Department Strategic Plan and Budget: Minister’s briefing

Meeting report

PUBLIC ENTERPRISES PORTFOLIO AND LABOUR AND PUBLIC ENTERPRISES SELECT COMMITTEE
5 April 2005
DEPARTMENT STRATEGIC PLAN AND BUDGET: MINISTER’S BRIEFING

Chairpersons: Mr Y Carrim (ANC) and Ms N Ntwanambi (ANC)[Western Cape](Acting)

Relevant document:
Department Budget
Department Strategic Plan 2005-2008

SUMMARY
The Minister of Public Enterprises briefly outlined the challenges facing the Department. While some of the State-owned Enterprises (SOEs) would be kept as part of government assets, a number would be sold to the private sector as they were non-core assets. During the following discussion, the issues raised included:
- that the Department and the SOEs should be fully capacitated in order to meet the envisaged vision;
- that the budget allocated should be in line with the programme proposed, and
- the role of the SOEs in African development.

The Department then presented their strategic plan and initiatives. These included: Enterprise Level Shareholder Management, Industry Level Shareholder Management; and Sector and Regional Development Level Shareholder Management. SOEs had to add to the competitive advantage of the economy.

The delegation then discussed some of the plans of Denel, Transnet, Eskom, Alexkor, Safcol and arrivia.com. These plans included Eskom and Transnet undertaking massive investments in infrastructure. They also included South Africa Airways (SAA) exiting the fold of Transnet. The Department delegation then discussed the Joint Project Facility Initiative and the implementation, and implications, of the shareholder compacts.

Members asked questions about the Department’s Black Economic Empowerment (BEE) initiatives. There were also concerns about the role of the SOEs in meeting national developmental priorities, such as employment creation. Queries were also raised about the structure of the SOEs, specifically the separation of the Department from the SOE Boards. This developed into a discussion regarding who provided the SOEs with their mandates. Finally, the Committee enquired about its own role and mandate in terms of the shareholder compacts.

MINUTES
The Chairperson welcomed the Minister and the Department’s delegation team led by its Acting Director-General and Deputy Director-General: Corporate Structure and Strategy, Ms Portia Molefe. Other officials were Mr James Theledi (Deputy Director-General: Analysis and Risk Management); Mr Tebogo Mphuti (Deputy Director-General: Corporate Finance and Transactions); Mr Mario Van der Walt (Chief Financial Officer); Mr Andrew Aphane (Chief Director: Communications and External Relations); Mr Paul Venier (Director: Strategy and Business Planning Administration, and Ms Rentia Solomon (Director: Corporate Governance and Policy).

The Chairperson noted that the Chairperson of the Select Committee on Labour and Public Enterprises, Ms P Hollander (ANC)[Northern Cape] would not be joining the meeting and Ms N Ntwanambi (ANC)[Western Cape] would be acting on her behalf.

Minister’s briefing
Minister Alec Erwin presented an overview of the Department’s strategic plan and budget. The strategic plan gave a broader picture of what the Department intended to achieve in its programmes, in order to ensure that the South African economy increased its growth rate and developmental capacity. It was noted that over the last ten years there had been tremendous efficiency in the economic operations of South Africa. The Department thus believed that the big state corporations could play even a more meaningful role in increasing our economic growth rate from its current 3%. The fact that our economy had grown over the last years could be because South Africa was currently experiencing excess capacity to generate electricity. South Africa was currently also seen as one of the major export manufacturers which put tremendous pressure on the Government to ensure that proper structures were in place to regulate its port systems. The the Department therefore tended to view the defence-related industries as very strategic in its bid to improve its manufacturing capacity, especially in relation to technological matters.

With that in mind, the intention was now to ensure that State corporations focused much of their attention on their core competence and thereby become productive. Thus Government would remain the main shareholder of all the four big State corporations, namely Eskom, Transnet, SAA and Denel. However, it should be borne in mind that notwithstanding that resolution Government would still pursue means to ensure that these SOEs did bring in private capital as the private sector’s investment was crucial to the development of the South Africa economy. Therefore, while Government would continue to dispose of its holdings and smaller companies, however they would ensure that Eskom continued to be responsible for the 70% of the country’s energy system. Among others, it would handle the generation capacity, the operation of transmission structures and distribution activities to some bigger structures. Transnet, on the other hand, would focus mainly on the transportation of freight, such as rail freight, ports and the pipelines. SAA would thus be moved from the balance sheet of Transnet to become a separate State-owned company. While Denel would still remain involved in all major State defence industries, however a number of private partnerships would be formed with relevant private companies, locally and abroad. He noted that Government might privatise the remaining SOEs as they did not consider them to be core business assets.

