Department Annual Report: briefing

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Public Enterprises

12 October 2004
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Meeting report

PUBLIC ENTERPRISES PORTFOLIO COMMITTEE

PUBLIC ENTERPRISES PORTFOLIO COMMITTEE
12 October 2004
DEPARTMENT ANNUAL REPORT: BRIEFING

Chairperson:
Mr Y Carrim (ANC)

Documents handed out
Department of Public Enterprises Annual Report: 2003 / 2004
Department Powerpoint summary of the Annual Report

SUMMARY
The Department of Public Enterprises addressed the Committee on its 2003 / 2004 Annual Report and outlined its work with different state-owned enterprises. Members felt that the Department was doing good work but were concerned about various issues, including that a shift had taken place in its strategy and that its measurable objectives were not clear which made evaluation difficult. In addition, Members raised concerns about the interaction between the Committee, the Department and the SOEs. It was decided that the Department would include the Committee in future planning before it dealt with the SOEs individually.

MINUTES
The Chairperson began the meeting by saying that it was the first time that the Committee would be looking at annual reports. This was to improve the oversight function of Committees. A report of the meeting would then be published.

Dr E Mokeyane, DPE Director-General, said the Annual Report covered the period April 2003 to March 2004. Since then some shifts had taken place. He pointed out that although the vision and mission remained the same, the mandate of the Department was under review. There was a uniqueness about managing state owned enterprises (SOEs). Restructuring of these enterprises and in the Department were continuing. He pointed out that the Department had received an unqualified audit report that also indicated that growth was taking place and that the internal controls were in place. This was the fourth year that this had taken place and was not a fact that should be taken lightly.

The focus enterprises were Eskom, Transnet and Denel. Eskom had developed internal competitive clusters that created a form of competition within the organisation. Transnet was doing well and its strategy was very clear. Referring to the Department, he said that it was intensely human resource driven and had a high staff turnover rate. The Department also had a flat structure. Two human resource surveys had been done in the Department. One of the results of this was the fact that an employee wellness program was being outsourced. As far as strategy was concerned, the Department was now focusing on energy, transport and defence. The structure had been revised and adapted. A performance agreement was signed between the Director-General and the Minister. There were streams of project teams busy working on different projects. The Executive Committee consisted of the Minister, the Director- General and the Deputy Directors-General. He then handed over to other members of the delegation.

Ms P Molefe, head of Corporate Strategy and Structure, said that her unit helped the Department to understand their role and the key objectives that would drive them. They also tried to ensure that a SOE maintained the lowest sustainable cost. The role of the SOEs in stimulating investment was also looked at. In some cases they would also seek to leverage the SOE. A gap analysis would be done with each SOE, which looked at how it performed in South Africa relative to the other players in the industry. The industry structure was then examined and an enterprise mandate was developed. In the case of Transnet, it was now focusing on transport and not trying to compete with the private sector. It was also important for Transnet to separate the operations side and the infrastructure. It was decided that Transnet would keep the infrastructure and bring in the private sector in the operations side. The thinking was that in the areas where the private sector performed better that the SOE, a private sector partnership should be established. The maintenance of the infrastructure was still under discussion.

Where Denel was concerned, it was important for them to understand their competency. Denel's problem was the fact that it was not recapitalised. The understanding by Denel when it was established in 1992 was that they would be the primary supplier to the Department of Defence. This however did not happen and it faced international competition. It was now felt that the aviation sector needed to be strengthened and that key partnerships needed to be developed.

Mr T Mphuti, head of Corporate Finance and Transactions, explained that every transaction that is handled, for example, the sale of non-core business units, was done by his unit. His unit also did the financing of SOEs. He explained that in the case of Alexkor, there was a land claim by the people from the Richtersveld that had to be sorted out before the equity partner could be brought in. It was decided that the community that had received the land would be given equity in the mine. These negotiations were now underway. He agreed that Denel needed money, but they were still trying to decide the best way of doing this. The value destroyers that were inside Denel, which were not key or strategic or loss-making, would need to be sold or removed from the balance sheet. This unit would decide on the best way of doing these transactions. A capital injection would also be needed for the Pebble Bed Modular Reactor project. They were now exploring ways to access finance for this purpose. His unit was also looking at bringing in clients and potential investments in the Coega development.

