Transnet 2019/20 Annual Report; DPE BRRR

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Public Enterprises

18 November 2020
Chairperson: Mr K Magaxa (ANC)
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Meeting Summary

Video: Portfolio Committee on Public Enterprises, 18 November 2020

2019/20 Annual Reports
2020 BRRRs

The Portfolio Committee on Public Enterprises met via a virtual platform to finalise its Budgetary Review and Recommendation Report on the Department of Public Enterprises. The Committee discussed a number of recommendations for the Minister, including the improvement of controls and systems to ensure an unqualified audit report, the need to conclude shareholder compacts with all state-owned enterprises and the importance of ensuring that the R10.5 billion allocated to SAA be used for its intended purpose. The Report was unanimously adopted with the amendments made in the meeting.

Transnet reported that the 2019/20 financials were still being assessed but the audit was qualified and would be again in 2019/20 once complete. That did not suggest fraud by the management or the board; it was about technicalities. The issues causing the qualification dated back to 2011 and the board and company was dealing with state capture issues. Transnet was engaging the Auditor-General, National Treasury and the Department of Public Enterprises to find a methodology of ring fencing issues related to state capture. It was a complex matter relating to the Public Finance Management Act and other issues, such as supply requirements as per National Treasury directives. Talks were ongoing and Transnet had recently met the Auditor-General.

Overall, the performance of the entity was significantly below the threshold set by the Department of Public Enterprises and the prior year’s performance. Transnet had done well in financial stability but at the cost of too much cost containment which had had a negative impact. Revenue was up 1.3% to R75.1 billion but net operating costs were up 1.9% to R41.1 billion. Net profit was down primarily due to adjustments of R2.5 billion higher than the current year. Cash generated was R35.9 billion and that had enabled Transnet to leverage funds and avoid going to the shareholder for additional funding.

Another challenge was simply dealing with the consequences of state capture. That was why it was critical to ring-fence those matters and deal with them separately so that Transnet could move forward with a clean slate on all other matters. Stealing of cables in Gauteng was a huge problem. In respect of Transnet Pipelines, there had been an enormous increase in environmental remediation and rehabilitation costs due to an unprecedented increase in pipeline theft.

Members noted that the Transnet report was all about the recovery of costs approved during state capture. Had Transnet recuperated any funds that had been illegally approved during state capture? Had any steps been taken against officials who were responsible for fruitless and wasteful expenditure? How would Transnet be able to contain the element of state capture? What precautions had been taken to prevent such a situation in the future?

Members asked the Transnet board members what corrective actions were being taken against non-performance in the shareholder’s compact. What corrective actions had Transnet taken to address the concern of the Auditor that the necessary steps were not taken to prevent fruitless and wasteful expenditure irregular amounting to R108 million in 2019 and rising to R484 million in 2020? What would Transnet be doing about that problem?

Would Transnet be effective in respect of cost and time for heavy rail? Would Transnet be able to compete with heavy cargo transport on SA roads? There had been a decrease in tons from 226.3 million tons in 2017/18 to R215.1 million tons in 2018/19. What had happened? What was going to be done about security? Had Transnet engaged with the Department of Transport? Was there a plan? If not, how could Transnet invest in new infrastructure without adequate security? What positive proposals did Transnet have to address the issues?

Meeting report

The Chairperson greeted the Committee Members and everyone who was connected on the online platform.
There were two items on the agenda: firstly, the Transnet Financial Report and, secondly, the Budgetary Review and Recommendation Report (BRRR).

The Chairperson explained that Transnet had a technical issue and could only join the meeting at 10:00, so he proposed that the Committee begin by engaging the BRRR.

DPE Budgetary Review and Recommendation Report
The Committee Secretary stated that he had emailed the report that morning. He flighted the report on the screen and spoke to it.

The report addressed the state of the Department of Public Enterprises and each state-owned enterprise that fell under the oversight of the Portfolio Committee.