The Minister noted that a consultation forum consisting of the big four SOE Chairpersons, CEOs and the Department's senior management had been instituted to look at various projects aimed at increasing the level of investment across the SOEs. He noted that the Committee would thus be briefed thoroughly on Government's programme during the Department's presentations.

Discussion
Mr S Manie (ANC) asked whether was there any proper assessment to capacitate the Department and SOEs to deal with their new roles as outlined in the new Government policies.

The Minister responded that they had looked at the issue of restructuring thoroughly and ensuring that all SOEs were fully capacitated to meet their challenges. The Ministry, Department and the Boards and management of the SOEs now had to develop investment and efficiency programmes which would be in line with these new policies.

Ms Mnandi (ANC) asked what had been done to ensure that the SOEs also appreciated the shift that had been initiated by the government in these new policies.

The Minister responded that all the SOEs had a clear understanding of their particular roles within the new system. Therefore there was a need to strengthen their managerial structures while effecting these managerial shifts.

Mr Manie (ANC) asked whether the budget was sufficient to meet the vision espoused in terms of this new role.

The Minister responded that although they would have wanted more, however he felt that the budget would be sufficient to meet their needs and carry out their programmes.

Ms N Mnandi (ANC) asked what mechanisms were in place to ensure that the Department played its oversight function effectively over the SOEs and their Boards.

The Minister responded that what they had done was nothing entirely new except to ensure that what was always within the Department's disposal was strengthened and made more effective.

Mr Sinclaire (NNP)(Northern Cape) asked what meaningful role could be played by Parliamentary Committees in terms of their oversight to ensure that SOEs remained accountable.

The Minister responded that the SOEs had to comply with the provisions of the PFMA. Thus it was the responsibility of the Parliamentary Committees to ensure that the Department, together with its political head and entities, performed in accordance with their strategic plans.

Mr K Sinclaire (NNP)(Northern Cape) asked the Minister to give the Committee a broad overview of the role played by SOEs in African development.

The Minister responded that the SOEs had not really played a meaningful role in Africa in the past. However plans were in place to ensure that they really understood their strategic position in continental issues and effectively took part in the processes.

Dr P Rabie (DA) asked which non-core business would be sold by Denel.

The Minister responded that it should be noted that Denel was involved in a very difficult industry and as such Government would have to determine what should be considered as its core business. Because without that it would be ridiculous to expect a single small company to effectively compete in the high economy of the world by manufacturing all major advance technologies on its own.

Dr Rabie (DA) asked the Minister to give clarity as to which foreign arms companies they were negotiating with in terms of their strategic partnership development.

The Minister responded that while he was not in a position to pre-empt the outcomes of any negotiations, however they would ensure that they roped-in like minded defence companies.

The Chairperson felt that the State should be much more assertive and clearer when it came to Denel. Further he reminded Members that last year it was agreed that the Minister would table in the Parliament the shareholders compact in the course of this year.

The Minister noted that the Department would definitely touch on shareholder compacts during its presentation. However it should be noted that they would like to have the reversed shareholders compact in place by 2006/07.

The Chairperson asked what was the timeframe put in place to ensure the conclusion of SAA’s demarcation from Transnet.

The Minister responded that while their target was to complete the whole process before the end of the year, however the difficulties and challenges involved in the whole negotiation process should also be borne in mind. Thus as the process unfolds they would keep the Committee informed accordingly.

The Chairperson asked the Minister to explain why it had been possible for Khulula.com to offer cheap flights, while SAA could not do that. Mr C Gololo (ANC) also asked how the Department felt the public and customers perceived the changes that had been taking place within SAA, including in flight prices.

The Minister responded that it should be noted that the manner of developing KPIs for the SOEs was very complex and the Boards were responsible for the effective running of their respective SOEs. However, the Department had tried to develop a general performance management framework to guide the SOEs. Thus the issue of cost was not unique to South Africa but affected all the airlines around the world and most depended on size and what could be provided by the airline industry in question. He noted that while they felt that SAA could contribute more in the region, however they would welcome any advice that would ensure that they remained on top.

Department briefing
Ms P Molefe (Department Deputy Director-General: Corporate Strategy and Structure) began by noting that the Department was responsible for the strategic direction and oversight of the key SOEs. This included ensuring that they were operationally efficient, that their investments were economically effective, and that they played a leading role within the economy, specifically in the areas of corporate governance and national policy implementation.

Ms Molefe then outlined the Department’s mission. This included working on policy with other government departments to establish optimal industry structures; developing a clear policy environment; working with SOE Boards to ensure their efficiency; establishing public-private partnerships (PPPs); and working with SOEs to enhance sectoral and regional economic development in the ‘Second Economy’.

