Safcol Annual Report 2021/22; with Deputy Minister

Meeting report

SAFCOL's 2021/2022 Annual Report

Mr Tsepo Monaheng, Chief Executive Officer (CEO), South African Forestry Company Limited (SAFCOL), said that the year under review had been a good one, but it was not without its challenges. It was important to highlight the value creation that SAFCOL had to offer, and the scope of the report would show that. The presentation would include a brief highlight of the entity's operations and the companies in which SAFCOL owned shares. He added that SAFCOL had been working on the transfer of shares.

SAFCOL's operations had not changed. It was responsible for 189 000 hectares of forest land, of which only 121 000 hectares were suitable for planting. It had been ensuring that this asset was managed sustainably, but it needed access to more fertile land in order to reach its targets

SAFCOL had moved into phase two of its long-term strategic plan. Some of the activities in phase 3 would prepare it for phase 4, which included growing its market share and revenue market streams.

He said SAFCOL achieved 86% of the shareholder’s compact while maintaining a healthy balance sheet and cash position. It had maintained a safety, health and environmental performance culture and because of that, no fatalities were recorded in the year under review. It also achieved the lowest disabling fatality rate ever recorded. It had entered into a long-term lease agreement with the Department of Forestry, Fisheries and the Environment (DFFE) and one Communal Property Association (CPA).

SAFCOL introduced medical aid for its employees in January, and invested R20 million in their training. R4 million was invested in bursaries, and seven black women-owned suppliers who were previously enrolled in the short learning programme with the University of Mpumalanga had been able to obtain silviculture contracts and create and sustain 1 693 jobs.

Financial performance

Mr Monaheng reported that SAFCOL's revenue had increased by 33% to R1.2 billion, and their operating profit from R40 million to R387 million. Profit after tax had improved from a loss of R45 million to a profit of R84 million. Overall, irregular annual expenditure had been reduced by 48%, to R60 million.

He reported that SAFCOL had received an unqualified audit opinion from the Auditor-General of South Africa (AGSA). It had implemented all the recommendations from its forensic reports and improved its broad-based black economic empowerment (B-BBEE) level from Level 4 to Level 2. Among their challenges were their ageing infrastructure, timber theft, limited access to more land with fertile soil, and minority shareholdings.

Mr D’Shorne Human, Chief Financial Officer (CFO), SAFCOL, said that the financial year under review had been exceptional, and should be used as a benchmark for future financial years. The exceptional performance was because of their biological assets and their ability to reduce their discount rate. Financial institutions could now see that SAFCOL was not necessarily a high-risk entity, because they recognised their improvement over the years and the strength of their balance sheet and income statement. SAFCOL was moving in the right direction and would continue to identify the levers that they could pull to reach and surpass their targets.

See presentation for further details

Discussion

Ms J Tshabalala (ANC) asked the Deputy Minister who the acting chairperson of the SAFCOL board was, now that its chairperson had been appointed as the chairperson on the Board of Eskom. She said his move to Eskom indicated that he was skilled and had the proper prerequisites to lead an entire entity. She asked the Deputy Minister what steps the Ministry would take to ensure that a qualified and capable leader was appointed.

She congratulated SAFCOL on receiving an unqualified audit opinion from the AGSA, and asked the CFO what would be done regarding the consequence management on monitoring processes and things that had not been implemented, including the matter of targets that had not been achieved. She asked what would be done to ensure that there was a continuous improvement in equity.

She asked the CEO and the Department of Agriculture what processes had been put in place, since 57% of the land owned by SAFCOL was subject to land claims. What had SAFCOL done to combat the issue of timber theft since it had always been a serious threat? Lastly, she added that the cutting down of trees contributed to climate change and asked how it would diversify its income streams, considering that the country was transitioning into a green economy, whereas most of SAFCOL’s revenue depended on the sale of logs. She asked how it would mitigate the contribution of deforestation to climate change.

