Safcol 2022/23 Annual Report; with Deputy Minister

Meeting report

The Chairperson greeted the Committee Members and acknowledged the attendance of Mr Obed Bapela, the Deputy Minister of Public Enterprise, and officials of the South African Forestry Company Ltd (SAFCOL) board and executive. He commented that the Committee's turnout tended to be more significant during contentious presentations, contrasting with the positive nature of the SAFCOL briefing, which was primarily focused on a favourable report. He invited the Deputy Minister to provide an opening overview before handing over to the SAFCOL representatives.

Deputy Minister’s overview

Deputy Minister Bapela initiated the presentation by highlighting SAFCOL's pivotal role in driving economic growth. He stressed the significance of safeguarding and nurturing SAFCOL as a critical asset, indicating that the annual report presentation would adhere to the customary procedure of commencing with an initial overview, before delving into specific details. He would provide more comprehensive comments after the presentation by SAFCOL's executive team. He introduced the sequence of speakers, starting with Mr Neeshan Balton, a non-executive member of the board of directors, before the executive team would present their findings.

Safcol Board comments

Mr Balton shed light on the organisation's journey since 2019, placing significant emphasis on its effective endeavours to stabilise the company and reshape its corporate culture. He stressed the restoration of profitability and the establishment of robust systems and processes, signifying the successful completion of their initial phase. He also outlined their current focus on expanding the revenue base and actively pursuing growth opportunities, while acknowledging the challenges addressed in the report. The report shed light on SAFCOL's notable achievements, including obtaining an unqualified audit, sustaining forestry certification, and maintaining its Broad-Based Black Economic Empowerment (B-BBEE) level status. The report revealed a net profit of R251 million and an impressive 79% fulfilment of their shareholder corporate targets. These crucial points were the principal highlights of the report.

SAFCOL Annual Report 2022/23

Mr Tshepo Monaheng, Chief Executive Officer (CEO), SAFCOL, offered insights into the entity's strategies and accomplishments over the past year, underscoring its endeavours to stabilise its operations and promote a cultural transformation. He stressed the critical importance of sustainable asset management and SAFCOL's unwavering commitment to rigorous financial and forestry certifications. The presentation also delved into the distinctive characteristics of forestry investments, emphasising the essential long-term perspective required to assess profitability. It also revolved around SAFCOL's dedication to environmental responsibility, particularly in meeting replanting targets and ensuring workplace safety.

Mr Monaheng highlighted the company's resolve to encourage youth participation and inclusivity, thus ensuring the forestry industry's continued growth and significance in the country's economic landscape.

(See presentation attached).

Discussion

Ms C Phiri (ANC) began by commending the presentation by SAFCOL, but expressed concern over the low attendance of Committee Members when the presentation was considered positive. She insisted that it was essential to have a full house, especially when reporting good news. She highlighted the need for effective communication and engagement with the entities, encouraging them to present their reports comprehensively.

She asked about the South African government's involvement and support for the initiatives mentioned in the presentation, emphasising the importance of government recognition. She sought clarification on the selection process for individuals living with disabilities, and how they were incorporated into the programmes run by SAFCOL. She urged that information be accessible to all South Africans, especially in the various provinces.

Ms Phiri encouraged the entities to provide updates on the progress of programmes previously presented during oversight visits. She raised a question about the criteria for partnering with SAFCOL, particularly for traditional leaders interested in collaboration. She also mentioned the significance of considering crowd-funding as a means to support various initiatives aimed at improving communities.

Mr G Cachalia (DA) initiated the discussion by seeking clarification on the fair value gain and its correlation to operational advancements, specifically concerning biological assets. He also requested further details from the chief financial officer (CFO) of SAFCOL regarding the strategy for restating corresponding figures and the potential ramifications on the entity's profitability. He also expressed interest in understanding the factors contributing to the 79% attainment of financial targets, and inquired about the SAFCOL's plans for bolstering profitability in the future.

Mr S Gumede (ANC) noted the importance of addressing the implications and expectations of state-owned enterprises (SOEs), likening it to a father-son relationship. He applauded the organisation for a strategic approach in terms of presenting the positive and negative aspects, acknowledging the need for the presentation to energise and encourage better performance. He reiterated the Committee's aim to motivate and support SAFCOL's growth.

