Safcol update on the overall business and contributions in terms of job creation, skills development, promotion and support of SMMEs; with Deputy Minister

Meeting report

Chairperson's opening comments

The Chairperson said the meeting would be focused on an update of the South African Forestry Company Limited’s (SAFCOL's)  business operations, and on assessing the improvements in its governance and the impact of the entity in the communities. It was particularly interested in knowing the inroads made in the diversification and beneficiation of timber products. It would receive an update on steps to address challenges related to land claims, as this had been haunting the entity for a while.

SAFCOL had notably been one of the better-performing public entities of which the Portfolio Committee was proud, and considers it a key partner in advancing rural development objectives. It intended to strengthen and encourage the efforts and actions of SAFCOL.

Deputy Minister's overview

Mr Obed Bapela, Deputy Minister of Public Enterprises, said considering the challenges related to the Covid-19 pandemic and the tight competition in forestry and timber, SAFCOL would be shedding some light on where they were as an entity, alongside an update on land claims-related challenges that were still hovering around their areas of operation. The sooner these claims were dealt with, the better the situation would be for the business to pursue its objectives. The unfinalised land claims remained a threat to the business.

Going forward, he would be engaging with the entity's Board and management on how to grow in the forestry sector, as it was quite a competitive market. The good news was that the entity was giving something to the fiscus -- the figures would be alluded to by the chief executive officer (CEO).

If state-owned entities and companies could begin to be moulded to not be reliant on the fiscus and to perform well and be contributors to the fiscus, that would be an ideal situation.

South African Forestry Company Limited

Mr Mpho Makwana, Chairperson, Safcol Board, said that Safcol had been on a positive journey of a turnaround since the appointment of the Board in October 2018. The nature of Safcol reporting at the time had been characterised by large losses and large challenges of unauthorised and irregular expenditure. The Board was comfortable and delighted with the positive turnaround. This had been confirmed by its financial reports, and the ability of the entity to declare dividends to the fiscus in the 2021/22 financial year. The Board remained optimistic about the entity's ability to contribute a profit to the fiscus and declare dividends for the upcoming financial year-end

Mr Tsepo Monaheng, Chief Executive Officer (CEO) said Safcol was at the inflection stage of the growth path, where the entity would need to implement strategies to achieve its objectives and be able to deliver to the shareholders, have a sustainable business, and be able to perform well in governance, socioeconomic areas, and environmental management. At this stage, Safcol would be exposing itself to minimising its business risk.

Some of the opportunities identified for growth by Safcol were:

• The mobile sawmill was being set up;
• Mechanised harvesting, which would improve efficiencies and would lower safety risks in the business, was being implemented;
• Ecotourism was undergoing the process of appointing a strategic partner;
• Commercialisation of agroforestry was going to be part of a strategy in the coming months
• Pole treatment was one of the key projects; and
• Furniture manufacturing was an area that could be levelled up and made a core business.

Some opportunities were complex, due to multi-stakeholder opportunities. The entity was resolute in ensuring these were not neglected.

The operations of the entity had not changed in both South Africa or Mozambique. The Sofala operation in Mozambique had 5.3% of its area under management planted, and the Manica district plant was profitable -- it just needed to ensure it paid back its debts. Safcol was hoping to plant in the coming season the maximum available plantable land. Safcol was happy that there were three potential partners interested in the planting. Should this be successful, the government of Mozambique may give Safcol more plantable land and expand its operations. This was a positive development.

SAFCOL conducts its business through sustainable management of plantation forests, timber processing, and ecotourism. Revenue was generated from the sale of logs and lumber and other non-timber-related products and services.

Looking at the quarter three performance of Safcol, there were 29 key performance indicators, and the entity managed to reach a 75% achievement.

One of the key targets missed was for employing people living with disabilities, and Safcol may not be able to achieve this target by the end of the 2022-23 financial year. Efforts were going to be made early in the 2023/24 financial year to ensure targets were met.

Safcol had done encouragingly well with its internal controls, and efforts were being made to ensure this remains the situation.

Financial performance

Safcol's revenue was down three percent in January 2023, compared to the previous year, yet the plan was to be at three percent more. However, expenditure was 14% lower than budgeted. The working capital year-to-year comparison had gone down by R100 million. This was largely due to lower cash generation, and the entity using its cash to replace equipment. Progress was slowly being made to fund some transactions from a bank facility, and not on the balance sheet.

