Eskom Distribution Division Report; SAFCOL and Alexkor Annual Reports: briefings

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SELECT COMMITTEE ON LABOUR AND PUBLIC ENTERPRISES

LABOUR AND PUBLIC ENTERPRISES SELECT COMMITTEE
8 March 2005
ESKOM DISTRIBUTION DIVISION REPORT; SAFCOL AND ALEXKOR ANNUAL REPORTS: BRIEFINGS

Chairperson:
Ms M Temba (ANC, Mpumalanga)

Documents handed out:
Eskom Distributive Division Report: PowerPoint Presntation
SAFCOL Annual Report 2003/2004: PowerPoint Presentation
Alexkor Annual Report 2003/2004: PowerPoint Presentation

Alexkor website
Eskom website

SUMMARY

The meeting began with the Eskom delegation presenting their Distributive Division report. The Eskom delegation highlighted that that the division was responsible for delivering electricity and maintaining the electrification network. The delegation then discussed the national electrification fund allocation principles; the 2004/2005 electrification performance and the planned Municipal Infrastructure Grant. The free basic electricity grant, black economic empowerment and general service delivery issues were also discussed.

The Committee raised various questions during the ensuing discussion. These included enquiring about the state of Eskom’s rural services; the Free Basic Electricity Funding Agreements; the debt owed to Eskom; Eskom’s employment equity targets; the backlogs in the electrification process; the Integrated National Electrification Programme (INEP); and the roll-out of the Regional Electricity Distributor (RED) plans.

The SAFCOL delegation then presented their 2003/2004 Annual Report. They provided an overview of corporate structures. The status of the privatisation process was also discussed, and an overview of the entity’s performance was provided. Finally, a review of the 2004 financial year was given. This included highlighting that SAFCOL had made a net profit of R37 million. The Committee then questioned SAFCOL about its Social Investment Programmes; the issues surrounding privatisation including possible job losses; the land claims against SAFCOL; and SAFCOL’s overseas operations.

The Alexkor Chief Executive Officer then presented the Alexkor Annual Report for 2003/2004. He began by presenting information on the corporate structure of Alexkor. He then focused on the financial review and highlighted that Alexkor had made a profit of R35.7 million in 2004, which was up from the preceding years. He also outlined their challenges, including the need to explore new areas for mining; the land claims case of Namaqua people; environmental rehabilitation projects; and its long-term liabilities such as paying existing pensions. In the ensuing discussion, the Committee questioned the life span of its mining business, the status of its empowerment programmes, and whether non-core assets had been privatised.

MINUTES

Eskom Distributive Division briefing
Mr M Ntsokolo (Managing Director: Eskom Distributive Division) provided background on Eskom’s Distributive Division. He explained that it was responsible for delivering electricity services, maintaining the distribution network, and ensuring customer satisfaction.

Mr Ntsokolo highlighted that for the purpose of distribution, Eskom planned to divide the country into six RED areas. Each region would have a Metro as an anchor customer, for example: RED 1 would be anchored by Cape Town; RED 2 by eKurhuleni Metro, RED 3 by the Nelson Mandela Metro; RED 4 by Johannesburg; RED 5 by eThekwini Metro; and RED 6 by Tshwane Metro. This would ensure that it was financially viable to supply electricity to each region.

Mr Ntsokolo then discussed the national electrification fund allocation principles. The Integrated National Electrification Programme (INEP) recommended how much each province or municipality should receive for electrification. These recommendations were then passed on to the National Electrification Advisory Committee (NEAC). Funding for reducing backlogs, electrifying rural areas, and electrifying Integrated Sustainable Rural Development Strategy (ISRDS) Nodal Zones was prioritised.

Mr Ntsokolo then discussed the progress made in electrifying households, schools, and clinics since 1994. He also discussed the 2004/2005 electrification budgets for each of the provinces. In order to reduce backlogs, the Eastern Cape and Limpopo had received the largest budgets. He also outlined how many connections had been made by Eskom in each of the provinces during 2004/2005.

Mr Ntsokolo also discussed Eskoms future electrification plans. These plans included Eskom aligning municipal requirements with available funding. It also entailed Eskom developing a plan to ensure universal access to electricity. In order to achieve the President’s target of universal electricity access in the next eight years, Eskom would require R16.8 billion.

Mr Ntsokolo then highlighted the possible implications of the planned Municipal Infrastructure Grant, which would be launched in 2006. Under this plan, funding for electrification would not flow through Eskom; rather it would go through the municipalities. The municipalities would then be responsible for achieving targets for electrification. Eskom would only be a service provider as the municipalities would be responsible for implementation. Such a plan would also carry certain risks, for example, there would be more decision-makers; there may be problems with quality assurance; costs may increase; and the network performance may be reduced. In the light of this, Eskom proposed that it be appointed co-ordinator of the bulk infrastructure creation. Eskom also suggested that a national standard be set for the installation of electrification infrastructure in households.

