SAFCOL Annual Report 2006: briefing

PUBLIC ENTERPRISES PORTFOLIO COMMITTEE
20 September 2006
SAFCOL ANNUAL REPORT 2006: BRIEFING

Chairperson: Mr P Hendrickse (ANC)

Documents handed out:
SAFCOL Group Annual Report - 31 March 2006
SAFCOL Presentation on Annual Report
SAFCOL Annual Report 2006 [not available electronically]

SUMMARY
The Committee met with the South African Forestry Company Limited, and was briefed on the Company’s Annual Report for 2006, which addressed primarily the Company’s future following the termination of the privatisation process of its operating subsidiary Komatiland Forests, transformation and human resource development, upliftment of communities and creation of employment opportunities. . The Company had a strong balance sheet and adequate cash reserves. There would not be any need to ask for recapitalisation, guarantees, and subsidies or transfer payments from Government. Policy guidance was awaited from Government regarding a new mandate and cross-border initiatives. Members sought clarification on acronyms, terminology and figures, and found the nine-month delimitation of the year under review confusing in the absence of extrapolation to a twelve-month period to facilitate year-to-year comparisons.

MINUTES

South African Forestry Company Limited (SAFCOL) presentation

Mr M J Breed, Chief Executive, thanked the Chairperson for the opportunity to present an overview of SAFCOL’s activities over the past financial year, the issues of privatisation, and the Company’s future; and introduced his co-presenters - Mr J P Coetzer, Financial Director, and Mr L Mudimeli, General Manager: Corporate Services. Also Ms L C Mossop-Rousseau, Corporate Services, formerly of the Department of Water Affairs and Forestry (DWAF), and Mr A A Mutshinya, Group Executive: Human Resources, who was especially concerned with the process of transformation and world class human resources practices, were available to answer Members’ questions.

Mr Breed reviewed SAFCOL’s main centres of operation in Limpopo and Mpumalanga, where it was a major employer, and additional operations in KwaZulu-Natal and other areas in South Africa, and in Mozambique. The Annual Report for 2006 was for a nine-month period only, as the year-end was changed to 31 March 2006 to coincide with Government’s financial reporting dates. The privatisation of Komatiland Forests (KLF), a wholly owned subsidiary of SAFCOL, was terminated. SAFCOL had produced acceptable financial results. The Board had complied with the protocol on corporate governance as issued by the Department of Public Enterprises in all material respects, subject to a few constraints that had been imposed in terms of the privatisation process.

The Board of Directors had met regularly. After the Annual General Meeting held on 15 August 2006, the Minister of Public Enterprises, as the Principal Shareholder, announced that the Board of Directors would be reconstituted; the new Board was due to be approved by Cabinet on 20 September 2006. Details of remuneration of Directors and Executive Management were provided. The audit report was unqualified. There were management teams at SAFCOL and at Komatiland, based at Nelspruit for day-to-day operations. The corporate governance code of ethics was very important to the Company.

The Shareholders’ Compact in the year under review focused mainly on the privatisation of Komatiland. It was now with the Department for realignment with new objectives and should be completed within the next two weeks. The SAFCOL group had a Code of Ethics that formed part of its conditions of employment and was in the process of being updated in alignment with local and international best practices. As of 23 June 2006, SAFCOL was a member of the Ethics Institute of South Africa.

The Company’s main focus in the nine months covered by the Report was to maintain Komatiland Forests’ assets with two exceptions – the closure of the Blyde sawmill, more than 50 years’ old and partly still operated by steam, on account of safety reasons, and the mothballing of the veneer plant next to it until such time as the viability of exporting its veneer products improves to acceptable levels. Replacing the sawmill with a facility in the Highveld area was under consideration, subject to the agreement of the Principal Shareholder. The Company focused also on replanting all the areas damaged by the fires of 2003. The third area of focus was the Mozambican forestry company, IFLOMA, of which KLF had acquired an 80% share on 1 April 2004. Offices were reopened, infrastructure upgraded, the existing plantation rehabilitated, two plantation nurseries established, an area of 1 000 hectares was replanted, a new personnel structure was implemented, 561 local people and three expatriates were employed, and a study undertaken to determine the feasibility of a wood fibre project.