He expressed his appreciation to the Committee Members present, and encouraged the SAFCOL team to perceive challenges as avenues for growth rather than causes for discouragement. He stressed the value of resilience and a proactive outlook. He raised several questions regarding the organisation's financial performance, seeking elucidation on matters such as revenue generation, elevated overhead costs, and the entity's forthcoming strategies for enhancement. He demonstrated a strong interest in comprehending the organisation's training endeavours and the advantages they yielded for employees, underscoring the importance of these programmes for individual and career growth.

Further, he praised SAFCOL's engagement with the community, emphasising the beneficial effects of allocating revenue for community development. He requested further clarification on the entity's operational condition, expressing an interest in its strategies for ensuring sustainable growth and overcoming possible obstacles. Wrapping up his comments, Mr Gumede expressed eagerness for the continued advancement of the organisation, stressing the importance of a strong and efficient strategic plan to attain enduring stability and prosperity.

Mr Cachalia also expressed interest in understanding the company's diversification plans and how it intended to expand in the future. He asked for elaboration on the Computer Numerical Control (CNC) and its associated costs, particularly in relation to projected revenues. Furthermore, he requested an update on the progress of security and revenue challenges, and their potential impact on the company's operations.

Regarding the allocation of resources, Mr Cachalia sought clarification on the distribution of funds for training, specifically questioning the effectiveness of the approach in developing staff skills and the company's long-term growth. He concluded by asking the company to provide comprehensive responses to his inquiries.

Mr F Essack (DA) appreciated the relatively optimistic outlook depicted in the financial report. Referring to a previous question about dividends, he recounted a recent conversation he had with the Minister that provided insights into the entity's dividend payment track record. He subsequently encouraged the representatives to provide more details about the expected dividends, considering the strong financial performance highlighted in the report.

Moving on, he delved into the progression made in certain areas, and sought clarification of the tactics employed to address the previous financial year's challenges, emphasising the significance of effective consequence management. He inquired about a specific tax penalty of R4.1 million, probing whether this was a carryover from the previous year and seeking insights into the organisation's strategies to mitigate such penalties in the future.

Shifting the focus to the issue of fruitless and wasteful expenditure, Mr Essack raised concerns about accountability within the organisation. He urged the representatives to provide an update on any actions taken to address the situation. He referred to a significant amount noted in the report for the 2021/22 financial year, and sought clarification on the measures implemented to rectify the matter.

Delving into compliance matters, he sought SAFCOL's perspectives on its adherence to specific legislation. Lastly, he expressed his curiosity regarding the mobile station procurement mentioned in the presentation, expressing a keen interest in understanding the concept and its implementation.

Mr N Dlamini (ANC) began by expressing appreciation for the report presented, saying that it brought to life the idea of the entity's role and contributions, particularly in the context of skills development. He commented that the presentation had indicated a lack of interest in competing with other entities or organisations. He questioned this approach, especially considering the significant amount spent by the government on training within the Department of Education and elsewhere. He wondered whether there was untapped potential in the market that the entity might be overlooking by avoiding competition. He was not necessarily concerned about who may have benefited from the training, as long as people were being trained. He assumed that young people were receiving training, even though some individuals may not show a personal interest in training.

Mr Dlamini acknowledged the significance of the entity's forward-thinking and cautionary approach to policy adherence. He pointed out that the deliberate nature of their investments, specifically the agriculture-related ones, often led to longer-term returns, illustrating the value of sustained commitment to such initiatives. He concluded his remarks by generally expressing satisfaction with the entity's performance.

Ms J Mkhwanazi's (ANC) comments mainly echoed the points already addressed, focusing on specific aspects of the discussion. She expressed a desire to delve deeper into the issue of the entity's community engagement and the potential for partnerships and collaborations across the country. She inquired about the qualifications necessary for such collaborations, and stressed the importance of aligning such initiatives with the organisation's objectives.

Ms Mkhwanazi also sought clarification on the entity's plans for expanding and diversifying its product offerings, particularly in relation to the processing and production lines. She emphasised the importance of considering the overall mandate of the SOE and its role in job creation. She also requested information on the entity's strategy for addressing any audit findings, and emphasised the significance of addressing material issues highlighted by the audit report before proceeding further.

The Chairperson raised a critical point about the core objectives and mandate of the SOE. He said that historically, the primary purpose of these entities, both in South Africa and globally, had been to contribute to economic development and address social issues. He stressed the importance of these entities in improving the country's revenue base, thereby addressing social problems.