Section 10 addressed the recommendations to the Minister. He referred to the recommendations, inter alia:
-Ensure that the Accounting Officer improves controls and systems to ensure the department achieves an unqualified audit outcome and matters of emphasis from each year must be addressed in the subsequent year.
-Ensure that state-owned companies (SOCs) protect jobs, particularly highly advanced technical skills to advance the manufacturing capability of the state. SOCs should invest in labour intensive infrastructure programmes to create employment.
-Ensure that the Department follows through on cases opened with South African Police Services on corruption allegations at Alexkor.
-Ensure that shareholder compacts are concluded and signed.
-Ensure that the R10 billion allocated to SAA is used for the intended purpose, particularly the payment of severance packages and legal obligations.
-Review the SOC Business Model to enhance sustainability of the companies, which is revenue enhancement and cost containment.

The Secretary noted that the report ended with concluding remarks.

The Chairperson asked if the Content Advisor had anything to add.

Mr Rodney Mnisi, Committee Content Advisor, said that the Committee observations were included in every section throughout the report to provide reasons for the recommendations. He had nothing further to add.

Ms J Tshabalala (ANC) complimented the secretariat on the work done but suggested that 34 pages was very long and it was important to take care not to put everything into the BRRR so that the report can be focused and emphasise the crux of what had concerned the Committee and not make statements about various Ministers. She believed that it was necessary to list the challenges and concerns of the Committee from Day One. In future, the report should focus on strategic plans and the performance of the Department of Public Enterprises (DPE).

Ms Tshabalala proposed some amendments. She would give them to the Secretary in writing but she would note them for record purposes. She was satisfied with the beginning. She referred to: “2. Overview of the Policy Environment.  The OECD states that ”…as well as women are paying the heaviest toll of the crisis.”
She felt that the paragraph did not need to be there. It was a statement about other areas. The next paragraph was repetition so that had to be removed. The second last paragraph of chapter 2 had to be removed. She noted that there were lots of matters regarding the style of writing.

She noted that the comment about Alexkor. The Committee discussions had not suggested that it was not possible to save Alexkor.

Ms Tshabalala was particularly concerned about the section of the report referring to Eskom. The report referred to an unsustainable debt burden. She queried whether it was R480 billion or R408 billion.

A second concern was in the recommendations where reference was made to an allocation of R10 billion to South African Airways (SAA). The correct figure was R10.5 billion. She had checked the ATC.

Ms Tshabalala stated that she accepted the report with the amendments.

Mr S Gumede (ANC) agreed that Ms Tshabalala had made substantial contributions. He had noted some of the issues but he had turned a blind eye. In terms of procedure, he suggested that the Committee mandate the Committee whip, Ms Tshabalala, to sit down with the Content Advisor and the Secretary and make changes. The report should then be brought back to the next meeting for noting of the amendments – which should be highlighted so that Members could clearly see amendments. However, he suggested that approval of the report not be deferred to the next meeting.

Mr Gumede advised that some of the recommendations made the previous year, but which had not been achieved, should have been “lumped” into the current report so that those recommendations were flagged and the Department of Public Enterprises could pay attention to the recommendations and address them

Mr Gumede, too, was particularly concerned that the figure of R10 billion was cited. It was R10.5 billion – it had to be corrected or other political parties would point to a fluctuating figure.

He said that he had reduced his questions, so he would present his comments. His concern was Denel. In 2018/19, the Financial Statement indicated that Denel had generated R3.8 billion but had experienced a loss of R1.7 billion. In 2019/20, R1.8 billion was appropriated to Denel but the entity had had a loss of R1.7 billion. That was worrying. What were the lessons learnt when the first R1.7 billion was “lost”. He still did not know if it was embezzled, or what had happened to the money. He needed to know. He was worried that for two consecutive years, Denel had “lost” R1.7 billion.

Ms J Mkhwanazi (ANC) acknowledged the comprehensive work done by the Content Advisor. She recommended a couple of technical changes and then seconded the proposal to accept the report with the amendments made by Ms Tshabalala.

Resolution
Ms Mkhwanazi proposed that the report be adopted with amendments to be effected before sending it to the House. The proposal was seconded by Mr Gumede.

The Secretary noted that it was constitutionally in order to adopt the report with amendments to be effected.

The Chairperson noted that the DPE Budgetary Review and Recommendation Report, with amendments, was unanimously adopted by the Committee.

Transnet Financial Report
The Chairperson welcomed the Director-General (DG) of Public Enterprises and the team from Transnet and the Department. He explained that the Committee meeting should have started at 9:00 but the information had not been given to the Department and so the meeting had begun at 9:30 with the second agenda item. He welcomed Dr Popo Molefe, chairperson of the Transnet board.