Mr A Apheme, head of Communications, said that branding of the Department was underway as they felt the Department needed to be more visible. This branding was in line with the vision that was announced by the Minister and also in line with the communication strategy of the government. This branding would look at how the Department links up with the SOEs, the communities and Parliament.

Discussion
Mr I Davidson (DA) said that he was impressed with Ms Molefe's input. He felt however that the shift in strategy created challenges for the Committee. It seemed as if the mandate for SOEs had shifted from the shareholder compact to a more strategic one. He wanted to know what these shifts had been for the Department and for the SOEs. There was also a need to understand the gap analysis mentioned by Ms Molefe. The mandate of the Committee needed to be clear so that they could monitor the Department and the SOEs.

The Chair added that it was important for the Committee to know the shift in strategy.

Mr S Manie (ANC) said that the annual report reflects some of the history of the Department. Referring to the mandate of the Department, he said that the report gives the impression that the Department was monitoring the SOEs but this was however missing from the mandate. According to the Public Finance Management Act (PFMA), a shareholder compact is signed between the SOE and the shareholder. In terms of this compact, the SOE would be evaluated. Should the SOE be running at a loss, the reasons needed to be found and a mechanism found so that under or non-performance does not take place. He also said that it seemed as if there was very little engagement between the SOEs and the boards. According to the PFMA, the boards had a fiduciary responsibility that it had to fulfill.

The Chair also referred to the shareholder compacts and said that Parliament and the Department both had oversight responsibility over the SOEs. He asked whether these compacts could not be brought to Parliament. This would enable the Committee to see whether the SOEs were fulfilling their mandates. He also asked if it was not possible to sanction SOEs should they be making a loss, due to some action, such as hedging.

Mr Mokeyane said that an interim report was being compiled on investigations into SOEs. Recommendations would be made, and the case of the hedging was also being looked at. Where losses are taking place, no condoning was taking place where people were acting against procedures. Action was being taken in such cases. In some cases such as Denel, the value of the Rand had played a role in the losses that they had incurred. He said that there was an engagement between the Minister and the Chairpersons of the different boards regarding their fiduciary responsibilities. The DG also regularly interacted with the CEOs of the various SOEs on a number of issues. He agreed that the key strategy drivers had to be identified. It was important to find a way between the Committee, the Department and the Minister to translate the key strategy drivers into specific measurable objectives and targets. It would also be necessary to develop a cycle of interaction with the Committee, the Department and SOEs. This would have to dovetail with the cycle of the signing of the shareholder compact. A workshop around this would probably be needed in which the parties concerned could apply their minds. The initial cycle would be between the Department and the Committee that would then influence the cycle between the Department and the SOE. This would make monitoring and oversight easier across the various areas.

Mr H Bekker (IFP) warned that the Committee should not become involved in the micro management of the Department. He said that when one looked at the annual report one could see some shortcomings. The role of the Committee would be to give the Department their blessing but then check up when things go wrong. This should however be at quite an early stage and not only when the annual report was made public.

Ms L Yengeni (ANC) said that it was not easy to follow the presentation if one did not know the background. For example, the problems in Denel were not being spelt out. It was said that Denel needed capital. She wanted to know if there had been a product analysis of Denel and whether the money would be used for research and development or marketing.

Mr S Kholwane (ANC) said that it was difficult to engage with the report because changes had taken place in the Ministry and in Parliament in the period under review. It was expected that before the annual report is tabled, the priorities and objectives would have been made clear. There were certain areas that the Minister had outlined as objectives, yet these were not reflected in the report.