Under SAFCOL itself, the Company managed and will continue to manage until 31 March 2007, certain areas under delegation from the Department of Water Affairs and Forestry (DWAF). Establishment of a research centre and seed orchard at Nyalazi was under consideration, with particular reference to indigenous trees. With regard to the privatisation status of the four companies in which SAFCOL held 25% shareholdings, the four companies had five years to achieve the undertakings made in the Business Plan Undertakings (BPUs). Some lessons learned from the process of privatisation were that BPUs needed to be tightly drawn up, with severe penalties if the undertakings were not achieved, and there needed to be clearer verification of representations to ensure that fronting did not occur. Also monitoring of all agreements should reside with the entity (SAFCOL) from which the disposal took place, and the appropriate roles and responsibilities for the different entities should be identified, with clear guidelines from Government.

Mr L Mudimeli said that the SAFCOL Group was committed to support the policies and initiatives of Government in all respects. Because of the focus on privatisation, affirmative action and rural development had been limited. Black economic empowerment (BEE) and the development of the second economy were key foci. BEE was one of the criteria taken into account in SAFCOL’s procurement policy for services and products, and the sale of raw timber to processors. Funding earmarked for Corporate Social Investment (CSI) was spent on rural development and the upliftment of individuals and communities. SAFCOL was involved in the Broad-based Black Economic Empowerment (BBBEE) Forestry Charter, and there was increased impetus to implement Employee Share Option Plans (ESOP) in disposed subsidiaries.

At the top level of management, SAFCOL was still 20% away from the transformation target. At the senior management level, SAFCOL was 25% away from the target. At middle management level the Company was 12% away from the target. SAFCOL was proud of its in-house training centre that provided skills training to SAFCOL’s own employees as well as externally. Annual training included in excess of 4 600 people involving more than 12 000 man-days. Auditing, mentoring and assistance are provided for emerging contractors. Bursaries were granted to employees, dependants and historically disadvantaged individuals to obtain academic qualifications. The current budget amounted to R1, 3 million. A total of 35 current bursaries were being sponsored of which 24 were for historically disadvantaged individuals and females.


Mr J P Coetzer gave an overview of SAFCOL’s financial performance. With regard to profitability the Company’s Weighted Average Cost of Capital (WACC) was 13.8%, which was in line with expected returns for forestry companies worldwide, and achieved a 15.4% Return on Capital Employed (ROCE). Sustainability was calculated by measuring the yield that could be achieved on a sustainable basis: this came to a yield of 1.7 million cubic metres of timber, with actual sales of 1.6 million cubic metres. It was important not to sell more timber than the sustainable yield to avoid depleting resources for the future. SAFCOL was considering investments in and sharing its experiences of privatisation with other Southern African Development Community (SADC) countries. With regard to privatisation, KLF was being retained, and a new mandate was being developed. 1.4% of timber sales were invested in long-term fundamental research.

In terms of corporate social investment, SAFCOL was committed to assisting primary and secondary school learners and adult basic education, also to small business entrepreneurs and projects, recreational facilities, and the prevention of the abuse of women and children. Corporate Social Investment since inception amounted to R17.5 million excluding bursaries, with R905 000 in the period of the Annual Report 2006. Of this 60.5% was on infrastructure and land (schools) and 24% on health care. Second economy projects included broomsticks and dowels, by-projects, eco-tourism, wood preservation, a lamination plant, and compost manufacturing.

Mr Mudimeli gave an overview of the Company’s good performance in terms of National Occupational Safety Association (NOSA) grading. The Company applied its practices to contractors who were not allowed on site until they had undergone basic health and safety training. The Company was strengthening its practices with regard to HIV screening and provision of food supplements. The Disabling Injury Frequency Rate was less than 2%.

Mr Coetzer reported a strong balance sheet and cash reserves, and explained that implementation of international reporting standards in the period under review had necessitated restatement of figures for 2005. Turnover for 2006 had decreased from R640 million in the previous year to R360 million because of the disposal of two subsidiaries and the closure of the Blyde sawmill. The Company aimed to maintain the value of its assets in the long term. The value of the assets managed by the Company had increased in the period under review by about R170 million. Profit before tax was R240 million and R169 million after tax. Investment plans included replacement of the Blyde sawmill, technology upgrades, fleet renewal, IFLOMA and a wood fibre project.