The Chairperson requested the DG to introduce his team.

Mr Kgathatso Tlhakudi, Director-General, Department of Public Enterprises (DPE) introduced himself and his colleague and handed over to Dr Molefe.

Presentation on Transnet Financial Report
Chairperson of Transnet board introductory remarks
Dr Molefe began by offering his apologies for the fact that he would have to leave at 12:00. He was a delegate at the President’s Investment Conference and the organisers insisted that he attend in person. He stated that he would leave any further matters after 12:00 in the very capable hands of the CEO, her team and the board members who were present, including Mr Louis Leon von Zeuner, Ms Mpho Letlape and Ms Gratitude Ramphaka.

Dr Molefe stated that the Group Chief Executive Officer (GCEO) and the Group Chief Financial Officer (GCFO) would deal with matters germane to the Annual Report.

He presented a brief introduction to the presentation. The previous year, Transnet had reported reasonable results, although the audit was qualified. The issues causing the qualification dated back to 2011 and the board and company was dealing with state capture. Transnet was engaging the Office of the Auditor-General (AGSA), National Treasury and the Department of Public Enterprises to find a methodology of ring fencing issues related to state capture. It was a complex matter relating to the Public Finance Management Act (PFMA) and other issues, such as supply requirements as per National Treasury directives. Talks were ongoing and Transnet had met the AGSA two days ago. Transnet would become attractive to investors only to the extent that it showed investors that it could deal with finances appropriately and address the malfeasance but, unfortunately, those same issues continued to dog the company.

Another challenge, as often heard in evidence before the Zondo Commission, was the continuously changing dynamics of things that Transnet was dealing with in terms of state capture. That was why it was critical to ring-fence those matters and deal with them separately and move forward with a clean slate on all other matters.

While that was going on, Transnet received qualified audits but that did not suggest fraud by the management or the board; it was about technicalities. Funds were committed to projects that continued to run over a period of time, e.g. the 1064 locomotives would continue to be recorded as an irregularity until settlement was reached with the Original Equipment Manufacturer (OEM) in a SA court.

Going forward, the board remained committed and in due course Transnet should pay dividends to shareholders. Covid-19 in 2020 had been a setback – Transnet had tried to preserve cash in order not to approach the shareholder for guarantees and had relied on its balance sheet.

Dr Molefe pointed out that the last bailout that Transnet had required from its shareholder had been R3.9 billion and that was in 1999. Transnet would have to partner with private sector as doing business in SA could not be too costly.

Presentation by Transnet
The presentation was conducted by Ms Portia Derby, the GCEO and Nonkululeko Dlamini, GCFO.

Ms Derby highlighted that all critical posts had been filled by permanent staff. She explained that Transnet was attempting to separate all the divisions of Transnet so that the entity could understand where the entity was making money and losing money.

In terms of the Shareholder’s Compact, only 28 KPIs were achieved out of the 74 compacted KPIs. That represented an overall achievement of 38% for the 2020 financial year. Overall, the performance was significantly below the DPE threshold and the prior year’s performance. Transnet had done well in financial stability but at the cost of too much cost containment which had a negative impact.

The GCE explained that Transnet would be paying attention to skills development as it was currently a Level 2 B-BBEE organisation and wished to retain that status. The entity was considering sharing some of its products with smaller companies but there were some issues related to the procurement policy.

She admitted that Transnet Engineering was problematic where the main service constraint had been over-inflationary increases in products and service costs. Nevertheless, 400 wagons had been manufactured and delivered and there was improving rolling stock availability. The TransAfrica train was nearing completion.
There had been procurement issues regarding tug boats in the Ports Authority. There was a great opportunity to promote the Port of Ngqura as a regional trans-shipment hub in sub-Saharan Africa. However, there had been underinvestment in new equipment.

In respect of Transnet Pipelines, the stealing of cables in Gauteng was a huge problem. There had been an enormous increase in environmental remediation and rehabilitation costs due to an unprecedented increase in pipeline theft. Despite the pipeline being a multi- product pipeline, it was always diesel that was stolen. One thing that Transnet was looking at was the possibility of insider information being provided as to when the product was being moved. Too many people seemed to know when Transnet was moving product. However, the GCE expected a lot more arrests to follow current investigations.