Mr S Manie (ANC) said that the annual report also showed how the budget was utilised. Each program should have quantifiable objectives. This was required from Treasury and the PFMA. In this way it would be possible to see if the budget was spent properly. This however did not come through in the report.

Mr Davidson (DA) wanted to know whether the defining of the shareholder compacts would take the place of strategic goals. He also wanted to know how far the Department had come with the objectives that the Minister had given to the Committee.

Mr Mokeyane said that the progress with the objectives was reported in a progress report that was on the Government's website. The shareholder management review was finalised. This was submitted to Cabinet in August. A discussion about the infrastructure investment plans of the SOEs would take place the following day. The timetable for submitting the report on this had been extended from end September to end October. This date was extended with Cabinet's approval but was not announced. Referring to the objectives of the Department, he said that they could submit a separate detailed report dealing with this. Concerning the different programs, he said that the Department was underspending by about 5%. The benchmark set by Treasury was 3%. He felt that they were therefore doing well. The human resource component of the Department was capital intensive.

Ms Molefe said that much work was being done with Denel. Certain problems were being identified. For example, they had taken the risk in using their own money to develop the Rooivalk helicopter. Other areas were related to sub-contracting. It was important for Denel to decide what competencies were needed which would give high volume, low margins and high technology. Discussions with the Department of Defence around procurement policy would also have to be done in order to correct many of the problems within Denel. The money that was needed at the moment was for the operations to continue until a strategy could be worked out. She stressed that it was a very strong company. She explained that the Department saw itself as a universal investor, which meant that they invested in every part of the SOEs and would monitor each part of it.

The Chair commented that the annual report as it was presented was not in the format that National Treasury wanted. It was hoped that in future the format would be standardised for all SOEs and Departments. The Committee would however send the Department some questions that they felt they still needed answers to. He then asked the researcher to highlight some of the issues that he felt was important and which he had looked at in his report.

The researcher said that he had looked at the estimates of expenditure and targets set by the Minister in March 2003. The delay regarding the energy policy was highlighted. The delays at the Durban container terminal were important as was the finalisation of a timeframe for dealing with this problem. The targets for restructuring were also an issue that was important.

Ms N Kondlo (ANC) asked if privatisation was an option when restructuring was done.

Mr Mokeyane said that privatisation was not a basis for restructuring. There was sometimes the feeling that non-core divisions had to be sold or private sector participation was considered.

The Chair stressed that the core SOEs would not be privatised. He said however that the Committee would like to look at different kinds of private sector participation with the Department. He suggested the Department inform the Committee regarding this at some other time. There was concern that jobs would be lost in these participation ventures.

Mr Mokeyane said that it was important to decide what would be used as a reporting baseline. He suggested that a template be sent to the Committee which could be improved upon. This would be very useful for future reporting. The Chair agreed that this was a very good idea.

Mr Manie (ANC) requested that when the Committee engaged with the SOEs, someone from the Department, who was responsible for the particular SOE, also be present at the meeting.

Mr Mokeyane agreed and said that someone would be there the following day when Transnet did their presentation. He said he would also try to be present. In conclusion, he appealed to Members to promote SOEs as far a possible, even though they had an oversight role over them.

The Chair agreed and said that if an SOE failed, it reflected upon them as well. He highlighted the areas which he felt should be in the report which the researcher would compile about the meeting. Some of the key issues to be addressed would be the manner of reporting, the fact that the Department has a clear strategy and the sanctions that would be applied to SOEs. The question around the shareholder compact, the Committee's role and the cycles also needed to be mentioned. The Chair added that some comment needed to be made about the structure of the Department. He commended the Department on the progress it had made in promoting gender equity and said that it was one of the highlights. The role of the SOE boards also needed to be addressed. He emphasised that Members needed the necessary research skills to deal with its work. The Department also needed to be congratulated on its audit report and the good input that had been given. He felt that the Members had been empowered.

The meeting was adjourned.


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