Mr Ntsokolo then discussed the issue of free basic electricity. A National Task Team had been created to negotiate a national contract on how municipalities would fund Eskom for free basic electricity. It also examined the possibility of implementing one national tariff countrywide. Mr Ntsokolo noted that 196 municipalities had already signed the Free Basic Electricity Funding Agreements. Only 39 municipalities had not yet signed. Of those who had signed, 141 municipalities had already rolled out free basic electricity. Various criteria were used to decide who received free basic electricity. Some municipalities were setting their own criteria, while others were using Eskom’s default of 150 kW free per month.

Mr Ntsokolo then briefly discussed Eskom’s Black Economic Empowerment procurement history. He also outlined some of the issues surrounding Eskom’s general service delivery. This included considering possible improvements, for example vending stations could be increased and the network could be strengthened.

Discussion
The Chairperson questioned whether it was the municipalities' or the local governments’ responsibility to pay for the bulk electricity that Eskom provided. She also enquired which municipalities had signed the Free Basic Electricity Funding Agreements.

Mr Ntsokolo replied that he would forward a list of municipalities who had not yet signed the Free Basic Electricity Funding Agreements to the Committee.

Ms N Ntwanambi (ANC, Western Cape) asked to whom Eskom was accountable. Was it the Department of Public Enterprises or the Department of Minerals and Energy? She also enquired who Eskom’s foreign customers were.

Mr Ntsokolo replied that Eskom was responsible, in different ways, to both departments. The Department of Minerals and Energy was tasked with setting electrification targets for Eskom, which Eskom had to meet. The Department of Public Enterprises was a shareholder of Eskom, and as such, Eskom was accountable to it for the financial performance of the company. The Eskom delegation also responded that its foreign customers were the Southern African Development Community countries.

Ms Ntwanambi asked whether it was cost effective to have both the City of Cape Town and Eskom providing electricity to the Greater Cape Town area. She also asked how much Eskom was owed by municipalities, and how it intended to retrieve these debts.

Mr Ntsokolo responded that it was costly to have multiple electricity service delivery providers in Cape Town. The REDs project was one attempt to rectify this problem. It would allow for cheaper electricity and the implementation of a standard rate.

The delegation also replied that the municipal debt owed to Eskom was a problem in the mid-1990s, when it peaked at R1.2 billion. Part of this debt was written off in 1995. The estimated municipal debt now stood at approximately R30 million a month. The offending municipalities were, however, servicing this debt.

Ms Ntwanambi asked if Eskom supplied informal houses with electricity.

Mr Ntsokolo responded that Eskom supplied informal houses with electricity. However, if informal houses had been erected in an area that had not been demarcated for settlement purposes, then Eskom would not provide electricity.

Mr D Gamede (ANC, KwaZulu-Natal) and Ms Ntwanambi commented that the Eskom delegation should have been more gender representative. Mr Gamede also enquired whether Eskom had a disability target for employment equity.

Mr Ntsokolo responded that Eskom was serious about addressing gender equity and planned to have women employed in 40% of all positions. He also noted that 56% of all Eskom employees were from a historically disadvantage background. Eskom also had an equity target for disabled peoples, which it had already surpassed.

Mr Gamede enquired about Eskom’s priorities and achievements thus far in the Integrated Sustainable Rural Development Strategy (ISRDS) Nodal Zones.

Mr Ntsokolo responded that he would send information to the Committee on the work that Eskom had done in the various ISRDS Nodal Zones.

Mr Gamede asked what Eskom was doing to provide electricity to households in rural areas. Mr K Sinclaire (NNP, Northern Cape) remarked that it was very expensive for rural people to get an Eskom connection. He enquired whether there was an Eskom subsidy available for this.

Mr Ntsokolo replied that Eskom would forward information on its projects in the rural areas to the Committee.

Mr Gamede commented that he was concerned about the planned REDs. He specifically noted that in May 2004 the President had stated that the first RED would be completed in June 2005. Would this target be met?

Mr Ntsokolo replied that the first RED would open in June 2005 in Cape Town. The plans for the other REDs were also on target.

Mr Gamede enquired whether the new generating capacity tender had been advertised.

Mr Ntsokolo replied that the tender had been advertised.

Mr J Sibiya (ANC, Limpopo Province) asked why the Limpopo Province had the largest electricity connection backlog in South Africa.

Mr Ntsokolo answered that Eskom had addressed the backlogs in the Limpopo Province and in Mpumalanga. An Energy Forum, comprised of Eskom and local municipalities, had been established to decide which areas should be prioritised.

Mr Sinclaire asked whether Eskom had the capacity to generate enough electricity to meet the needs of South Africa.