For the entity to determine if the value was created for the shareholder and to determine whether investments made were generating income for the company, the DuPont analysis showed that as at the end of January, the entity was behind on return on equity. This was due to the net profit margin dropping to below competitors such as SAPPI.

Highlights

Mr Monaheng said Safcol highlights for the period under review included:

• The incorporation of three land claimant communities into the South African supply chain -- (Kaapschehoop, Mamahlola, and Entabeni).
• A strategic partnership with the Development Bank of Southern Africa (DBSA).
• Implementation of the mechanisation project.
• The Mpumalanga SAPS was now making arrests of timber thieves. The Hawks were assisting, and the Provincial Asset Forfeiture Unit and the prosecutor’s office were responsive.

Challenges

Challenges faced by the company included:

• The cost of doing business had increased, putting pressure on margins.
• Load-shedding was affecting operations negatively.
• Customers were struggling financially, resulting in lower-than-budgeted revenue.
• Timber theft and illegal mining, although some progress was being made with improved security measures.
• Access to more plantable land (plantations).
• The Department of Mineral Resources and Energy (DMRE) approved mining rights in Mpumalanga without consultation with Safcol. The DMRE had been engaged, and they were awaiting further engagement.
• Inter-departmental alignment on approved beneficiaries of minority shares was being awaited.

Safcol had an impact on communities beyond the usual business operations. The entity had corporate social investment initiatives that were in place with strategic partners. Alongside the building of footbridges for learners to access educational institutions, some of the projects included collaboration with schools and renovating victim care centres in schools. These kinds of contributions were to demonstrate Safcol’s commitment to the community.

To improve its socioeconomic impact and food security, Safcol had agroforestry projects that supported 13 small-scale farmers with agricultural implements and technical skills training. These were followed by market linkage initiatives for anointed co-operatives, where global gap certificates were awarded, resulting in the farmers being approved to supply Woolworths and Shoprite. As a result, 413 job opportunities were created and sustained, and 150 indigenous trees and fruit trees were planted at various sites. To date, over R6 million has been spent on these initiatives.

The entity had done a lot of work on enterprise and supplier development to prepare Safcol service providers to deliver service at an acceptable standard. This was being facilitated through the University of Mpumalanga.  

Safcol believed in the importance of skills development, to ensure an impact beyond the business. Whilst some initiatives were community-focused, the bursary scheme offered by Safcol reached beyond the communities in which they operated.

See attached for full presentation

Discussion

Ms C Phiri (ANC), as a Member with an interest in youth, asked about the bursaries offered by Safcol, commenting that it seemed there had been no outline of demographics.

In Safcol’s programmes, how did it share best practices with other provinces, as it appeared that Mpumalanga was performing well? Particularly in Limpopo, how did it want to share the best practices happening in Mpumalanga? Why was this not happening in other provinces where Safcol was operational?

She suggested that Safcol should report on all of the key indicators.

What cash was available at the entity, and how would Safcol ensure it remained accessible?

On the availability of plantable land, it had previously informed the Portfolio Committee of its engagements with various entities for forestry management services. What had been the progress in these discussions?

Mr G Cachalia (DA) expressed delight in having a state-owned entity (SOE) that achieved results and performed well. He did, however, highlight that the presentation lacked information about the entity's risks, how they affected matters, and how the entity intended to deal with and mitigate them. One of these risks in South Africa was said to be around safety and security, so the Committee would like to know what was being done proactively to deal with that.

Mr S Gumede (ANC) said that there were four key challenges facing Safcol. These were its ageing infrastructure, unavailability of plantable land, timber theft, and load-shedding. How did the entity mitigate these challenges, as they had an impact on its revenue?

Safcol had indicated that the demand for logs surpassed supply, so how would it deal with this predicament? There was a need for more supply to satisfy the demand on the ground.

What actions was it taking to address illegal mining?

Regarding access to more plantable land, what was the main challenge behind this?

How much had been lost as a result of the theft experienced by the entity?

Whilst Safcol's programme was appreciated, it seemed there was a high intake for learnerships. When these come to an end, what did they do with the recipients of the learnerships?

Mr F Essack (DA) asked Safcol to clarify what the banks' terms were regarding funding its expenditure in terms of value, interest rates and the term of the offering. From the previous financial year, the profitability of Safcol had significantly reduced, which was important to note.

