Safcol 2018/19 Annual Report, with special emphasis on land claims & post-settlement model for all stakeholders

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Public Enterprises

30 October 2019
Chairperson: Mr K Magaxa (ANC) and Ms T Modise (ANC, North West) (Acting)
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Meeting Summary

2018/19 Annual Reports

The South African Forestry Company Limited (SAFCOL) briefed the joint Committee on its strategy and business, its performance against shareholders compact, the financial performance, its human and social capital, and the way forward for the state-owned entity.

SAFCOL had a history and culture of not doing the right things or following guidelines. Those who worked for the entity operated within silos. The new management that took over had decided to instil a value-based culture. SAFCOL’s internal operations had not changed for the past 20 years and no allowance had been made for monitoring the performance of employees. The company had thus failed to reposition itself and its overall performance had suffered as a result. The entity had clung to old technology and failed to create new job opportunities. The entity was also saddled with outdated infrastructure that had to be maintained.

SAFCOL currently owned three subsidiaries -- Abacus Forestries, Kamhlabane Timber and Komatiland Forests (KLF) outright -- and KLF had bought an 80% stake in a Mozambican company called Industrias Florestais De Manica (IFLOMA). The entity also held minority equity stakes in four companies on behalf of communities. These companies were Siyaqhubeka Forests, based in Kwazulu-Natal (25%), Amathole Forestry Company (16%) Singisi Forest products (10.9%) in the Eastern Cape, as well as MTO Forestry (17.58%) in the Western Cape.

SAFCOL planted pine trees, which comprised about 90% of all harvests, eucalyptus and waterleaf trees. It took about 28 years for one tree to grow to maturity. Key risks to the entity were fires, timber theft, pests, disease, climate change, infrastructure maintenance and loss of productive land due to land restitution.

It had achieved a 12.5% increase in revenue, to R1.042 billion, but had irregular expenditure of R129 million in the 2018/19 financial year. However, this was a marked improvement from the previous year, when irregular expenditure had peaked at R233 million.

SAFCOL had adopted vertical integration as a core strategy, as it could harvest on only 121 055 ha of the 189 760 ha made available, and was busy negotiating with the Department of Agriculture, Forestry and Fisheries (DAFF) to make more hectares available. Some forests were in a bad state as a result of mismanagement.

Members wanted to be briefed on the qualified audit opinion issued by the Auditor General (AG), and what SAFCOL had done to address these anomalies. They called for stringent measures to be introduced to arrest the irregular expenditure trend, and for the board and management to implement consequence management. They urged the company to increase the participation of women, youth and people with disabilities in its supply chain, and expressed their exasperation with the low employment rate of people with disabilities. They questioned why SAFCOL continued to hold shares in companies on behalf of communities, and wanted a breakdown of these shares and what had been done to transfer them to community-owned entities.

Meeting report

SAFCOL Annual Report

Mr Tsepo Monaheng, Chief Executive Officer: South African Forestry Company Limited (SAFCOL,) briefed the Committee on SAFCOL’s strategy and business, the entity’s performance against the shareholders’ compact, financial performance, the human and social capital and the way forward for the state entity.

SAFCOL had a history and culture of not doing the right things or following guidelines. Those who worked for the entity operated within silos. The new management that took over had decided to instil a value-based culture. SAFCOL’s internal operations had not changed for the past 20 years, and no allowance had been made to monitor the performance of employees. The company had thus failed to reposition itself and overall performance suffered as a result. The entity clung to old technology and failed to create new job opportunities. The entity was also saddled with outdated infrastructure that had to be maintained.

SAFCOL currently owned three subsidiaries -- Abacus Forestries, Kamhlabane Timber and Komatiland Forests (KLF) outright -- and KLF had bought an 80% stake in a Mozambican company called Industrias Florestais De Manica (IFLOMA). The entity also held minority equity stakes in four companies on behalf of communities. These companies were Siyaqhubeka Forests, based in Kwazulu-Natal (25%), Amathole Forestry Company (16%) Singisi Forest products (10.9%) in the Eastern Cape, as well as MTO Forestry (17.58%) in the Western Cape.

SAFCOL created value through its six “capitals” -- manufacturing capital, human capital, social capital, financial capital, natural capital and intellectual capital.