Mr Ntsokolo noted that Eskom could generate enough energy for South Africa. However, Eskom could not supply energy to other countries at the same levels as in the past. It was seeking to increase its capacity to rectify this situation.

Mr Sinclaire then enquired whether there would be retrenchments due to the Integrated National Electrification Programme (INEP).

Mr Ntsokolo responded that there would be no retrenchments. Indeed, Eskom expected 38 000 new jobs to be created. These jobs would be both temporary and permanent.

Mr Sinclaire enquired whether the theft of Eskom property, such as cables, was a major problem.

Mr Ntsokolo replied that theft was a problem. Eskom, along with Telkom and Spoornet, had a joint committee to attempt to deal with theft.

SAFCOL Annual Report briefing
Mr C Ntuli (Chairperson) presented SAFCOL’s Annual Report. He began by discussing SAFCOL’s corporate governance. He noted that employees and boardmembers were being educated about the implications of the Public Finance Management Act (PFMA). This included recognising that the Board was the accounting authority of SAFCOL, and ensured that Boardmembers met their fiduciary duties.

Mr Ntuli then discussed the status of the privatisation of SAFCOL. He gave a brief history of the entities that SAFCOL had privatised, such as Singisi and SiyaQhubeka. This included information on the amounts that they had been sold for. He noted, however, that no privatisation transactions were completed during the past financial year. There was a bid by Bonheur for the Komatie Land Forests (KLF) in 2004, but the Competition Commission prohibited the transaction. A process was underway which aimed to address this issue and ensure that KLF could be privatised. He also noted that in preparation for privatisation, SAFCOL had acquired a number of forestry assets from the Department of Water Affairs and Forestry.

Mr Ntuli then outlined the performance objectives of SAFCOL. These included: making SAFCOL profitable; ensuring sustainable forestry management; expanding SAFCOL’s oversees market; achieving privatisation; enhancing sawmilling technology; undertaking research and development; undertaking employee development; achieving employment equity; and expanding into southern African countries by purchasing plantations like Ifloma in Mozambique.

Mr S Kajee (Chairperson of the SAFCOL Audit Committee) then provided a financial review of the year ended June 2004. It was noted that SAFCOL revenue for the year was R682 million, and that it made a net profit of R37 million. The profit margin would have been greater, but SAFCOL had experienced a fire in KLF that caused R50 million in damages. He also noted that because SAFCOL was in the process of privatising, it undertook little new investment.

Discussion

Ms Ntwanambi and the Chairperson asked what empowerment programmes SAFCOL had for their employees and the communities that surrounded the plantations. Specifically, in terms of the Social Development Programme, were schools and day-care centres being provided? The Chairperson also asked if SAFCOL provided bursaries to the children of its employees.

Mr Kajee replied that SAFCOL had a Corporate Social Investment Programme for employees and the communities that surrounded the SAFCOL plantations. He said that SAFCOL would send information to the Committee on each of its Corporate Social Investment initiatives.

Ms Ntwanambi enquired whether SAFCOL had any plantations in other countries besides Mozambique.

Mr Kajee noted that Mozambique was the only foreign country in which SAFCOL owned plantations.

Ms Ntwanambi enquired about the project in the Grabouw area. She had heard that there were problems with the farm workers in Grabouw, and questioned whether SAFCOL had experienced this.

Mr J Coetzer (SAFCOL Chief Financial Officer) noted that SAFCOL had established an empowerment project in Grabouw in 1996, which included a community of 130 historically disadvantaged households. This community, in various ways, now owned more than 50% of the shares of this project. He also responded that if workers were unhappy, they would sometimes set the forests alight. SAFCOL, however, strove to keep its employees happy.

Mr D Mkono (ANC, Eastern Cape) asked whether SAFCOL was export driven.

Mr Kajee noted that SAFCOL sold 95% of its timber on the domestic market. Exports only accounted for 5%.

Mr Mkono stated that there had been reports of many employees leaving SAFCOL. What was causing them to leave and was it the privatisation process?

Mr Kajee replied that if, or when, SAFCOL was privatised, the lower level employees had been guaranteed their jobs for a period of three years. Management and supervisors, however, had not received the same guarantee. Employees from the management levels were leaving SAFCOL because of the uncertainty that surrounded their future employment.

Mr Sinclaire enquired whether SAFCOL had insured its plantations against fire.

Mr Kajee responded that up until five years ago SAFCOL had insurance cover for its standing timber. Since then, no company has been willing to insure plantations.

Mr Sinclaire noted that R28.4 million had been lost under privatisation. He requested an explanation for this.

