answer any questions a reply would be provided within 24 hours.

The chairperson suggested that the committee read through the presentation since there were under time constraints.

Discussion
Mr Gerber (ANC) expressed his concern over the method they followed during the current process. He was concerned over houses being financed by Eskom and the amount of properties Eskom owned that did not have bonds on them. He also referred to Telkom who last year went through the same process trying to sell some of its properties. They asked for an R50.000 fee for the tender documents. This process was stopped and now it is a mess.

Mr Theledi stated that it was costly for Transnet to service all these properties and they were making a loss. The challenge for them was how best to structure the deal to remain sensitive to people who pay small amounts of rent. There would be a rating of properties process before the tendering begins. The R40.000 fee was there to make sure that bidders were serious and to cover administration costs.

Mr Gerber disagreed with the expensive fee. He asked the department whether they had exact numbers for their properties. He stated that the process being followed was exactly the same as what Transnet did with the scrap metal. They put out a tender before they knew the value of the metal. Such a process did not work and cost taxpayers millions.

Mr Theledi replied that the scrap metal issue was something totally different. He added that they did appoint advisors to do a feasibility study. They do have a sense of where the properties were located and they had a risk profile on them. They would do a rating of these properties also. Then tenders would receive all the necessary information when they applied.

Mr Gerber emphasised that this was exactly his point. It comes across as if Transnet did not have all the necessary information on their properties. Why was this not done before they started with the tendering process?

Mr Kannemyer (ANC) regretted not having enough time for the presentation. He asked whether the task team were mandated to determine fair value for these properties.

Mr Theledi replied that when they first started this process they concentrated on the loan books. He said the advert (which countrywide last week) was not for tenders but for an expression of interest. He added that before the tendering process started the valuation of properties would have been done.

Mr Kannemyer felt they would have been better advised to have done this valuation process at an earlier stage. He asked how the housing situation would be affected.

Mr Chiba (ANC) commented on the advert which called for binding offers. How would this be possible if the valuation process had not been done.

Mr Gerber referred to the presentation where it speaks of a second phase analysis. He requested a copy of this analysis if it had been done. He asked the department how much it will cost if all 600 employees, who had been offered severance packages to be taken up by the 20 September 2003, accepted.

Mr Theledi stated that the advert called for an expression of interest and not tenders. On job losses he said that as they were restructuring state owned enterprises they should implement social mechanisms to soften the blow. On the severance packages he said that Transnet Housing was overstaffed. He added that the severance packages and the study on this was separate from this process. Workers would not be worse of due to restructuring. They would look again at the decision to ask R40.000 for the tendering documents.
The results of a rating analysis would be known by the 15 September 2003 and be made available for bidders.

The Director-General commented that they should have gone through the presentation which covered all these facts. He proposed a more detailed engagement and added that the depth of the work done so far would benefit the committee.

Mr Chiba expressed his surprise at the answers given. They asked for tendersby the 15 September 2003 but were still waiting for the rating agencies. He asked them how they could expect binding bids if they did not know the value of the properties.

Mr Gerber asked them whether they know how many properties they owned that were not bonded. He felt that they were opening themselves up for legal battles if they were not exactly sure who the property belonged to. He questioned whether they knew which properties belonged to Propnet, Spoornet, Transnet Housing and Intersight. He referred especially to those properties attached to railroads as they would not be bonded.

Mr Montana replied that the impression should not be created that this work was not done. He mentioned that Propnet and Intersight had this valuation done four years ago. The only issue that emerged was the outstanding asset evaluation. He said that they could supply the committee with a breakdown of bonded and unbonded properties within 24 hours and that they were very clear about who owns what. The principle of job retention had been agreed on.

Dr Mokeyane promised to make all information available within 24 hours that was not covered by the presentation. They now had a first hand understanding of the issues.

