The Committee was briefed by the Transnet Board to discuss the financial stability of the company and issues of alleged wasteful, irregular expenditure and the investigations thereof. Transnet received a qualified external audit opinion on its 2018/19 Annual Financial Statements. The Department of Planning, Monitoring and Evaluation was present and confirmed the reasons for Transnet’s irregular expenditure.
The Committee heard that Transnet’s irregular expenditure of R49 992 billion was mainly due to the awarding of tender contracts based on tender pre-qualification criteria that did not comply with the Public Finance Management Act (PFMA). Members asked how much money had been spent on BBB status enterprises; what kinds of interventions have been put in place to reduce freight from road to rail; when the final verdict will be heard on the pensioner’s class action lawsuit; what Capitec, Regiments and Coral’s role were in the implications of this case; and how Transnet plans to recover monies that were squandered. The Committee requested an update on the class action lawsuit with pensioners who had previously worked at Transnet.
Members were concerned about Transnet’s claim that it is one of the SOE’s that is stable yet it had requested bailouts from the State. Members were equally concerned about the allegations of fraud and corruption - and asked for a status report on the outcomes of the allegations – and the class action lawsuit with the pension fund for people who had previously worked for Transnet.
The Committee requested that the Board of Transnet provide the timeframes of when it plans to fill EXCO positions. The Committee felt that although Transnet has a representative workforce, it did not meet its targets especially with regard to recruiting more females at EXCO level and more people with disabilities. Members appealed to Transnet to improve their efforts to support small businesses in the country. The Committee stated that it would monitor SOE’s. Members said that they were happy that Transnet was performing better compared to other SOE’s however there were concerns around irregular expenditure which needed improvement. Members strongly suggested that the Board should seek Parliament’s assistance when needed. The Committee was pleasantly surprised to hear that Transnet generates revenue of over R200 million every day.
Opening remarks by the Chairperson
The Chairperson opened the meeting and welcomed everyone. Apologies were received from the Minister of Public Enterprises, Mr Pravin Gordhan, and the Deputy Minister of Public Enterprises, Mr Phumulo Masualle and Mr C Smit (DA, Limpopo).
The Chairperson also welcomed the Department of Planning, Monitoring and Evaluation (DPME) and the team was introduced by the Acting Deputy Director-General for Transport and Defence Enterprises, Ms Avril Halstead. She submitted apologies for the Minister and the Deputy Minister of the DPME.
The Chairperson requested everyone to introduce themselves and the organisations they represented. The Chairperson of the Transnet Board, Dr Popo Molefe introduced himself and members of the Board. Dr Molefe mentioned that he would have wanted some of the Directors of Transnet to attend the meeting but noted that this would have been too expensive.
The Chairperson took everyone through the agenda. After noticing that the DPME was scheduled to present in the meeting, Ms Halstead mentioned that they will not present, but will only make brief remarks on Transnet’s financial stability because much of her inputs were already covered in Transnet’s comprehensive presentation.
Ms Halstead noted that Transnet is financially stable, has a sound balance sheet and was generating decent profits. She confirmed that 90% of the irregular expenditure was incurred in the previous year due to locomotives that were purchased and other expenses that were incurred by the previous Board of Transnet and that this has been confirmed by the Minister. She mentioned that despite this, the current Board must deal with the legacy challenges of the previous Board. Ms Halstead handed over to the Transnet Board.
Briefing by Transnet on the financial stability of the company and on alleged wasteful, irregular expenditure and investigations thereof
Dr Molefe introduced the Acting Chief Financial Officer, Mr Mark Macdonald, and asked him to take Members through the presentation.
Mr Macdonald presented Transnet’s Integrated Report and Annual Financial Statement, which broadly highlighted its financial performance for the 2018/19 financial year. He said that Transnet’s revenue increased by 1, 6% to R74, 1 billion which was aided by a 9, 1% increase in petroleum volumes. Transnet’s net profit had increased from R4, 9 billion in 2018 to R6 billion in 2019 (24, 7% increase). Capital investments of R17, 9 billion brought Transnet’s expenditure over the past seven years to R183, 5 billion.