It had planted pine trees, which comprised about 90% of all harvests, eucalyptus and waterleaf trees. It takes about 28 years for one tree to grow to maturity. It highlighted fires, timber theft, pests, disease, climate change, infrastructure maintenance and loss of productive land due to land restitution as key risks.

In relation to SAFCOL’s performance against shareholder’s compact, certain targets had not been achieved, most notably in the financial area. The entity had achieved an increase in revenue of R1.042 billion (+12, 5%), but recorded a loss of R118 million for the period. Irregular expenditure had amounted to R129 million, which was a marked improvement from the previous year, when irregular expenditure peaked at R233 million. Profits were down by 46.7%.

The company had adopted vertical integration as a core strategy, as it could harvest on only 121 055 ha out of 189 760 ha made available, and was busy negotiating with the Department of Agriculture, Forestry and Fisheries (DAFF) to make more hectares available. Some forests were in a bad state as a result of mismanagement.

SAFCOL managed to bring down the number of outcomes highlighted by the Auditor-General of South Africa (AGSA) from 11 to one.

Discussion

Mr E Marais (DA) commented that SAFCOL had come a long way on land claims-related matters, which had been a major factor that held the entity back in performance and planning for future purposes. This had resulted in it not being aware of how much land it owned, so it should engage with the Minister of Rural Development and Land Affairs on this, as it affected SAFCOL’s profit margins and impacted on thorough planning.

It was a pity that SAFCOL had received a third consecutive qualified opinion for irregular expenditure. and wanted an assurance from the CEO that he had what it took to ensure that this did not occur again. It was the responsibility of senior management to ensure that all audit prescripts were adhered to, and that there should be consequence management for officials who did not follow procedures.

Ms C Phiri (ANC) commended the will of the CEO to turn things around at SAFCOL. She touched on IFLOMA’s financial sustainability and the company’s financial dependence on KLF, and wanted to ascertain how the turnaround strategy would contribute to making IFLOMA sustainable. How much would be needed or had been spent to make IFLOMA sustainable, and what strategies were in place to overcome these challenges, especially as it related to risk implications?

She recalled that during the presentation, Mr Monaheng had raised the issue of SAFCOL’s frustration with the slow pace of land claims and being locked out of the process, and suggested that the co-Chairpersons might be able to take up SAFCOL’s plight. Nonetheless, she wanted to ascertain what the entity had done to engage the relevant department on the frustrations the entity had experienced. She raised this question as it seemed that Mr Monaheng was quite a decisive CEO.

She also wanted to be briefed on the qualified audit opinion issued by the AGSA, and what SAFCOL had done to address these anomalies. The irregular expenditure incurred was quite a large amount and had been as a result of procurement processes not being followed. She also questioned why businesses owned by young people had received only 5% of all contracts awarded. She was emphatic that young South Africans had to benefit from economic opportunities, and asked for an explanation. She also lamented the low employment rate of disabled people, which stood at 1%. 

Mr M Nhanha (DA, Eastern Cape) questioned why SAFCOL, a state entity, was still acting as a shareholder on behalf of communities and wanted to ascertain when the status quo would end. Would the entity reconsider holding shares on behalf of communities? He called on it to empower communities to run their own companies.

On beneficiation, he mentioned that Mr Monaheng had referred to a community that had requested R100 million for a specific project, but SAFCOL could grant only R3 million. What other interventions had it considered or implemented to aid beneficiation?

He said he hailed from the Eastern Cape and was familiar with the Amathole district. It was characterised by economically marginalised communities that required intervention in the form of education opportunities that could bridge the poverty gap. He wanted to ascertain from SAFCOL whether the entity administered any bursaries.

He was intrigued by the irregular expenditure incurred that had led to a qualified audit opinion. There had to be an initiator of this irregular expenditure, so SAFCOL had to indicate what steps, if any, had been taken to arrest this tendency.

One of the issues highlighted by the AGSA had been the lax internal controls and non-compliance as indicated in SAFCOL’s financial statements. This was an indictment of the company’s management, and it could not continue on this trajectory, especially if management was aware of these irregularities. Something had to be done to rectify this.