He questioned whether the entity's current activities were aligned with these fundamental objectives. He noted the entity's significant role in addressing education-related issues, such as the shortage of school desks, and encouraged the SAFCOL representative on the potential for expanding its mandate to further benefit the country's development. He called for a more aggressive approach to capitalise on the entity's capabilities to produce high-quality desks and potentially export them to the broader southern African market.

Essentially, he insisted on the need to realign the entity with its core developmental goals and broaden its contribution to addressing critical national priorities. He advocated a comprehensive understanding of the entity's mission and initiatives, underscoring its significant role in fostering both economic and social progress.

SAFCOL's response

Mr Monaheng responded to the questions and provided insights into some of the external constraints the entity had faced. He mentioned the significant impact of labour strikes on their operations, noting that they had lost six days of production every month from September to April. This loss had had financial implications, as it had increased operational costs, such as spending on diesel, among other things. These constraints had limited the entity's capacity to focus on a more expansive developmental agenda.

He said that while the entity faced external constraints, its ability to undertake a broader developmental agenda could be compromised. He acknowledged that addressing these constraints would contribute to a more significant developmental focus. He also alluded to the fact that other members of the management team would address specific issues raised during the discussion. In this response, he would address the practical challenges and external factors affecting the entity's ability to pursue a broader developmental agenda.

Among the challenges the entity faced were the impact of load shedding, the construction sector's stagnation in South Africa, and government's limited push for major infrastructure projects. He acknowledged the closure of several sawmills in the industry, and discussed the external challenges that the entity had had to navigate. Despite these challenges, the entity managed to remain profitable and effective, even with limited resources.

Mr Monaheng pointed out the entity's commitment to its developmental mandate and the allocation of resources for this purpose. He highlighted investments in training and various corporate social investment (CSI) projects. The entity's approach was not solely focused on commercial viability but also on fulfilling its development mandate and maintaining the country's forestry resources.

He noted the importance of the entity's financial health to support their developmental initiatives, and for the management team and the board to work together to ensure they met their development objectives while maintaining financial sustainability. This approach would enable them to continue serving the development needs of the country while facing external challenges.

He spoke about the entity's dual financial health and development strategy, demonstrating a commitment to its mission amid external challenges. He provided further details on the initiatives SAFCOL had undertaken regarding developmental projects and training opportunities for local communities. He specifically highlighted the organisation's efforts to train young people in fields related to bioenergy, emphasising the partnership with experts in this endeavour. He expressed enthusiasm for these projects and the positive impact they could have on the communities involved.

Addressing the issue of training individuals with disabilities, he acknowledged the current limitations in their training programmes. While they did have a training centre and some interventions for people with disabilities, they were working on developing a more comprehensive approach. He mentioned the importance of creating more inclusive training opportunities for people with disabilities, discussing the potential for virtual training and the need to collaborate with relevant institutions to enhance their training capabilities in this area.

His comments recognised SAFCOL's commitment to community development through various training initiatives and partnerships. They also recognised the need for further expansion and inclusivity in their training programmes for individuals with disabilities.

Mr Monaheng acknowledged the need for an improved and workable state-owned company, understanding that they needed to maintain their financial health while investing in the development of young people. He highlighted their commitment to regional beneficiation projects and supporting communities for active participation in these projects.

Responding to the question of revenue generation raised by Mr Gumede and Mr Cachalia, he said they were working on reducing fixed costs and increasing variable costs to enhance profitability. Their investments in training were viewed as an essential part of their overall strategy to grow revenue. They contributed to the skills development levy and were exploring partnerships with colleges to provide more opportunities for young people.

Mr Monaheng mentioned that they planned to educate young people about the potential of high-value products in the forestry industry, and aimed to facilitate training to support the production of such products. He underlined their commitment to achieving a balance between commercial viability and community development, ensuring a sustainable and profitable future for the organisation.

He delved into various operational challenges and initiatives, shedding light on the complexities of the industry. He said it was important to maintain strong relationships with stakeholders and local communities, and outlined collaborative efforts on various projects. He acknowledged the challenges posed by fluctuating prices and the need to balance profitability with competitive pricing, alluding to the delicate nature of supplier relationships in the industry. He underscored the necessity of strategic planning and resource allocation, especially for long-term projects, expressing determination to overcome current obstacles and pursue exciting opportunities ahead.