After this, Mr Macdonald explained why Transnet received a qualified external audit opinion on its 2018/19 Annual Financial Statements. He mentioned that the external auditors did not obtain enough audit evidence that the disclosed irregular expenditure that amounted to R49 922 billion was “complete and accurate”. This was primarily caused by a lack of implementation of controls and monitoring of existing controls on contracts entered into in the previous years. Mr Macdonald noted that the qualified audit opinion is not related to compliance with International Financial Reporting Standards (IFRS) and the Companies Act of South Africa of 2008.
He said that Transnet’s management has made significant efforts to improve controls so that complete and accurate records of irregular expenditure can be maintained, and new incidences of non-compliance can be prevented. He indicated to members that since the implementation of controls, there has been improvement in procurement controls. Further, Mr Macdonald noted that the 2018/19 amount on irregular expenditure would be higher this year. This is because R41, 5 billion spent on locomotive contracts entered into prior to 2015 must be accounted for.
Although there have been numerous consultations with technical and legal advisors, there are divergent views on whether expenditure from tenders that contain pre-qualification criteria should be interpreted as irregular as defined in the Public Finance Management Act (PFMA). This matter is still under investigation.
Mr Macdonald took Members through Transnet’s operational performance against its 2018/19 Shareholder’s Compact and mentioned that this was not a good performance. Transnet achieved 53% of its Shareholder’s Compact targets. These targets comprised of the following:
- 25% Financial sustainability, and only 85% of its targets were achieved;
- 15% Industrialisation, and only achieved 60% of its targets;
- 25% Socio Economic Development, and only achieved 59% of its targets;
- 15% Capacity Creation, and achieved 51% of its targets; and
- 20% Operational Excellence and achieved 36%.
He noted that Transnet’s revenue increased by 1,6% from R72,9 billion to R74,1 billion, and this was aided by the increase in petroleum volumes mainly due to the operationalisation of TM2. Despite increases in fuel and electricity costs, Transnet’s operating costs decreased by 0, 1% from R40, 4 billion in 2018 to R40, 3 billion in 2019.
Mr Macdonald mentioned that the revenues generated by Transnet had increased by 1,6% from 2018 to 2019 and this revenue was mainly generated by the Operating Division. However, the rail volumes comprising of export iron ore, export coal and GBF decreased by 4,9% in 2019. Petroleum increased by 9,1% in 2019. Transnet’s operating expenses had decreased slightly by 0,1% in 2019 despite a rise in fuel prices and electricity costs. Despite the rise in fuel prices and electricity costs, Transnet had a range of cost-optimisation initiatives that saved the company R6,8 billion against its planned costs. To do this, Transnet rationalised its overtime, reduced professional and consulting fees, rolled out programmes to measure condition assessment versus time-based maintenance execution, and limiting discretionary costs for travelling, printing, stationery and telecommunications. Mr Macdonald mentioned that the company was able to use these savings to meet its wage increase rate of 7,1% for its workers.
Transnet’s net profit for 2019 had increased by 24,7% due to a 3,8% increase in the EBITDA (Earnings before Interest, Taxes, Depreciation, and Armortisation) and a R3,3 billion fair value gain specifically with the TNPA investment property. However, the net profit was offset by increases in depreciation, impairments, increased finance cost and tax. Mr Macdonald highlighted to Members that although Transnet is a state-owned enterprise (SOE), it must pay tax. He also highlighted that Transnet had incurred tax losses because it had overtime accrued deferred tax costs, which it is in the process of paying.
Mr Macdonald mentioned that at the time of the investigations, Transnet did not report this as irregular expenditure and had confirmed this with the auditors. After the investigations were resolved, the new Board decided to report a cumulative R41 billion as irregular expenditure - which spanned over a few years - in the Annual Financial Statements.
The Chairperson thanked Mr Macdonald for the presentation and asked Dr Molefe and members of the Board if there were any additions that they would like to make.
Dr Molefe said that he was pleased with Mr Macdonald’s presentation and felt that he had represented the board well. He requested Mr Macdonald to explain how Transnet’s tender pre-qualification criteria conflicts with Section 217 of the Constitution, which states that tenders must be comparative, transparent and fair.