Regarding Covid-19, Transnet had been lucky as board members had been ahead of the pandemic thanks to the financial knowledge and contacts of members and Transnet had set up a command centre very early in the process. The port sector was badly hit by Covid-19 and the importance of the port sector had become very evident. The GCE praised Transnet staff members who had left their homes and gone to the Western and Eastern Cape to assist where Covid-19 had hit staff.

Financials 2019/20
Ms Dlamini informed Members that her financial report related to a different timeline to the figures given by the GCEO.
 
Revenue was up 1.3% to R75.1 billion but net operating costs were up 1.9% to R41.1 billion. Net profit was down primarily due to adjustments of R2.5 billion higher than the current year. Cash generated was R35.9 billion which had enabled Transnet to leverage funds and avoid going to the shareholder.

Capital investments were up 3,5% to R18,6 billion; cash generated was up 2,1% to R35,9 billion; ratios showed a gearing of 47,6% and cash interest cover at 2,9 times mean that both were within loan covenant requirements; 2.7% of personnel costs were invested in training artisans, engineers, and technicians.

A lower tonnage had been transported in 2020 during the lockdown but staff had been kept on and so personnel costs were comparatively higher. Transnet was looking to manage overtime and other personnel-related issues, such as limiting travel by staff, as virtual meetings had been proven extremely successful.

Transnet had raised R11.8 billion and repaid R13 billion and all payments were made in respect of lenders.

In slide 21, the GCFO showed how Transnet was focussing on the PFMA. The qualified audit was as a result of the fact that the auditors were not convinced that all irregular expenditure had been reported. Transnet had been working on that issue since 2018 and significant reporting had happened, but some of the issues dated back to 2012. Transnet continued to strengthen control. It had been determined during the current audit that the remedial plan was good, but not strong enough to identify all issues.

Transnet was working on the audit qualifications. It had become important to ensure a separation between Finance and Procurement to address major issues there.

The GCFO informed the Committee that the 2019/20 financials were still being assessed by the auditors so Transnet was in a closed period. She would come back to Committee and report on the audit, once it had been finalised

Discussion
Mr Gumede accepted and noted the report – it wasn’t as bad as he had expected. He was impressed with the programmes that the entity was undertaking. Transnet seemed to be up to date with repayments.

He was concerned about the irregular expenditure eight years since the irregularities began in 2011/12. Why did the internal auditor or the external auditor pick it up until 2018? Why were the auditors being paid when they did not pick up procurement irregularities?

Mr Gumede’s other concern was the element of state capture. How would Transnet be able to contain it?
Members feared that it would be their Committee that had killed the SoEs whereas Members would like to leave a legacy of weak SoEs becoming stronger.

Mr E Marais (DA) said that it was all about the recovery of costs approved during state capture when they should not have been approved. The previous Committee had spent long hours engaging with people including the CEOs of Eskom and Transnet. What precautions had been taken to prevent such a situation in the future?

He wanted to highlight the issue of road versus rail transport. It was all about cost and time for the client. Would Transnet be able to compete with heavy cargo transport on SA roads? Of course, another problem was that roads were deteriorating at a fast pace as a result of the transport of heavy materials and goods.

The Chairperson noted that that Mr Marais’s speech had been distorted as a result of a poor connection.

Mr Marais repeated his questions. Would Transnet be effective in respect of cost and time for heavy rail? Had Transnet recuperated any funds that had been illegally approved during state capture?

Ms Mkhwanazi appreciated the comprehensive report. Had any steps been taken against officials who were responsible for fruitless and wasteful expenditure? She asked the board members what corrective actions were being taken against non-performance in the shareholder’s compact.

Ms C Phiri (ANC) applauded the Department and Transnet for doing well under the circumstances as the Covid-19 pandemic had been very challenging, but she stated that the Committee was observing the same sequence as in the previous year. Why could Transnet, again, not find documents in time for the auditors?