Mr Kajee responded that a Privatisation Bid Evaluations Committee that comprised of the Treasury, the Department of Public Enterprises, the Department of Water Affairs and Forestry and SAFCOL, had decided on which bids to accept. Once the Bid Evaluations Committee accepted a bid, SAFCOL also had to accept the bid, even if it was below the value of the entity being privatised. The loss of R28, 4 million occurred due to such a situation. Indeed, the entity in question was valued at R70 million, but there was only a bid for R41, 6 million.

Mr Sinclaire asked why the Competition Commission had intervened in the sale of KLF.

Mr Sinclair responded that if Bonheur had been successful in buying KLF it would have controlled 75% of the timber industry in Mpumalanga. It was for this reason that the Competition Commission intervened.

Mr Sibiya questioned whether SAFCOL was exploiting workers in the plantations that it owned in Mozambique. Did SAFCOL train and pay a living wage to these workers?

Mr Kajee replied that SAFCOL was paying a decent wage to employees in Mozambique. They also received training.

The Chairperson noted that SAFCOL had stated that its employment equity targets had been disrupted by the privatisation drive. She asked for more details on this.

Mr Gamede enquired whether SAFCOL was subject to any land claims.

Mr Kajee responded that there were land claims. However, SAFCOL did not own the land on which its plantations were situated. This was government property. SAFCOL only held the right to farm the land. Technically the land claims were, therefore, against the government and not SAFCOL. There was, however, a programme in place to identify the rightful owners of the land. They would then receive a portion of the monthly leasing fee.

Alexkor Annual Report briefing
Mr D Zihlangu (Alexkor Chief Executive Officer) began by discussing the corporate structure of Alexkor. Alexkor was divided into three units, which were the mining, the social infrastructure, and trading units. The core component of Alexkor was the mining unit. This was comprised of land, beach and marine mining, with marine mining contributing most of the revenue.

Mr Zihlangu then presented the Alexkor financial review for the year ended July 2004. He noted that Alexkor mined approximately 80 thousand carats in 2004, which was up 0.6% from 2003. At the end of the financial year, Alexkor also had cash, or the cash equivalent, of R71.4 million. However, he noted that the diamond production turn over had decreased from R251 million in 2003 to R227 million in 2004. This was mainly due to the weakening of the Rand. Despite this, Alexkor had made a net profit of R35, 7 million for the 2004 financial year.

Mr Zihlangu then discussed the challenges that Alexkor faced. Amongst these was a land claim by the Namaqua people, which was currently under litigation. There was also another court case under litigation with Nabera. Nabera had been tasked with making Alexkor profitable, in the 1990s, in preparation for privatisation. They did not achieve this, but still claimed that they added value to Alexkor and should be compensated R119 million for this. Mr Zihlangu also noted that Alexkor would need to undertake both land and sea exploration to find new areas to mine. Alexkor, or the owners who may buy it once it was privatised, would also need to replace much of the ageing equipment and infrastructure. Other liabilities included pension payments, medical aid for retired employees and land rehabilitation commitments.

Discussion
Ms Ntwanambi enquired whether there were any land claims by Namibians against Alexkor.

Mr Zihlangu responded that there were no land claims by Namibians against Alexkor.

Ms Ntwanambi also asked if Alexkor employed migrant workers from neighbouring states.

Mr Zihlangu replied that Alexkor was not employing migrant workers from neighbouring states. They did employ people from areas such as Upington though.

Ms Ntwanambi enquired if there were diamonds in Port Nolloth. She also asked if there was a problem with smugglers in the diamond industry.

Mr Zihlangu noted that Port Nolloth was the centre of the Illegal Diamond Buying (IDB) trade. Smuggling was also a problem. Alexkor, along with the Scorpions, was seeking to address this problem.

Mr Sinclaire stated that he had heard a rumour that Mr Zihlangu was leaving Alexkor. He was concerned, as Mr Zihlangu had made Alexkor a profitable entity. He asked what would happen to Alexkor upon Mr Zihlangu’s departure.

Mr Zihlangu replied that although he was leaving Alexkor; it had been a team effort to ensure that Alexkor became profitable. The rest of the team would remain and he did not expect a change in the financial status of Alexkor.

Mr Sinclaire enquired about the empowerment projects that Alexkor was involved in, specifically those that involved women.

Mr Zihlangu responded that Alexkor viewed the empowerment of women as a priority. It had a programme to offer bursaries to women to further their studies in subjects that related to mining.

Mr Gamede asked whether the non-core businesses of Alexkor would be sold in the foreseeable future. He also enquired what the lifespan of the mining operation was.

Mr Zihlangu replied that the Cabinet had decided to dispose of non-core assets in 2001. The non-core businesses of Alexcor were to be transferred to the Northern Cape government, and other aspects of Alexkor were to be sold to private enterprises. However, the land claims case halted this.

Mr Zihlangu noted that the life span of the sea mining operations was another six years. This was why exploration was necessary.

The meeting was adjourned.

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