With regard to issues of procurement of locomotives and irregular expenditure, he confirmed that the matter is under investigation and that some contracts may be withdrawn. In this instance Transnet would have to put in place amicable measures that are just and equitable when cancelling contracts with locomotive suppliers that have not supplied since inception of contract.
Ms L Bebee (ANC; KZN) thanked Mr Macdonald for the presentation. She asked how much money has been spent on BBB status enterprises. She also asked what kinds of interventions have been put in place to reduce freight from road to rail. She requested an update on the class action lawsuit with pensioners who previously worked at Transnet. Lastly, she asked how Transnet plans to recover monies that were squandered.
Mr A Cloete (FF+, Free State) asked when the final verdict will be heard on the pensioner’s class action lawsuit, and what Capitec, Regiments and Coral’s role were in the implications of this case.
Mr A Arnolds (EFF, Western Cape) raised concerns about Transnet’s claim that it is one of the SOE’s that is stable. He was concerned with Transnet’s claims that the company is financially stable, yet it has requested bailouts from the State. He said that the 1064 locomotive contract that was considered irregular expenditure has a direct impact on Transnet’s performance. He also asked when the issues with the locomotive contracts will be resolved. Mr Arnolds asked why there was an increase in irregular expenditure in the 2018/19 financial year. He requested that the Board of Transnet provide the Select Committee with timeframes of when it plans to fill EXCO positions and what the status is on employees who were found to not have complied with the PFMA.
Ms W Ngwenya (ANC; Gauteng) enquired on the status and outcomes on the allegations on fraud and corruption. She also wanted to know the status of employees who were found to not have complied with PFMA. Lastly, she asked the board to give a clearer sense of what is happening with the class action lawsuit with the pension fund for people who previously worked f or Transnet.
The Chairperson asked how Transnet plans to regularise irregular expenditure and whether it plans to increase its capital investments. He also felt that, although Transnet has a representative workforce, it did not meet its targets especially with recruiting more females at Exco level and more people with disabilities. Lastly, the Chairperson asked about Transnet’s plans to improve its efforts to support small businesses in the country.
Dr Molefe requested Mr Gert De Beer to respond to the questions posed by Members of the Select Committee.
Mr De Beer, Chief Business Development Officer, Trasnet, responded to Ms Bebee’s question on how much money has been spent on BBB status enterprises. He mentioned that Transnet spends 93% of its costs on BBB status enterprises. He however acknowledged that much more needs to be done to uplift and support small enterprises at provincial and local level. To do this, Mr De Beer mentioned that Transnet will be partnering with youth hubs to help support small youth-led business enterprises. He further added that Transnet will be embarking on a customer satisfaction project which plans to engage an excess of 1 000 emerging customers. In this project, Transnet intends to understand the challenges that customers face when dealing with Transnet and it will try to find solutions to mitigate these challenges. Mr De Beer mentioned the importance of this project and emphasised how Transnet has a direct impact on local economies, for instance, how it employs people from local communities who then boost its local economies.
To respond to the Chairperson’s question on whether there are plans to increase capital investments, Dr Molefe asked Mr Macdonald to confirm whether R153 billion is spent on capital investments. Mr Macdonald confirmed this to be true, but he mentioned that Transnet will be doing this with borrowed money. He said that Transnet is still paying debts incurred by the previous management. He confirmed that the National Treasury was committed to support its plans to increase capital investments.
Mr Macdonald responded to Mr Arnold’s question on irregular expenditure and referred members to the slide on irregular expenditure.
Dr Molefe said that the contracts that were identified as irregular expenditure have not yet been cancelled, and because of this, money must still be spent on them. The contracts will be declared invalid and unlawful the day there has been pronouncements on the contracts. He confirmed that the public will be updated on the matter as and when the Board receives an update.
Mr Macdonald responded to the question regarding the recruitment of females at Exco level and people living with disabilities and acknowledged that Transnet needs to improve on this.
With regards to the class action lawsuit on pensioner’s fund, Mr Macdonald mentioned that a settlement was reached, and affected pensioners will be paid. The first lump sum will be paid to all pension fund beneficiaries on the 26th of December 2019, the second and third lump sum will be paid in January and February 2020 respectively. He mentioned that Transnet will meet with the applicants of the case in court in the following year. He confirmed that Capitec, Regiment and Coral did not act in the best interest of everyone, and that these companies have been sued. The proceeds from recovered monies will also be used to pay affected pensioners.