Mr G Cachalia (DA) asked that the Committee be provided with an update on the outstanding land claims and how they would potentially affect the profitability of SAFCOL. He commended the profit of R84 million, but highlighted that South African Pulp and Paper Industries (Sappi) had made USD$199 million (approximately R3.5 billion) in the third quarter. Given SAFCOL’s and Sappi’s success in the same sector, he asked if SAFCOL had any specific plans to corporatise SAFCOL to maximise profits. He asked if they had any plans relating to the diversification and expansion of the state-owned entity (SOE). Lastly, he asked if the Department had assessed and investigated what SAFCOL was doing right regarding its governance culture and operations that other under-performing SOEs were not doing.

Mr S Gumede (ANC) commented that SAFCOL’s performance was stellar. It was commendable that SAFCOL had grown by 12% in a period when other SOEs were struggling. He commended their expansion, introduction of different programmes, medical aid, and overall growth strategies. SAFCOL needed to be encouraged at all times to ensure that they did not lose track.

He recalled that they had once expressed their wish to expand, and asked whether they had put this wish aside or not. Considering the serious nature of what they were doing, he suggested that an SOE forum be formulated so that all of SAFCOL’s experiences, success and learnings could be shared with other SOEs. His only concern was SAFCOL’s ability to sustain its performance.

Mr F Essack (DA) asked SAFCOL to be more transparent with their public procurement processes. He referred to its return on investment, and commented that it was remarkable. He also commended their reduction of irregular expenditure to R60 million, but was concerned as this was still a lot of money, and very high for an institution that had produced a decent report. Lastly, he asked for an update on the forensic report that had been mentioned in the presentation.

 Ms J Mkhwanazi (ANC) commended the performance, management, and progress of SAFCOL. She asked for an update on the Timbadola investment project. Considering that one of the mandates of SOEs was to develop skills and curb unemployment, she asked SAFCOL for their target of hiring female workers and people living with disabilities. She also asked how they were planning on tackling the issues raised by the AGSA, especially the monitoring of financial compliance. Lastly, she asked the Deputy Minister if he could take any lessons from the performance of SAFCOL to share with other SOEs.

Mr N Dlamini (ANC) commended SAFCOL’s performance and asked for an update on the issue of land claims and how they would affect the entity in future.

The Chairperson also commended the Deputy Minister on the work done by SAFCOL. He added that SAFCOL proved that SOE s were not inherently inefficient and corrupt, and that the state was indeed capable of running public entities while ensuring that they were profitable for the broader society, and not for a small minority. Its performance indicated that South Africa could expect an improvement at other struggling SOEs like Denel and Eskom if they learnt from SAFCOL. Privatising these struggling entities was not an option, since that would be playing into the hands of the people who had contributed to the problems the entities were currently facing. Those individuals intentionally created problems at SOEs and then moved to be on the private sector side.

Mr Cachalia said that the Chairperson’s opinion on SOEs was his personal opinion, and not necessarily the Committee’s.

Mr Phumulo Masualle, Deputy Minister of Public Enterprises (DPE) responded, and told Mr Cachalia that his opinion excluded the DA, and was that of all Members of the ANC, which were the majority in the Committee.

Responses

Deputy Minister Masualle said that an announcement of the new chairperson would be made shortly, since stability and continuity of the Board of SAFCOL had to be maintained. They would consider Board members, and augment the Board by drawing expertise relevant to the sector and its immediate challenges. There could be an appointment of an acting chairperson of the Board, so there could be finality on the matter.

Ms Keneilwe Mabena, Forestry Oversight Manager, DPE, said that her Department, together with the Department of Land Reform and Forestry, had worked extensively on the matter of land claims, with some delays along the way. The delays had negatively affected SAFCOL, and they had scheduled a meeting with the Land Claims Commission on how they could speed up the process and be included in the Forestry Master Plan. She would come back to the Committee with an update regarding this matter.