What was the current progress regarding the issue of mining rights, as the matter seemed to be urgent?

He highlighted the need for consequence management against officials who had incurred irregular and fruitless expenditure. Were any concrete steps being taken, and what was the current state of progress?

Ms V Malinga (ANC) requested more clarity on land restitution matters. What seemed to be the hold-up?

Which provinces benefited from the bursaries the entity offers, and what were the criteria behind the awards?

Ms J Mkhwanazi (ANC) reiterated the importance of functional SOEs, as South Africa was fighting poverty, unemployment, and the lack of economic development.

How far was Safcol in addressing its audit findings? Could it clarify what it meant by "effective controls?"

Safcol's response

Ms Zatu Moloi, Chairperson: Audit Committee, Safcol, said a lot of irregular expenditure in the entity was from previous years, but because some of the contracts spilt over into the current year, they had formed part of the balance. As it stood, the irregular expenditure identified in the entity for the previous financial year was less than R1 million. The trend was decreasing, and incidents of wrongdoing were followed up with recommendations from the audit. The audit tracker was reviewed quarterly and the entity was averaging 90 percent resolution of findings.

Mr Monaheng said Safcol was equally committed to training the youth in Limpopo and KwaZulu-Natal. The proportions were admittedly higher in Mpumalanga, but this was largely due to its operations in the province.

Safcol had reported on only 24 key performance indicators because they were quarterly targets. The rest would be reported upon at the end of the financial year, as they were annual targets.

Safcol had been earmarking some plantations in Mkhondo and Msunduzi to expand and manage more valuable assets and create job opportunities. It took the entity longer to access plantations from the Department of Public Enterprises (DPE) than anticipated. Accessing these plantations was key to executing the entity's strategy, as diversification required more timber. As a result, the entity was looking to plant more trees so that in about three years, the entity could access the diversification opportunities.

The safety and security of employees and stakeholders around the plantations were a real concern. Safcol was now working well with law enforcement agencies, and arrests were taking place.

The entity did have other risks, such as land claims, and Safcol viewed them as both a risk and an opportunity, as 57 percent of the operations in plantations were under claims. Should the conclusion of the claims not go its way, it was likely that a reduction in plantable land would occur, posing a risk to attaining its strategic objectives. Fire, baboon damage and cyber-attacks also remained risks that were being closely managed.

Regarding the demand for logs surpassing supply, this was often managed by ensuring that at the beginning of the year, logs for processing were prioritised for South Africa. In the event there were excess logs that the processing industry did not take, then availability would be made for international export.

Illegal mining was dealt with by working with law enforcement agencies in the provinces, working with the national Department of Mineral Resources, and with the forestry industry, as the problem was industry-wide and solutions ought to be for the whole industry.

Irregular expenditure was difficult to avoid, particularly in instances of emergency. However, Safcol did monitor this monthly to ensure that there was no irregular expenditure. As it stood, about R200000 had been incurred due to an emergency, and while this figure was still low, the idea was to achieve zero.

On strategic partnerships, Safcol strongly believed diversification was essential for taking the entity to the next level. Diversification of projects necessitated strategic partnerships. Moreover, other projects, such as ecotourism, were not the forte of the entity and, as a result, caused losses, so to address this, strategic partnerships were key.

At the end of the learnerships, some learners were absorbed, others got opportunities whilst others were unfortunately let go. Safcol would like to absorb all participants in the learnerships. Once diversification had been achieved, all participants were likely to be absorbed as there was a need for skilled people.

The reduction in profits was worrying for Safcol. This had been largely due to a reduction in customer requirements and a change in weather conditions that made some areas difficult to get into. The weather was a delicate factor to balance in the business. Actions and efforts were in place to improve revenue in the entity.

Land claims were tricky, as Safcol was not responsible for the conclusion of land claims, but it supported the efforts of the Department of Rural Development through the Land Commission. In every forum, it asks the Department and Commission to complete the claims, as there were seven of its plantations under claim.

Safcol Chairperson Makwana referred to recent developments in Tanzania, and said Safcol might see an opportunity for diversification.

Mr Monaheng said a dynamic company in Germiston was involved in a project in Tanzania for building multi-storey buildings made of engineered wood. Safcol was looking to enter a memorandum of understanding where there was a joint venture in owning a plant that produced engineered wood in Germiston, Sabie and Limpopo. This product had a high demand both locally and internationally. Safcol was looking at concluding this in the next two months.