He also touched on the difficulties faced in the planting project, citing financial constraints and the reliance on external support. He reiterated the need for strategic partnerships to ensure successful execution and sustained progress in their endeavours. He also stressed the importance of consistent performance, emphasising the need for a stable and reliable business foundation. He noted the evolving nature of the industry and the need for careful financial management to adapt to the changing landscape.

In response to Mr Essack’s question regarding the payment of dividends, he clarified the company's adherence to proper accounting practices, ensuring compliance with financial regulations and guidelines. He indicated the importance of accurate financial reporting and the allocation of resources in line with established protocols. Despite the challenges faced, he expressed confidence in the organisation's ability to navigate the complexities of the industry and make strategic decisions to sustain growth and stability.

Mr Monaheng provided further insights into the company's financial strategies, emphasising implementing a new guarantee system to streamline financial processes and ensure transparency. He commented on the importance of safeguarding company assets and investments, particularly in light of the recent security concerns. He acknowledged the challenges in managing the company's plantations, expressing gratitude to the board for their efforts in addressing security issues to protect the workforce and assets.

Regarding the procurement of mobile solutions, he highlighted the company's strategic decision to prioritise certain products over others, focusing on higher-value offerings that align with the organisation's long-term goals. He clarified that the company's intentions were not to compete directly with existing products, but to explore new opportunities that would benefit both the company and the market.

Mr Monaheng reiterated the company's commitment to fostering and building enterprises within the industry, raising the issue of the significant investments made in this area. He mentioned the importance of revenue generation through strategic sales and distribution channels, recognising the short-term pressures to deliver on sales targets. He also brought to the Portfolio Committee's attention the need for a balanced approach to revenue generation, stressing the importance of focusing on long-term growth initiatives and sustainable revenue streams.

Mr Sibalo Dlamini, Chief Operating Officer (COO), SAFCOL, provided insights into the company's revised strategies, notably shifting from the traditional approach of growing trees over 30 years to a more agile and sustainable strategy aligned with current market demands and development objectives. This change in strategy had had a significant impact on the company's financial performance.

He commented on the mobile sawmill initiative, explaining that while SAFCOL had previously used a more traditional approach to processing wood, they were now adopting smaller mobile devices that could be taken directly to the forest for cutting the trees. These devices produced semi-finished products that still required further processing. The intention was to deploy these mobile sawmills within various plantations and involve local communities in the process, enabling them to participate in the value chain.

The goal of these initiatives was to improve production efficiency and enhance local economic development, particularly through value addition and supporting the communities surrounding SAFCOL's operations.

Mr D'Shorne Human, CFO, SAFCOL, addressed the financial inquiries posed by Mr Cachalia, providing clarification on the net profit and the visible operating gains. He said that the layout of the income statement included gains associated with the company's operations, such as expenditures related to the management of biological assets, including pruning, thinning and weeding. These expenses were considered essential components in the operation of the business, and were accounted for as operating gains.

He added that the net profit could potentially be reduced by approximately 3%, given the exclusion of fair value gains by the shareholder. Despite the exclusion, he expressed a degree of dissatisfaction with the current financial performance, suggesting a desire for improved results.

In response to the financial questions posed, he referred to the intricacies of the accounting practices employed by SAFCOL. He explained the use of the accounting standard, which involved utilising a discounted cash flow analysis over a period of 30 years to determine the fair value of the plantation assets. This process involved evaluating projected revenue, anticipated costs, inflation, and the weighted average cost of capital. He acknowledged the potential confusion surrounding the 3% margin, and proposed renaming it to align more closely with the finance professionals' perspective, which would yield a margin closer to 10-12%.

Regarding changes in accounting policies, Mr. Human spoke of the decision to revalue investment properties to their fair market value, resulting in a significant addition to the income statement. He also addressed the failure to achieve certain financial targets, such as the current ratio, which had been impacted by short-term elements of biological assets.

In response to the question related to the audit report, Mr Human highlighted the difference between an emphasis of matter and an adverse or qualified opinion. He clarified that the material irregularity mentioned in the previous year's report had been successfully resolved, leading to its exclusion from the current report. He also provided insights into the implications of the International Financial Reporting Standard (IFRS) 9, which mandates the projection of anticipated credit losses at the initiation of a financial transaction, utilising a model that accounts for data ageing and the probability of recovery.