He recalled that he had been a member of the Public Enterprises Committee for the last seven years, and every time SAFCOL appeared before Parliament it had raised the risk that baboons posed to operations. He wanted to ascertain whether baboons had ceased to be a risk, as the CEO had not mentioned it during the presentation. 

He also wanted to ascertain whether SAFCOL had a detailed list of dismissals, and the job grades of those dismissed.

Mr A Arnolds (EFF, Western Cape) said he wanted state-owned entities (SOEs) to be effective and efficient. Most SOEs liked talking about turnaround strategies and in almost all cases these turnaround strategies proved to be insufficient.

He recalled that during the presentation, Mr Monaheng had spoken about the new values of SAFCOL, and in this spirit he requested the CEO to provide an update on what had happened to the provident fund payouts of former SAFCOL employees. He added that there were communities that had still not received their shares, and wanted to know when they would receive their shares and what was being done to reach out to these communities.

He highlighted that a lot had been said about internal controls and wanted to ascertain what had been done thus far to operationalise these processes. He also touched on SAFCOL’s procurement processes that had not been transparent, and asked what the Committee could do to assist. He stressed that the responsible officials should take responsibility for their actions and that consequence management should be implemented.

He asked whether SAFCOL was aware of the exploitation by private companies of communities that resided around forests, and what it had done to address these concerns.

He requested an update on how the R5.6 million on corporate social responsibility -- out of an R11 million budget -- had been spent.

Ms D Dlamini (ANC) noted that SAFCOL held a 25% stake in Siyaqhubeka on behalf of communities. She wanted to know why this share topped SAFCOL’s own shareholding.

She asked about the delays in the rollout of IFLOMA operations, and the amount spent on research and development (R&D).  Did IFLOMA have a turnaround strategy?

Ms J Tshabalala (ANC) referred to the internal control deficiencies highlighted by the AGSA, and wanted to ascertain what had been done to address this concern.

She asked what the CEO had meant when he stated that South Africa had to cultivate a “wood culture.” On revenue collection, what were SAFCOL’s plans to ensure that the entity becomes sustainable? She commended the entity on its social compact.

She wanted to establish why SAFCOL had operations only in Kwazulu-Natal, Limpopo and the North West, and how lucrative its relationship with its Mozambican operation had been. She lamented the fact that SAFCOL had not achieved the preferential procurement target that had been set, and asked why that had been so and what was being done to correct it. Her final question related to how SAFCOL fared on customer satisfaction.

Co-Chairperson Magaxa recalled that during a visit he undertook with a former Deputy Minister of Environmental Affairs to Paarl, to a community that lived adjacent to a forest previously owned by SAFCOL, they had encountered a destitute community that had no access to basic services. This seemed to be pattern --  people had simply been abandoned by the company that bought the forest. He had gone to the local Drakenstein municipality to enquire why the community in question had no basic service delivery and had been informed that the land was privately owned. This was worrying, as SAFCOL could not abscond from its responsibility.

Acting Co-Chairperson Modise wanted to know why Mr Monaheng had stated that it was difficult to transfer shares back to the communities that rightfully owned these shares.

SAFCOL was also asked if it had any plans on how to mitigate climate change.

 

SAFCOL’s response

Ms Zimkhitha Zatu, Non-Executive Director: SAFCOL, fully agreed that a qualified opinion was not acceptable. However, despite having received a qualified audit, the entity had made giant strides as it had managed to bring down the audit findings down from 11 to one. This showed that steps had been taken to address the AGSA’s concerns. Measures had also been taken to capacitate the internal audit team, which ensured an extra layer of assurance that kept the rest of the company on its toes where internal controls were concerned. Additional measures implemented included ensuring that the internal audit team focused on the right issues and that the team was adequately resourced.

She stressed that SAFCOL had experienced a leadership vacuum, as the entity did not have a Chief Financial Officer (CFO) or a Supply Chain Manager. The new CFO had been appointed less than two months ago, and there had been an admission that serious issues existed in supply chain management (SCM) that had to be addressed.

SAFCOL had also instituted consequence management, with various disciplinary steps being taken against 24 employees who had been implicated in wrong doing. It had also blacklisted a few companies identified for wrongdoings.

