Department Strategic Plan and Budget: briefing by Director General

Meeting report

PUBLIC ENTERPRISES AD HOC COMMITTEE
9 June 2004
DEPARTMENT STRATEGIC PLAN AND BUDGET: BRIEFING BY DIRECTOR GENERAL

Chairperson: Mr B Martins (ANC)

Relevant documents
Department presentation
Minister's Budget Speech of 14 June 2004

SUMMARY
The Director General gave a presentation which was a follow-up to the Minister's briefing the previous week. He focused on the issue of restructuring. The discussion raised these issues:
- huge increase in department personnel costs
- how the BEE Act would be translated into concrete terms
- strategies to connect the second economy to the benefits of the first economy
- gearing of Spoornet
- financing of South African Airways new planes
- the log process of restructuring of Eskom
- privatisation had to be linked with competition
- the time frame for the restructuring of the Airports Company South Africa (ACSA)
- the perception of the investing community that the programme of privatisation was on hold.

MINUTES
The Director General, Mr M Mokeyane, went through the Powerpoint presentation (see document). Certain slides were left intentionally blank as these dealt with strategy and policy positions which he preferred to leave for the Minister to outline in his Budget Speech of 14 June.

Discussion
Mr I Davidson (DA) commented that because key elements of the presentation were left blank it would not be easy for the Committee to form an opinion on the budget. The questions that they needed to ask were not being answered by this presentation. For example, how is infrastructure development going to be achieved? What is the mixture of debt and equity? How is the debt and equity going to structured? What businesses would be restructured or exited? Was it going to be full divesture or public private partnerships (PPPs) and what type of social compacts and regulatory regime were going to be put in place? However he did ask for an explanation for the huge increase from R37 to R56 million allocated for personnel costs and professional consulting fees

The Chair noted that even though there were blank slides in the presentation, the Committee should feel free to pose questions in terms of its oversight function.

Mr Mokeyane replied that the strategic shifts from 1 April 2003 with the department moving from two to three branches caused the spike in the personnel costs. The performance monitoring and benchmarking branch had been upgraded in status and was split into two divisions in order to attain the objectives in shareholder management.

Ms P Mnandi (ANC) requested clarity on whether the figures on Slide 33 represented the overall budget or individual aspects of the budget.

Mr C Frolick (ANC) noted that black economic empowerment over the past five years had mainly been symbolic and that the BEE Act was broad in nature. He asked how the BEE Act would be translated into concrete terms in moving towards its objective for broad based black empowerment in the light of the emphasis on infrastructure development. How would the second economy be tied into the benefits of the first economy? What strategies would be put in place?

Mr Mokeyane replied that Slide 33 was a summary of the entire budget. In terms of BEE, he spoke of the great energy that had been infused into the departments since the new Cabinet and there was a specific vehicle that had been agreed upon primarily among three key departments of government. The Minister would speak about this specific vehicle that would address the issues of BEE in relation to state owned enterprises. That vehicle is linked to the issue of tying the second and first economy and for making opportunities for participants in the second economy to jump into the first economy. And also the increased levels of public infrastructure investment are aimed at addressing that issue

Mr Davidson said that one gets an indication of what government intends doing about Portnet on the issues of separating the ports authority and concessioning. However Spoornet was the interesting one as that was where there had to be major changes in terms of restructuring. He had read that R42 billion would be required over the next fifteen years to refurbish. This would require raising of debt as the Minister had indicated but it must also indicate private sector involvement on a large scale. If one looked at that figure and at the current gearing of Spoornet and the Treasury statement that it would not stand behind bonds issued by parastatals, then the gearing of Spoornet becomes very important. To raise money with the reasonably high gearing that it already has, almost puts it beyond the market. He asked for a comment on this. He moved on to South African Airways and asked how the R6 billion required for restructuring the pension fund and also the purchasing of new planes, would be financed. Was it also going to be by way of gearing? He mentioned the inordinately long time that the restructuring of Eskom was taking. He appreciated the delicacies of getting it right but what was important was the issue of introducing competition into the system at the same time. He had a problem with PPPs as there was no introduction of competition and thus your maximum efficiencies did not come through. He asked how far was the review of candidates for divestiture. He referred to the example of the divestiture of Telkom which was a successful listing but its major failure was that no real benefits were coming through to the consumer as it operated as a privatised monopoly. One had to ensure that that type of scenario did not happen with Eskom.

Mr Bekker noted that Slide 8 no longer mentioned Telkom. He asked if once listed, are companies such as Telkom no longer a concern of the Department of Public Enterprises because the state was retaining a substantial amount of shareholding in that particular company.

Mr Mokeyane said Telkom remained under the auspices of the Ministry of Communications. There was an agreement that in terms of the listing of Telkom, Public Enterprises could execute that listing but the shareholder was said to be the Minister of Communication. That is why Telkom does not appear on Slide 8.

He said that government was grappling with the issue of administered prices and investigating this and recognised that this issue needed to be addressed. The purpose of restructuring was not to substitute a public monopoly with a private monopoly. A timetable existed for this matter to be finalised. On the review of candidates for divestiture, the review does not mean a change nor does it preclude a change. The conclusion had not been reached yet. However this is done now in the light of the focus on increasing the levels of public infrastructure. What does this mean for those entities? In reply to the criticism of Eskom's restructuring taking too long, he said that electricity supply is a very sensitive area. They had learnt from the mistakes of the past that this process should not be hurried. It is not a time-driven restructuring but an effective restructuring. He emphasised that there was not a SAA R6 billion pension fund problem at all - and asked the media to note this fact. On the purchase of new planes, they had to come up with infrastructure plus funding strategies. Funding strategies options were being looked at currently. The Minister had already addressed the issue of Spoornet and the fact that there were innovative funding options that Spoornet had come up with. They would have to come back and say how this is to be funded and what are those specific projects. With the co-ordination of SOE infrastructure investment, they had to analyse and establish linkages in investment plans that met the larger imperatives of government's economic objectives. He assured the Committee that the blank slides have been filled but it was being left to the Minister to deliver these in his Budget Speech.

Mr Frolick (ANC) asked for the time frame for the restructuring of the Airports Company and what processes were under way.

Mr Mokeyane replied that the Minister was open-minded about the restructuring of ACSA. There were teams looking at what options existed in light of the existing shareholders agreement and in light of the current equity market in aviation. Those teams were made up of three departments and the company itself and they would review what options existed and make recommendations to Cabinet.

Mr Davidson said that the perception of the investing community was that the programme of privatisation was on hold. One had to achieve as soon as possible clarity to the international investment community that this government is open for business in terms of investment into these entities which has a huge capitalisation.

Mr Mokeyane replied that they engage with investors, discuss and share ideas with them on a continual basis and they understood fully well that restructuring is continuing. They understand the issues of the equity markets in the respective areas.

The meeting was adjourned.