Ms Tshabalala appreciated the report that was well-presented by the GCFO. She was concerned about specific issues regarding corrective actions. The Auditor-General had deemed that Transnet had not taken the necessary steps to prevent fruitless and wasteful expenditure amounting to R108 million and R484 million in the past two years, as disclosed in Note no 39 in the consolidated and separate financial statements (as required by the PFMA). The majority of the fruitless and wasteful expenditure was caused by poor contract management and poor delegation of authority. The Auditors could not obtain sufficient appropriate evidence that disciplinary steps had been taken against those officials as required by section 51 of the PFMA because records were not maintained on actions taken regarding irregularities. Disciplinary steps had not been taken against the officials who had incurred or permitted fruitless and wasteful expenditure. Why had disciplinary steps not been taken? The Committee was worried about fruitless and wasteful expenditure. If there had been deviations, Transnet had to tell the Committee. What would Transnet be doing about that problem? Moving forward, the Committee would want to interact with the Chief Procurement Officer, the Audit Executive and the Group Chief Executive on the matter of fruitless and wasteful expenditure.

She referred to matters of procurement and contract management, i.e. three contracts for which there was no auditing evidence. Management had indicated that the information had been requested from a storage service provider but could not be found. There was no evidence for the other two contracts. Similar concerns had been reported in the prior year. What action is being taken to address that finding? What corrective action is being taken regarding non-performance in respect of the Shareholder Contract? What was the board going to do? What steps did it intend taking?
 
Ms Tshabalala noted that Transnet wanted to spend R153.5 billion on rail, port and pipeline. Those were part of the infrastructure plans that the President had spoken about in the Recovery Plan. How would Transnet avoid irregular expenditure during the expenditure of those funds? Would more local companies be benefitting? What was status quo of B-BBEE moving forward and the court order around that matter? She understood that the report was on the current financial year, but how was Transnet going to deal with that moving forward?

She also noted that the Department was investigating the implications of giving effect to the National Ports Act of 2005. There had been a decrease in tons from 226.3 million tons in 2017/18 to R215.1 million tons in 2018/19. She wanted an explanation as she was keen to understand what had happened.

Ms Tshabalala stated that the company had generated R6.6 billion profit in 2018. To what end did it benefit the operations and the challenges? What was Transnet going to do about the dilapidated infrastructure and the stealing and corruption? What was going to be done about security? Had Transnet engaged with the Department of Transport? Was there a plan? If not, how could Transnet invest in new infrastructure without adequate security?

She noted that, when presenting, the GCEO had spoken about Transnet experiencing challenges with the private sector and wanting to approach the shareholder in that regard.  What was the intention of Transnet in approaching the shareholder or Cabinet regarding private participation? Were there any conditions that Transnet was considering? Who would benefit from that engagement?

Ms Tshabalala asked about the 2.7% of personnel costs being spent on training artisans, engineers and engineering technicians. Where were those people who had been trained? Could they be traced? It was good that Transnet was engaged in training as the unemployment rate was so high in the current times. She was proud of Transnet but what was being done with the trained people. Did Transnet follow up on those on whom it had spent so much money training? Were they employed by Transnet or elsewhere?  Was there value in the training?

She ended with her concern about the theft at Transnet, especially the theft of diesel, and about the amounts of irregular expenditure in the Transnet over time, especially in the Ports. Did Transnet have any positive proposals to address the issues? What could Transnet share with the Committee?

Ms Dlamini responded to Mr Gumede’s questions, which she noted cut across the concerns of several Members. It was an issue that pained Transnet a lot – a qualified opinion three years in a row and on the same issues. Those issues dated back to 2011/12, but the reporting approach had not been strong so the irregularities had occurred but were not reported. 2018 saw the start of the new board and the audit showed the strides made by the board. Since 2018, the Auditor-General had also paid greater attention to Transnet and therefore, reporting had begun to improve. It was the backlog that was causing the qualification. The new contracts since 2018 were much more compliant and, going forward, if any reporting did occur, it would be related to legacy issues. Contracts in Transnet were in force for at least five to seven years but, as per PFMA, irregularities had to be reported when they occurred. If Transnet had not reported those irregularities when they had occurred and the contract continued over the years, the entity had to continue reporting those irregularities that had begun years ago. That had forced Transnet to open the balances of prior years to resolve matters. Transnet was attempting to automate contracts. New contracts were less non-compliant even as they cleaned up.

She addressed the fruitless and wasteful expenditure. In attempting to deal with those, a process had been instituted whereby Exco required a monthly report from the operational divisions. Some of the issues relating to consequence management required training, which was why training was significant. Page 128 of the financials showed irregularities at R108 million which was high, but was significantly reduced from the R484 million in the previous year.