She added that IFLOMA was a Komatiland Forests subsidiary based in Mozambique. The KLF had supported IFLOMA because it was mothballed and not operational, and the latter had turned a profit this year. It was no longer a loss-making company, but generated profits. Various new initiatives were being explored, especially since the KLF did not have to support IFLOMA financially anymore. Funds from KLF had been used to pay for salaries whilst IFLOMA was still getting operational. As the funds to IFOLMA were a loan, it was not considered impaired by the auditors.

Mr Mohaneng said that when parts of SAFCOL had been sold in 2002 to Siyaqhubeka Forests, the agreement had been that the 25% held by SAFCOL would be transferred to the relevant communities. Since then, SAFCOL had continually stated that the entity was ready to transfer the shares. It was exposed to risk itself by continuing to hold these shares.

Climate change had become a big problem not only in South Africa, but also globally. Mitigating actions included developing a plan to plant as many trees as possible, a reduction in fumes that emanate from processing plants, and research.

He said that SAFCOL did not own the land it operated -- it leased and operated the land on behalf of the South African government.  Historically, it had been a countrywide entity, but some of its subsidiaries in other provinces had been sold. It would be difficult to plant and operate forests in other provinces as a result of the soil and climate conditions that would not be favourable to forestry. Water was a big challenge and to manage a forest required a water licence. Such a water licence would not be in granted in Gauteng, for instance, due to the limited water supply. SAFCOL’s approach had been to plant more trees in provinces where it operated, and to conserve land and water in those it did not.  

Regarding training and skills development, SAFCOL did administer a programme that trained local residents in Sabie to provide services to the company and other market role-players. This programme had been funded by Finland, in partnership with the United Nations. It also provided nine bursaries. In addition, SAFCOL had allocated projects to these entrepreneurs, and had also provided support. The Finns had been very impressed with the remarkable success of this initiative.

SAFCOL’s focus area had been women and youth-owned entities, and it provided bursaries that had been advertised countrywide. People with disabilities would continue to receive special attention going forward.

The 25 % stake the entity held in Siyaqhubeka shares when the company was privatised, comprised of 16% for the community and 9% for employees. The employees had ultimately sold their stake to MTO Forestry.

Regarding the inculcation of a “wood culture” in South Africa, Mr Monaheng said that it had been difficult to convince South Africans to build with wood. In countries like Japan and the United States, wooden house frames had become the norm, and South Africa could follow suit as it was cheaper and more durable to build with wood. The government could also save on importing expensive steel and other products. Ultimately, wood was a friend to the environment.

SAFCOL had implemented consequence management, and disciplinary cases had taken a lot of time to deal with. Supply chain processes presented the biggest challenge, as they used to be completely dysfunctional and decentralised. SAFCOL had since implemented a centralised system with the view to receiving a clean audit.

It was also concerned about the wage bill, which stood at 40% for its 1 550 employees. This percentage was way too high for a billion rand company. Re-skilling was essential.

SAFCOL would provide a breakdown of all dismissals to the Committee.

Mr Monaheng said SAFCOL’s infrastructure was falling apart, and the company had been saddled with a lot of old vehicles, so its first task was to address these challenges. There was a general agreement among management that more investment in the company’s operations should be done. However this could be done only if profit margins increased.

He commented that interventions in communities were difficult for SAFCOL, but the entity had representation on the boards of private forestry companies like MTO and Amathole, and could raise concerns during board meetings. SAFCOL had received objections to the sale of a forest near Tsitsikamma, with the same concerns as raised by Mr Magaxa.

Mr Monaheng said that baboons continued to pose a risk to forestry, and had been classified as a pest. SAFCOL had been looking at new research to counter the baboon pest in a humane way, such as using repellents.

SAFCOL had been made aware of the challenges regarding pension payouts. However, it had nothing to do with this, as it affected the employees that had been absorbed by the private companies when SAFCOL sold off certain assets.

Ms Dimakatso Motseko, Executive: Human Capital, echoed Mr Monaheng’s comments, but added that some former SAFCOL employees had received their pension payouts whereas others had not. There had been a challenge to identify some beneficiaries, and SAFCOL was looking to address this.