Mr Gerber stated that he was now more confused than before. He added that their questions on valuations had not been answered adequately. He wondered why they were rushing this process. This eliminating exercise was the same thing as a tender process. Transnet could only gain by doing the process thoroughly. The current process did not make business sense. Transnet should rethink the issue.

The Director-General again stressed how keen they were to appear before the committee and to provide them with more information and to do a presentation.

The meeting was adjourned.

Appendix : Presentation by Department of Public Enterprises

TRANSNET HOUSING-ESKOM FINANCE COMPANY
10 SEPTEMBER 2003

BACKGROUND
Cabinet (August 2001) à Approval for Feasibility Study à Transnet Housing
à Eskom Finance Company
Merger between Transnet Housing and Eskom Finance Company

Cabinet decision (Feb 2002) à Adjudication Team (NT, DPE, EFC, TH) à Appointment (Transaction Advisors: Aloecap)

March 2002 (Aloecap commerce feasibility study) à Feedback to all Stakeholders à June 2002 (Aloecap completes feasibility study)

LOAN BOOK FUNDING
- Transnet passes the same lending rate to EFC
- Transnet uses its balance sheet to raise funds

Open markets à Transnet à TH
Treasury

- Eskom passes the same lending rate to EFC
- Eskom uses its balance sheet to raise funds

Open markets à Eskom à Eskom Finance Company
Treasury

FINDINGS OF THE STUDY
- there is a business case for a merger provided the objective is to address efficiency issues
- there is no value added in the merger if the short term solution is to dispose the merged entity
- the merger will lead to possible job losses to address the inefficiencies in the merged entity

TASK TEAM DECISION
- Based on the FINDINGS, the task team recommended for the companies to be disposed of as separate entities due to significant job losses that might take place as a result of a merger.

RATIONALE FOR DISPOSAL OF BOTH TH & EFC SEPARATELY
CABINET DECISION TO SELL AS SEPARATE ENTITIES
- In December 2002 the Department of Public Enterprises together with the other Departments prepared a Cabinet memorandum recommending the disposal of Transnet Housing and Eskom Finance Company as separate entities.
- In March 2003 Cabinet approved the disposal of Transnet Housing and Eskom Finance Company as separate entities.
- In May 2003 letters from the Minister of Public Enterprises regarding the disposal were written to the respective Chairmen and Chief Executive Officers of these entities.
- In June 2003 the Finance Committee of Transnet approved the disposal of Transnet Housing as an entity, not only the loan book.
- In July 2003 government, and Transnet consulted with labour regarding the disposal of Transnet Housing.
- In July the Board of Transnet approved the disposal of ~ansnet Housing.
- In August 2003 the expression of interests were advertised in major daily and week-end publications.

THE RATIONALE FOR THE DISPOSAL OF BOTH ENTITIES
- Both entities are not aligned to the strategic focus of these SOES
- The restructuring of non-strategic assets is informed by the government policy framework
- This exercise should not worse off the employees of the entities, both on the jobs and the housing benefits.

RATIONAL OF THE APPROACH
- experience has shown us that some bidders are not serious about
transations
- there is no pre-qialification process
- the R40 000 is a function of the size of the deal
- the administrative costs, including ratings, should be defrayed were
possiblr.

ESKOM'S PROPOSED RESTTRUCTURING MODEL
- EFC has not fit in the proposed model for Eskom

Eskom Regulated Business
- Eskom Generation Business + Eskom Transmission Business + Eskom Distribution Business
- Eskom Finance Company

REGULATORY CONSIDERATIONS
- Eskom currently violating NER regulations à NER does not approve of cross subsidies from regulated to unregulated business

Eskom à Indirect subsidies à Eskom Finance Company
- HR
- Finance
- IT Support

RATIONALE FOR DISPOSAL-MOTIVATION CONT…
The disposal of Non-strategic assets à Government's objective à Restructuring the State
owned enterprises

The disposal of non-core asset will be in line with the government's objective of restructuring the State owned enterprises