She responded to Ms Tshabalala’s question on SAFCOL’s contribution to climate change. She told the Committee that SAFCOL was one of the lowest contributors to climate change because they were not vertically integrated, and they had only less than 3% of unplanted land.

A delegate from SAFCOL said that the entity made a significant impact as an organisation that contributed to the sequestration and reduction of emissions through trees' ability to function as carbon sinks. She added that the carbon tax made provision for companies to reduce their emissions through investing in activities that reduced emissions. It was important for SAFCOL to keep track of the latest climate science, particularly the long-term projections regarding the impact of climate change, to ensure that SAFCOL was well prepared for any negative impacts, such as fire and drought. She said that the expansion of forests at SAFCOL was done in a manner that was climate-proof, to minimise damage.

Mr Monaheng responded to Ms Tshabalala’s question on consequence management, as it had been highlighted in the AGSA's report that the implementation of consequence management was not visible. He explained that an independent company had been appointed to investigate who was responsible for SAFCOL’s irregular expenditure. The company had given them a report on the matter and initiated consequence management processes with those identified as being responsible for the irregular expenditure.

He agreed with Ms Tshabalala regarding stretching their targets from 80% to 100%.

He responded to Mr Cachalia’s question and his comparison of SAFCOL’s profits to those of Sappi by explaining that more profits were made with value-adding products. Logs did not produce large profit margins, and SAFCOL would be able to compete with Sappi if they were not reliant on the sale of logs to make a profit. They were working hard on the 50:50 strategy to balance the scale and ensure that 80% of SAFCOL’s profits were not only from logs.

He said that the SAFCOL had looked into offshore growth in the Southern African Development Community (SADC) region. This had been put on hold to strengthen SAFCOL in South Africa first, and ensure that growth was built on a stable foundation. This would be considered again, seeing that SAFCOL was performing well.

He said SAFCOL was spending a lot of money on security to curb timber theft. They were forming relationships with communities that benefited from forestry, because they were closer to the timber theft operations.

He explained that R59 million of the total R60 million in irregular expenditure was from activities in past financial years, and only R1 million in irregular expenditure had been incurred in the 2021/22 financial year. SAFCOL was moving towards having no irregular expenditure at all.

Mr Monaheng said that the speed at which the Timbadola investment project was moving was very frustrating. A bioenergy plant would be built to supply heat and electricity to ensure that SAFCOL had a stable power supply. He added that SAFCOL was in the process of appointing an independent company that would manage the building of the bioenergy plant and the Timbadola investment project.

Mr Human said SAFCOL had an analysis structure in which three key drivers of their profit were identified, scrutinised and monitored every quarter to find ways of improving the total return on equity.

He said that Sappi was the benchmark when looking at SAFCOL and its profits, but another entity that was on par with SAFCOL had been identified and was used to make comparisons. SAFCOL would continue striving to be as profitable as Sappi, using their export strategy and revenue diversification. They would ensure the sustainability of SAFCOL’s performance by closely monitoring costs and income, and ensuring that budgets were not exceeded.

A lot of compliance was shown by the committees that played a part in its procurement processes. SAFCOL had to demonstrate compliance by taking more time to look at the quotes they received. They wanted to try and optimise what they put into the procurement scope process and put together a policy which specifically dealt with individuals who did not follow the processes in a principled manner.

SAFCOL used a simple metric to calculate and benchmark their human capital return on investment. Their operating profit was divided by their employee costs, and they looked at how much profit was made through investing in employees. They spent R400 million on employee costs, resulting in under R400 million in operating profit.

Mr Human said SAFCOL had compiled an action list, and 90% of all the findings in the audit had already been closed. They had proceeded with consequence management actions. The remaining 10% was related to annual processes that could be concluded only at the end of the year. SAFCOL had also drafted a policy which included new and improved consequence management action.

The Chairperson thanked SAFCOL on behalf of the Committee for their continuation of improving the capacity of the entity. He also thanked the Deputy Minister for his central role in the success of the meeting.

The meeting was adjourned.