Land restitution caused uncertainty for SAFCOL, and it had been working closely with the Department of Agriculture, Forestry and Fisheries (DAFF) and the Department of Land Reform (DLR) to iron out these challenges.

She admitted that SAFCOL could do more in terms of the allocation of opportunities to the youth and disabled, especially in enterprise development. The entity was committed to rectify this and to do more.

Mr Thabo Moloi, Acting Chief Operations Officer, said that SAFCOL spent about 3% of its operational budget on research and development. The research was being conducted at SAFCOL’s own research centre based in Sabie, where it also kept its own seeds.

Ms Portia Derby, Non-Executive Director: SAFCOL, said that when the South African government took a decision to privatise certain of the company’s assets, conditions had been set for the shareholding and sale of these assets. SAFCOL was currently holding cash on behalf of communities that the entity really wanted to transfer back to these communities. However, it had to ensure that the money was transferred to viable and sustainably managed community-owned companies, and thus had to make sure that the communities were well trained on how to administer these funds.

Regarding SAFCOL’s operations in Mozambique, she pointed out that there had been a shift in rainfall patterns in Southern Africa, and that Mozambique had become very important for the forestry industry. Production was moving eastwards as a result of this phenomenon.

She referred to private forestry companies abandoning local communities, and said it was time for SAFCOL to review the conditions it set for privatisation. When some SAFCOL assets had been sold in 2002, there had been no charter in place. This had since changed with the introduction of a Forestry Charter in 2017.

Mr Dumisa Hlatshwayo, Chief Financial Officer, said SAFCOL intended to meet with customers on 31 October, and that the entity had done a lot to build cordial relations with its customers.

Mr Moloi added that SAFCOL had ongoing interactions with customers on their needs, such as log dimensions, and when complaints arose it addressed them.   

Follow-up questions

Co-chairperson Magaxa suggested that there should be some mechanism in place to reverse the sale of SAFCOL assets if private companies were found wanting, as communities had raised serious concerns.

Ms Phiri asked where the SAFCOL management could take the Committee on an oversight visit so that it could familiarise itself with the entity’s work.

Ms Tshabalala asked where SAFCOL was located and how much the entity spent on rentals every month.

SAFCOL’s response

Mr Monaheng replied that he would engage the chairperson of SAFCOL’s board to extend an invitation to the Committee to conduct an oversight visit to SAFCOL’s Sabie operations.

He said that to date, four claims had been successfully facilitated and would be transferred as soon as possible.

SAFCOL had offices countrywide, but the main office was in Pretoria. It was currently busy with a review of how to optimally locate 40 employees to Mbombela in Mpumalanga so that all operations could be centralised.

Mr Hlatshwayo said that SAFCOL owned some buildings, and also spent about R11 million on rentals. When the relocation was completed, SAFCOL would save about 50% on the rental amount. Of SAFCOL’s 189 760 ha of biological assets, only 121 055 ha were plantable, and it cost about R73 million to maintain these biological assets annually.

Ms Makgola Makololo, Acting Deputy Director-General: Energy, Department of Public Enterprises(DPE)) affirmed that land claims had not been an easy issue for SAFCOL, and that capacity issues had hamstrung SAFCOL’s ability to plan adequately.

Irregular expenditure had become a trend, and there was an urgent need for intervention in these entities to adhere to the AGSA prescripts. The DPE was concerned about SAFCOL’s cost growth versus revenue growth, as its cash position had declined.

The DPE was of the opinion that SAFCOL had great potential, especially since trade figures showed that there had been increase in wood imports. SAFCOL could thus play a much more significant role. The new board and strengthened management team had been tasked to create new opportunities, especially in neighbouring Southern African Development Community (SADC) countries.  The DPE also supported SAFCOL’s decision to centralise operations. It would take up to three years to migrate.

Co-chairperson Magaxa, in his concluding remarks, commented that R11 million was a big amount to spend on rentals for a small company like SAFCOL, so the Committee appreciated its efforts to move its offices closer to the areas of production. It also appreciated the determination by SAFCOL’s management to address irregular expenditure and to ensure that it did not happen again.

The Committee adopted minutes of a previous meeting without amendments.

The meeting was adjourned.

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