Ms Molefe then noted that the Department would be involved in the following initiatives:

-Enterprise Level Shareholder Management. This would entail ensuring that individual SOEs added to the competitive advantage of the economy through lowest cost sustainable competitive service provision and investment programmes, which encouraged private sector confidence. In order to achieve this, the Department would: review the strategic, business and investment plans of SOEs; include the best practice governance process in the shareholder compacts; set and monitor targets for the individual SOEs; perform a gatekeeper role between SOEs and policy departments; and ensure SOEs complied with regulations.

-Industry Level Shareholder Management. Through this the Department would aim to ensure that key input industries, in which the SOEs operated, were efficient. This would entail the Department identifying an optimal division of labour between individual SOEs and the private sector, facilitating the desired level of private sector participation in the optimal industry structure, and defining a fair competitive pricing regime for individual SOEs.

-Sector and Regional Development Level Shareholder Management. This would involve the Department working with economic clusters to ensure regional and sectoral economic development through leveraging SOE assets and capabilities. The Department would specifically focus on the minerals beneficiation value chain, advanced manufacturing, and manufactured input industries to the SOEs.

Ms Molefe then discussed the initiatives that would be implemented in the SOEs, which reported to the Department. These included Transnet aggressively investing in, and focusing on, ports, rail and pipelines; South African Airways exiting the auspices of Transnet to become a stand alone SOE; Eskom investing in infrastructure to meet future electrification demands; the restructuring of electrification distribution into six regional distributors; and the continuation of Denel’s major strategic review, which aimed to make it economically sustainable.

Ms Molefe then discussed the Joint Project Facility Initiative. The objective of this would be to develop projects to the point where an investment case was accepted by the financial community. Five key projects had been identified, which were in the areas of property; Africa; human resource development; energy; and information, communication and technology (ICT). Skilled project managers would be reporting on the progress of these projects to the Department, and the Department’s Committee of Chairpersons and CEOs.

Ms Molefe then described the shareholder compacts, which contained performance agreements between the Department and the SOEs. Included in these were the SOE’s key performance indicators, the entities’ strategy, information on governance systems, information on legal compliance, and information on the SOE’s reporting systems. She noted that the Transnet and Eskom compacts were due to be signed at the end of June.

Discussion
Ms P Mnandi (ANC) asked how the Department planned to ensure that its interventions in the ‘Second Economy’ were effective. She also asked whether these interventions would target women, the disabled and the youth.

Ms Molefe acknowledged that the Department needed to expand its ‘Second Economy’ interventions. However, the Department had been working on a pilot project, in Phalaborwa, to establish a call centre, which would employ some of the unemployed youth from the area. If this initiative succeeded, it would provide a model for creating employment opportunities for unemployed youth in the rural areas. There were also other developmental projects underway, such as the initiatives in Coega. These were long term, and at times, difficult projects. Indeed, interventions in the ‘Second Economy’ tended, by their nature, to be difficult.

Ms Mnandi enquired whether the Department’s BEE initiatives were broad based. Ms Mnandi and the Chairperson also enquired about the progress made by the joint programme between the Department of Public Enterprises and the Department of Trade and Industry, on broad based BEE.

Ms Molefe responded that the Department would ensure that black owned companies benefited from the Department’s drive to develop the economy. For example, black owned companies would be involved in manufacturing aircraft components for the Airbus A400M project. Indeed, a small black owned company had already been allocated a 15-year contract to supply black boxes for the A400M project. Ms Molefe noted that the Department also needed to be cautious when it sold non-core assets to black owned companies. It could not burden black owned companies with entities that were not viable. She added that the Department would be presenting information on the SOEs’ employment equity performances on 6 April.

Mr S Manie (ANC) noted that the Department’s objective, under Enterprise Level Shareholder Management, was to ensure that SOEs added to the competitive advantage of the economy through lowest cost sustainable competitive service provision. He felt that this objective was problematic, because it lacked any reference to the national priorities of employment creation, poverty alleviation and addressing the historical imbalances of the past. He also stated that the Committee had been engaging the SOEs around the issue of how they could be involved in addressing these national priorities. However, the Department seemed to view the role of the SOEs as being more commercially driven. He enquired how these apparent differences between the Committee's view and the Department’s view were going to be addressed. The Chairperson and Ms N Ngcengwane (ANC) added that there needed to be a balance between the commercial objectives of the SOEs and job creation. Simply reducing the cost of business would not necessarily translate into job creation in the wider economy. The Chairperson also enquired whether a mechanism could be implemented whereby once an SOE had reduced its business costs it would then be obliged to invest in employment creation.