Adv Sandra Coetzee, Legal Executive, Transnet, addressed the question of consequence management. It was not just a matter of taking disciplinary action and recovering losses but also training and an elimination of root causes that led to irregularities. Transnet was updating its material for training related to the PMFA and training would be rolled out to all employees and would be mandatory on an annual basis.

She referred to the controls already mentioned and stated there was a need to recognise that some of the expenditure occurred year-on-year had emanated from a single procurement event and would continue to be reported as irregular expenditure unless the contract was terminated or condoned by National Treasury. Operational requirements dictated that contracts had to be continued where there had been no fruitless or wasteful expenditure. Some contracts were non-compliant but did not result in fruitless and wasteful expenditure. She clarified that not every instance of irregular expenditure had resulted in fruitless and wasteful expenditure or was a consequence of fraud and corruption. They were non-compliant in matters such as not reporting to the CIBD (Construction Industry Development Board).

Adv Coetzee added that Transnet was going through the process checking line-by-line so that Transnet could determine whether fruitless and wasteful expenditure, or fraud and corruption, had been incurred in any of the contracts. The exercise would be completed before the next financial year. National Treasury Note 2 of May 2019 permitted SoEs to apply for condonation following a failure to report, etc. in order to stop the continuation of irregularities expenditure. Transnet was still detecting instances of irregular expenditure. For National Treasury to condone the irregularities, Transnet had to show that it had completed all investigatory processes and recovery of losses and the referral of criminal complaints, where applicable. Transnet was strengthening its relationship with the law enforcement agencies to improve its ability to follow up on disciplinary action, the recovery of losses and criminal prosecutions. Transnet had established a co-ordination forum with the law enforcement agencies and met on a regular basis to ensure that their combined efforts achieved traction to fulfil Transnet’s obligations so that it could get the irregular expenditures condoned by National Treasury.

She informed Members that during the 2019/20 financial year, Transnet had taken disciplinary action against 14 senior managers, who had mostly left Transnet, but, nevertheless, some of the disciplinary action was still underway, either through arbitration or in the Labour Court. As reported in the media that week, assets had been seized from one of those senior managers by the Special Investigating Unit (SIU). That was the result of the collaboration between Transnet and theSIU. Through such collaboration, Transnet would intensify its investigations, recovery of losses and, where necessary, criminal proceedings.

Dr Molefe responded to the question regarding the recovery of monies. As previously reported, R680m had been recovered from China South Rail (CSR), which was due to monies paid to CSR in advance and Transnet had been due to recover R180 million from Regiments but, unfortunately, an action to liquidate Regiment occurred before Transnet had received its money, but the case was continuing. Letters of demand had been issued to a number of executive with regard to monies lost as a result of their gross negligence. There were other monies that were being pursued. It was an ongoing process, especially pertaining to the interest swops and Transnet pension funds.

Dr Molefe requested the Chairperson to excuse him so that he could attend the Presidential Investment Conference.

The Chairperson acquiesced.

Ms Gratitude Ramphaka, board member, informed the Committee that the GCEO had introduced an almost new management team and that was evidence of the intention of the board to clean up Transnet.

Ms Derby addressed the question of road versus rail. Rail was competitive at any distance greater than 300km. The regulations in SA were such that road did not pay its full cost, such as pollution, etc. and therefore was, obviously, cheaper. Recently, the President’s statement allowed the private sector access to the freight rail transport system. Management was still trying to unpack the system to understand what it meant. Transnet was happy for private sector participation but all FR providers had to belong to the same bargaining council because personnel costs had to be the same. Such a system would not work if the staff were paid differently. In principle, there was no difference between how the private sector or the public sector operated, and the public sector should not be anti-competitive. However, the private sector should play by the same rules as the public sector. The public sector could not take all the socialising risks while the private sector took all the rewards. That would be insane. Transnet would insist on that fairness in terms of risk and profit and, if not, it would resist private sector participation and promote the continuation of the state service. Transnet supported the regulations regarding the Transport Regulator. If there were private sector involvement there could be greater collaboration; it would create greater stimulus and more jobs. Transnet had reached out to private companies to assist Transnet during the Covid-19 situations and many companies had assisted, but the robustness of the system would improve if there were not a state monopoly.