Mr Human elaborated on the audit-related matters and the specific accounting issues within SAFCOL. He addressed the impact of IFRS 9, which necessitates the estimation of expected credit losses, and the company's proactive response to the market challenges, resulting in an increased acknowledgement of potential credit losses based on data ageing and repayment plans. He also explained the new disclosure requirements regarding irregular, fruitless, and wasteful expenditure, emphasising the importance of adhering to National Treasury's instructions.

In response to an inquiry about the bio-chemical project, he highlighted its significant potential profitability, with an estimated net present value of R10 billion over ten years. He stressed the necessity of seeking funding for the project through development finance institutions (DFIs) and banks due to the substantial initial capital requirement. Regarding liquidity and revenue challenges, he had expressed the need for the company's implementation of liquidity preservation methods and interventions even before receiving National Treasury's directive.

Acknowledging the concentration risk associated with a limited customer base, Mr Human underscored the importance of diversifying revenue streams through targeted export strategies and developing higher-value biochemical products. There was a need to manage long-term investments in trees effectively, even though their cash yield might be realised only upon their maturity, reiterating the significance of prudent balance sheet management and recognising profits appropriately.

He elaborated on various aspects related to SAFCOL's operations and financial performance. He shed light on the company's participation in the SOE turnaround strategy and the collaborative initiatives being pursued within the industry to promote knowledge-sharing and best practices. He stressed the significance of upholding a robust balance sheet while concurrently directing efforts towards generating cash flow via strategic ventures and measures for conserving cash.

He emphasised the company's policy of paying dividends from free cash and highlighted the measures being taken to enhance cash reserves. He also provided insights into the company's efforts to address disciplinary matters and irregular expenditure through stringent human capital policies and improved control systems. He clarified that the company had undergone investigations and taken steps to ensure accountability, while improving its processes to prevent similar occurrences in the future.

He addressed the issue of regular and irregular expenditure, explaining that certain cases were associated with past events and that measures had been implemented to prevent their recurrence. He emphasised the importance of process improvement and consequence management, underscoring the company's commitment to upholding compliance and accountability.

He clarified that certain instances of loss allowance increases were due to emergency situations that were rectified later, but the necessary approvals had not been obtained in time. He explained that the assessment of credit ageing had influenced the loss allowance calculations. Regarding the audit report, he noted that the auditors had opted not to express an opinion on the integrated report, as their focus was primarily on the financial statements. He emphasised that the emphasis of matter did not signify any qualification of the audit, but rather served to direct attention to specific areas of importance.

Mr Human also pointed out that the emphasis of matter was not always associated with negative developments, as positive changes like modifications in accounting policies could prompt a similar emphasis. He acknowledged that some users might interpret it as negative, but clarified that the emphasis of matter was meant to highlight important aspects of the report. He concluded by affirming the company's dedication to maintaining its current trajectory.

Deputy Minister’s closing remarks

Deputy Minister Bapela expressed his appreciation for the valuable input and questions from the Members. He acknowledged that South Africa was facing several challenges, but emphasised the importance of sharing positive stories about the country. He said South Africa's forestry industry had encouraging stories, and praised the industry for initiatives like developing seeds and promoting trade with other African countries.

He referred to issues related to land claims and the importance of improving processes and collaborating with communities. He also noted the significance of mitigating external threats, such as climate change and diseases that affect forests. He mentioned ongoing challenges with illegal mining activities in forested areas, and the need for improved security.

He addressed the challenges in the market and the importance of competition, emphasising that competition could lead to healthy market growth. He also discussed the potential for the forestry sector to take advantage of the African Continental Free Trade Agreement.

DM Bapela recognised the dedication of young people in the forestry industry and the need to support and encourage their growth in the sector. He encouraged further research and partnerships to explore potential exports of trees from forested areas in other African countries.

In conclusion, he thanked the Committee for their engagement, and expressed his commitment to addressing the challenges and advancing the forestry sector in South Africa.

Chairperson’s closing remarks

The Chairperson acknowledged that the meeting had run longer than scheduled, but expressed gratitude to all the participants for their valuable contributions. He recognised the importance of adhering to the set time limits and ensuring that processes were not undermined. He thanked everyone for their active participation and insightful input, expressing his hope that the meeting had been fruitful and productive.

The meeting was adjourned.