Ms Molefe acknowledged that this was a challenge and that the Committee had raised pertinent concerns. The main challenge was that SOEs needed to maintain the lowest possible cost input in order to be competitive. One of the biggest costs for the SOEs was labour, however, retrenching staff to reduce costs was often not the best solution. If a SOE was not competitive, there were usually greater underlying reasons for this. Another problem was that the SOEs borrowed from their pension funds, which meant that they had to be competitive in order to provide the pensioners with a solid rate of return.

Mr Manie enquired how the Department would achieve its objective, under the Sector and Regional Development Level Shareholder Management, of impacting broadly on the economy through strategic sectors, such as advanced manufacturing.

Mr Manie then noted that the Department had not furnished enough information on its plans to place Denel on a sound financial footing.

Mr Manie observed that the shareholder compacts would be presented to the Committee. He enquired if this would be undertaken to provide information to the Committee; or would it be done so that the Committee could have an input into the shareholder compacts? Ms N Kondlo (ANC) added that she was also unsure what the role of the Committee would be when it received presentations on the shareholder compacts.

Ms Molefe responded that the Committee should be given a mandate to comment, and provide input, on the shareholder compacts.

Ms Mnandi remarked that the SOEs had provided their staff with valuable skills through their human resource development programmes. The private sector often poached these highly skilled staff members from the SOEs. She enquired what the Department was doing to ensure that these people were retained by the SOEs. Ms Mnandi also enquired about Denel’s human resource development programme: had it provided skills to Denel’s black staff members over the past ten years?

Ms Molefe responded that Denel, Transnet and Eskom had skills development training programmes. The Department was undertaking a study on these training programmes to assess their quality and whether the SA Qualifications Authority (SAQA) had approved them. The Department was also undertaking research into establishing an entity that would provide SOE staff with advanced practical and policy producing skills. This would be a long-term undertaking.

Ms Kondlo was concerned that the SOE Boards had been allocated too much power. Added to this, she was concerned that the distinction, and separation, between the Boards and the Department was too extensive. The Boards were supposed to be accountable to the Department. She also felt that the SOE Boards needed to respond to the challenges of a developmental state.

Ms Molefe replied that the separation of powers, if undertaken correctly, was a valuable tool as it allowed the Department to play an oversight role, while the Board was responsible for the operation of the SOE. However, the Minister had established the Chairpersons and Chief Executive Officers Committee in an attempt to ensure a closer relationship between the SOEs and the Department.

Mr T Mputhi (Department Deputy Director-General: Corporate Finance) added that the SOEs were registered in terms of the Companies Act, and were required to maintain certain standards of corporate governance. They were identical to other companies, except for the fact that the state was their major shareholder. There were, therefore, technical issues that prevented the Department from becoming involved in micro-managing the SOEs. Similarly, if the Department became involved in the SOE Boards, locating the responsibility for the performance SOEs would become problematic. Would the Boards or Department be responsible for the SOE’s performance? There was, therefore, a clear need to distinguish the SOE Boards from the Department.

Mr Manie noted that everyone accepted that the SOEs had to be governed by laws. However, he felt that state ownership of the SOEs made them vastly different to private companies. In private companies, shareholders determined the companies’ mandates. As the Boards of the SOEs were not the owners of the SOEs, they should not be providing mandates to the SOEs. Indeed, because the SOEs were state owned, it was, in fact, the people of South Africa who owned the SOEs. It should, therefore, be the people of South Africa who provided the SOEs with a mandate. Indeed, they had already provided the government with a mandate to create jobs and to address the imbalances of the past. As a result, the SOEs’ mandate needed to include these national developmental issues, and not only focus on profit making.

Mr Manie also noted that when the SOEs reported to the Committee they merely informed the Committee that they were not responsible, or mandated, to create employment. One possible solution to this situation would be for the Department to include socio-developmental components within the shareholder compacts. This would also demonstrate that the Department was serious about employment creation. If this took place, it would provide the SOEs with the responsibility, and mandate, to create employment. It would also allow the Committee to constructively engage the SOEs on the issue of employment creation.

Ms Molefe responded that maintaining state ownership of the SOEs was a strategic decision. Part of the problem in South Africa was that shareholder activism did not exist, even in the private sector. As a result, shareholders in the private sector did not make the decisions, or provide mandates, for private companies. South Africa, as a whole, perhaps needed to shift in the direction of stakeholder activism. She added that the Transnet shareholder compacts would possibly contain developmental components. This would possibly align the Department’s and the Committees’ views on the role of SOEs in terms of fulfilling developmental obligations.

The Chairperson noted the Department would be returning on 6 April to present the remaining aspects of its budget.

The meeting was adjourned.