Ms Derby agreed that there had been irregular expenditure but people did not always realise that fruitless and wasteful expenditure was far worse than irregular expenditure. The review of procurement processes were being simplified for staff but sometimes did not comply with the CBID rules. There was a rule that tenders from a certain size had to involve smaller companies. That had to be resolved. Sometimes the entity contravened PFMA and the choice was irregular expenditure or fruitless and wasteful expenditure. Rule 54 of the PMFA contained a requirement that the shareholder had to respond within 30 days but there was no requirement for the CPO (Chief Procurement Officer at National Treasury) to respond within 30 days. The private sector did not have the additional steps of adhering to the PMFA and getting permission from the CPO. Their only concern was to win business and to win it as fast as possible.

She explained that if Transnet did not get a response from the CPO within 30 days or even 6 months, it could not go ahead without incurring irregular expenditure.  Transnet had approached the CPO regarding the 208 locomotives for which it needed storage but had not yet received a response, months down the line and therefore could not meet demand. The problem was not demand; it was supply. There were other problems of cable theft, etc. for Transnet but, as an SoE, the rules of PMFA further hampered SOEs. However, she agreed fully that Transnet needed to resolved fraud and irregular expenditure as well as fruitless and wasteful expenditure. Customers were mad at Transnet because it was not reliable and it was not reliable because it had other things to respond to.

Concerning the documentation that was not ready for the auditors, the GCEO explained that the Transnet IT system was not up to date. All IT systems had previously been outsourced. Transnet needed at least some internal capacity as it was trying to digitalise all documents. The process was immense and would take at least three years to complete. 13 000 contracts had to be reviewed and checked to determine whether they were irregular and whether Transnet was paying the right price. Transnet had determined that, in future, it would buy directly from manufacturers and not through third parties or middlemen.

She added that that tied up with Ms Tshabalala’s question on the industrialisation process. Six months was needed to work with the Transnet R&D team that had a very deep knowledge of the capability in SA and was very interested in supporting SMMEs. She could have a separate discussion about that matter.  The changes being made would ensure a stimulatory effect on the industry.

Ms Derby responded to the question about why Transnet Freight Rail’s (TFRs) volumes were going down. The problem was partly a result of the fact that the Transnet Market Demand Strategy (TMDS) of a few years ago had forecast  a much higher economic growth rate than turned out to be the case and so the investments were way above the forecast growth rate and the volumes that had been forecast, never arose. Transnet was determining the total capacity of the entity and on the back of that the volumes that Transnet could meet given the constraints of local availability and despite cable theft, etc.

Concerning the training, Transnet trained a lot but did not train enough given the installed capacity to train. Transnet had 22 training centres across the country but the 3 000 seats had never been fully used. Given the unemployment rate, Transnet was aware that there was an urgent need to develop skills where people able to use their hands. However, Transnet could not employ those trainees. At 56 000 employees, Transnet was over-staffed. The intention was to train to a standard where, as other players came into the system, they could find skilled personnel. A senior executive had been appointed to consolidate all the training centres under a single academy so that Transnet would be able to optimise the substantial training budget. To retain the Level 2 B-BBEE status, the entity had to spend around R800 million on training. Some of the trainees had been employed but many had not.

In respect of the issue of dilapidated infrastructure and cable theft, Transnet was working closely with PRASA to ensure coordination in dealing with cable theft. Both organisations were looking at their security strategies. Technology would be playing a major role in the security strategy. Since drones had been introduced, there had been significant success in combatting fuel and cable theft.

Ms Tshabalala advised the Transnet Legal Executive to pay attention to National Treasury Note 39 regarding the requirement for separate financial statements as the majority of irregular expenditure could be found there. Poor contract management and poor delegation was largely to blame and she should pay attention to that. She believed that the GCEO and her team could do it.

The way in which the PFMA hampered Transnet as opposed to the private sector had to be addressed to prevent another qualified audit. She had heard the issues regarding PMFA and National Treasury which slowed matters down and the Committee needed to look at that being corrected. She understood that the reporting line to National Treasury had to be clarified. She hoped that in future they celebrated an unqualified audit.

Regarding the President’s private-equity partnership, Ms Tshabalala liked the way in which the GCE had approached the matter. She agreed that a fair share of the risks should be carried by the private sector. Transnet alone could not carry the burden of risk.  She wanted, from the GCEO’s side, transparency of the private-public equity partnership so that the Committee could have oversight of the matters and not be on the back foot. She was confident and thanked the entire Transnet executive.