Mr D'Shorn Human, Chief Financial Officer, Safcol, said the cash availability target was set at about R300 million, which was R50 million from last year, as Safcol raised the bar gradually. It monitored the cash value daily, and monthly liquidity elements were monitored. It tried to implement the costs by following the revenue, to allow for a breakeven. Every single expenditure amount goes through the CFO to ensure that the costs are income-generating.

The terms of the bank for funding were currently with Standard Bank, as it had the most competitive elements. The facility was for R90 million over five years, at a rate of prime + 0.9%.

Safcol's profitability was mainly affected by the lower revenue and reduced log volumes from key customers, and it was struggling operationally to compensate for these changes. Efforts were being made to address this challenge.

Mr Sibalo Dlamini, Chief Operations Officer, said the entity loses about R14 million annually due to timber theft.

Ms Christelle Marais, Chief Risk Officer, said the entity had implemented and fully operationalised a risk operation framework that drives a risk culture. This had seen colleagues at the lowest level in the plantations adopting a risk-conscious culture, in alignment with board and management expectations.

The external impact of risk was updated quarterly, and the strategy was to make Safcol employees resilient in the rural areas where the entity operates. Physical security aspects were being strengthened when the entity was finalising its integrated risk approach that would rely on technology to assist in obtaining evidence and preventing certain security breaches. The entity was looking to balance out the human and technological aspects of its risk system.

The entity was closely working with the South African Police Service (SAPS) to educate people on the impact of illegal mining in the forestry business. There were about 35 instances of both legal and illegal mining instances, but the distinction between the two was not always clear.

Ms Dimakatso Motseko, Human Capital Executive , said the entity's bursary allocation was based on its year-on-year performance. It had about 40 bursaries to provide to the Safcol community for the present financial year. The bursaries were across all the provinces, with a priority focused on people living in rural areas, with disabilities, and orphaned members of society.

Follow-up discussion

Mr Gumede asked if Safcol had experienced any fatalities in its plants.

Some strategic projects, such as mechanisation, had met their deadlines, yet others seemed like they would not meet the 31 March deadline. In terms of Safcol's projections, was it going to be reasonably possible for the projects to meet their deadlines in the next financial year?

Did Safcol have international projects outside of its Mozambique operations?

Ms Phiri said the Timberdola project was considered strategic for increasing revenue. What were the reasons for the mentioned delays?

The Chairperson asked Safcol to explain the connection between the combined heat and power (CHP) and the Timberdola projects -- were they operating together?

Safcol's response

Mr Monaheng replied that the entity was making safety a cultural matter, not just a compliance one. Safety was key to Safcol’s business, and fortunately, there have not been any fatalities. It had a campaign that rejected non-compliance with safety measures, and people were continually encouraged to adhere to safety precautions.

Whilst some projects may not meet the March 2023 timeline, the entity was making appointments in the coming months. The system had a slow start, but the implementation and oncoming projects were well underway.

Whilst Safcol had a strategy to have subsidiaries internationally, the key priority was to ensure a strong home base that would allow the strengthening and optimising of local operations.

To mitigate challenges related to power cuts, the entity was considering making use of solar panels as a short-term strategy, whilst in the long term, the entity was looking to supply its electricity to some of its operations.

Explaining the relationship between CHP and the Timberdola projects, he said CHP uses offcuts that come from the timber processed from the plantations. These were converted into electricity and steel in the mill. Success in the CHP plant would result in Timberdola having electricity supplied from the CHP plant, and steel to put in the mill to improve the quality of lumber coming out.

Deputy Minister's comments

Mr Bopela said the expansion strategy of Safcol would be explored, as suggested by the Committee Members. It was a wise recommendation for the Safcol leadership to explore this, as Africa – particularly Central Africa – was known for its timber production. There was an African Union (AU) Agenda 2063 for "the Africa we want," It was important to consider the minerals leaving the continent without any beneficiation. Safcol had the capacity, and it was wise to look into working with other African countries to realise  Agenda 2063.

The Chairperson thanked all participants for their engagement.

Adoption of minutes

The Committee considered and adopted its minutes of 22 February and 1 March.

The meeting was adjourned.