Ms M Letlape, Transnet Board, responded to the question asked by Mr Arnolds on when the Exco position will be filled. She confirmed that these positions which include a CIO, CPO, CAE and a Treasurer will be submitted to the Minister. She mentioned that interviews will begin on Monday the 2nd of December 2019. She confirmed that candidates for management positions have been shortlisted. The position for the Chief Executive for the Operations Division will be advertised. The Chief Human Resources Officer position cannot be advertised yet because the incumbent in the position is still under investigation. She mentioned that if the incumbent is not found guilty, he or she will be reinstated to the position. With regards to issues of transformation, Ms Letlape mentioned that Transnet is conscious of its obligations to transform its workforce. She mentioned that the company needs to improve with recruiting people living with disabilities.
Dr Molefe asked Mr Macdonald to respond to issues on Transnet’s internal controls.
Mr Macdonald mentioned that there were collusions that took place at Board level, where many of the irregular expenditure was approved by the previous Board. He confirmed that internal controls have been put in place to resolve and prevent this. He mentioned that the company has enough internal controls but that they need to be improved. To do this, the Board has resolved to appoint a Governance Officer who will assist with improving its internal controls.
Dr Molefe requested Adv Oupa Motaung, Transnet Board, to respond to legal questions relating to recovering monies from civil cases.
Adv Motaung mentioned that summons were issued to all entities that were involved, including Capitec and Regiments. He further mentioned that legal advisors were seconded to investigating parties to assist on these matters. Adv Motaung reassured the Committee that Transnet will monitor this investigation process and report to the Board. Lastly, he said that charge sheets were drafted and submitted to the National Prosecuting Authority.
Mr Macdonald responded to the Chairperson’s question on how the Board plans to regularise its irregular expenditure. He said that the Board has applied to the National Treasury for condonement of R8 billion and is awaiting the outcome of the application. If the National Treasury declines this application, the accounting authority (the Board) may agree to remove the irregular expenditure from its financial reports.
The Chairperson mentioned that the reasons why the Committee was emphasising irregular expenditure was because the South African Auditor General Report highlighted that irregular expenditure incurred by SOE’s was of great concern. The Chairperson mentioned that the Committee will be engaging with SOE’s to try and reduce irregular expenditure.
Dr Molefe agreed with the Chairperson but mentioned that Transnet is dealing with these issues. He mentioned that the Board has been asked to report on how many cases have been completed and how many are pending. He said that the details of the cases will be sent to the Committee. Currently, there are two former Acting Chief Executives Officers and the Chief Operating Officer for Transnet Pipelines of Transnet that are under investigation including former board members.
The Chairperson stated that the Committee will monitor SOE’s and is happy that Transnet is performing better compared to other SOE’s. He mentioned with concern that irregular expenditure needs to be improved and resolved and that the Board should seek Parliament’s assistance when needed. He notified the Board that the Committee may conduct informed or uninformed oversight at Transnet.
Ms Bebee mentioned that her question regarding a reduction on road freight was not answered.
Dr Molefe requested Mr Macdonald to answer this on behalf of the Board. He also asked Mr Macdonald to respond to how Transnet will maintain financially stability without seeking bailouts from the State.
Ms Letlape answered on behalf of Mr Macdonald. She emphasised that Transnet generates revenue of over R200 million every day.
Mr Richards responded to Ms Bebee’s question on how Transnet will reduce its freight from road to rail. He mentioned that although this has been the most challenging exercise for Transnet, it has secured the supply of 375 railways wagons that are expected to export Manganese. He expressed his confidence on the competence of these Transnet engineers and mentioned that these wagons will be built locally by engineers employed by Transnet.
The Chairperson thanked everyone for attending the meeting.
The meeting was adjourned.
Download as PDF
You can download this page as a PDF using your browser's print functionality. Click on the "Print" button below and select the "PDF" option under destinations/printers.
See detailed instructions for your browser here.