Mr Gumede said that a serious issue had come from Group CEO. She had said that irregular expenditure was better than fruitless expenditure. The Committee could perhaps assume that, at times, the irregular expenditure was deliberate. Financially, she was correct but it was not something one could say on such a platform, even if it were true. She should not aim at undertaking irregular expenditure, although she could defend irregular expenditure against fruitless and wasteful expenditure. What did she mean when money was “lost”? The question of irregular expenditure could lead to more serious things.

Ms Derby responded to Mr Gumede. She explained that Transnet managed irregular expenditure as well as fruitless and wasteful expenditure. Transnet dealt with foreign funders and people both in and outside of SA did not understand Irregular expenditure. They thought that irregular expenditure was fraud and corruption. She was not suggesting that fruitless and wasteful expenditure had to be reported but, as a competitive entity, Transnet could not stop the movement of goods and bottleneck the economy because the entity had to wait months for approval. She wished to have a closed session to discussion the matter with the Committee so that she could talk Members through some of the challenges that SoEs faced in comparison to private companies. Some of the private players were listed on the JSE and disclosure was the same as it was for Transnet, so there was no intention to hide information. She wanted to be upfront with the Members.

She thanked the Committee for the opportunity to present to the Committee.

Ms Letlape, board member, said that the GCEO needed the help of the Committee to convince National Treasury, the AGSA and to another degree, the Department that Transnet got into irregular expenditure because of the time factor as it had to wait for approvals or decisions for inordinate lengths of time, which meant that Transnet could not continue operations. For example, a contract was coming to an end but the responses to requests to replace the contract took so long in coming that Transnet could not continue to operate. She agreed that Transnet and the board should speak to the Portfolio Committee but Transnet should actively ask for the Committee’s assistance. She asked the GCEO to provide examples of how Transnet was hampered by PFMA.

Ms Derby gave an example of the situation when people punctured the pipeline and stole fuel which spilled and created an environmental hazard. There had been more spills in the current year than ever before so Transnet had used up the budget for cleaning spills and yet spills had to be cleaned up in terms of the Environmental Management Act. Transnet had written to National Treasury and asked for R168 million but National Treasury said it could only spend R50m. Transnet knew that was insufficient money but  the entity could not have a new contract when a previous contract was still running. There were environmental issues and even communities in danger, so Transnet had to decide at that point whether to incur irregular expenditure or not.

Mr Tlhakudi stated that what needed to be said had been said. The Department was quite aware of the challenges that Transnet faced in dealing with state capture and also how the new team in Transnet was burdened with the history of the company, so one of the challenges was to address the irregular expenditure. Some areas of how irregular expenditure was reported was the topic of ongoing discussions between the Department and National Treasury and how requirements could be changed so that the new team at Transnet was not burdened with history of the entity. The Department knew that there were very difficult challenges that faced the executive and the board. He was confident that there would be better results in the future. He thanked the Chairperson for the opportunity to present the Transnet 2019/20 Annual Report.

Committee Chairperson
The Chairperson thanked Transnet for the presentation. Members appreciated the financial improvements at Transnet. He was mindful that some of the issues had to be resolved and he hoped that the Zondo Commission and the NPA would deal with as many issues as possible. Most of the wrongful actions had taken place some time ago and not during the term of office of the Sixth Parliament. The Committee was in an administration that had to deal with mopping up and cleaning up the problems caused by the previous administration. Members were sensitive or concerned about some of the things that they heard but they appreciated what was happening in Transnet. They appreciated the aggressive commitment of the executive. It was one of the better SoEs but one should not get too comfortable as Transnet was central to the economy of the country.

He had noted the commitment of the GCEO to have a closed session, i.e. in camera, to discuss some of the issues that caused Transnet to take difficult decisions. Members could then probe as much as they wanted and the Executive would be free to respond without hesitation about sensitive matters. He wanted the executive to explain so that the Members would be empowered. Transnet had to go forward and not reverse. He appreciated the presence of Dr Molefe and the members of the board and reminded them that the Members were committed to help Transnet become a model for the country.

Concluding remarks
The Chairperson thanked Transnet for the briefing and the Members for their contributions and engagement.

The meeting was adjourned.
 

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