Mr Breed said the forestry side of the Company was a world-class asset, as had been confirmed by overseas consultants. The Company had competent staff, and excellent research capability. A previously insufficient recruitment of younger people, who had been discouraged by the environmentalist lobby from entering forestry, was being addressed. SAFCOL’s future focus would be to review its strategy, giving full information to its Principal Shareholder to assist him in decisions on the future of the Company. A further area of focus was transformation and human resources development, investment in second economy projects, operational upgrades and cross-border investments. The Company was proud of its enthusiastic and dedicated workforce. Its management team was in place to pursue and achieve whatever Government required.

Discussion
Prof E Chang (IFP) requested that, for the basis of the presentation to the Committee, the figures for the 2006 nine-month period be converted to figures for a twelve-month period, by dividing by nine and multiplying by twelve, to facilitate comparison.

The Chairperson supported Prof Chang’s request.

Mr Coetzer accepted this and apologised.

Mr K Minnie (DA) asked how many jobs were lost with the closure of the Blyde sawmill, and why could it not be rebuilt there.

Mr Breed replied that as many jobs as possible were saved. The Company was going to conduct a feasibility study. Because of the privatisation process, rebuilding the mill could not be considered in the time under review. There was also a shortage of saw logs in the area, and the Company was considering building a new mill in the Highveld region.

Mr Mudimeli added reasons of safety for the Blyde saw mill’s closure and said that it was necessary to consider projections of timber production 30 years hence in deciding whether or not to rebuild.

The Chairperson asked if building a new sawmill was under consideration why could it not be built at Blyde.

Mr J Stephens (DA) asked what, in brief, were the reasons for discontinuation of the privatisation process, would the Company be able to borrow at “sovereign rates”, and what effects the Company’s operations were having on the ecological balance in the Mpumalanga area, in particular the effects on water.

Mr L Gololo (ANC) said that the Company was not sufficiently assisting the physically challenged, and that whites were still dominating the senior positions while the other racial groups were predominant in the lower grades. He asked whether that would be corrected. He also asked about the role of SAFCOL in ensuring that transformation and job creation norms were adhered to in those entities that had been privatised and what was the percentage shareholding of SAFCOL in KLF following the discontinuation of the privatisation process.

The Chairperson criticised inconsistent use of terminology in the presentation. This made it difficult for the Committee to obtain a clear picture.

Mr Breed responded to Mr Stephens’ question on the reasons for discontinuation of privatisation. In terms of the Competition Act the sale of Komatiland Forests (KLF) to the Bonheur Consortium was a reportable transaction and had to be referred to the Competition Commission for approval, but the Commission prohibited the sale, because it would have decreased competition and would not have been beneficial to the economy. The decision was referred to the Competition Tribunal. The industry opposed the transaction vigorously at the hearings. In February 2006 Bonheur withdrew their offer for acquisition of KLF, for various reasons which SAFCOL accepted. The Minister of Public Enterprises reconsidered the feasibility of proceeding with the process, and, on the advice of SAFCOL’ s board, decided that, because of “the effluxion of time” since KLF was offered for sale, the change in value of KLF’s assets, and the opposition of the industry, Government should reconsider the whole process of privatisation.

Mr Coetzer said that currently the Company was achieving, on a floating rate basis, prime lending rate less 2.5%, which he considered a good rate. For fixed rate borrowing the Company was quoted 10%. However, the Company could not borrow at “sovereign rates”.

Mr Mudimeli acknowledged that South Africa was a country of scarce water resources. Use of water was regulated by legislation. SAFCOL had to pay the Department of Water Affairs and Forestry (DWAF) for permits to consume water. SAFCOL was part of Forestry South Africa, which was studying the effects of plantations on water issues. SAFCOL underwent auditing by the Forestry Stewardship Council.

Mr Breed said that commercial forestry was beneficial to the environment and had started in South Africa in response to the lack of forests. SAFCOL’s mission was to be environmentally responsible in all its practices.

Mr Mudimeli, in response to Mr Gololo’s question, said that the Company was actively forming links with organisations that could assist it in employing physically challenged persons.

Mr A Mutshinya added that there was now increased participation by the categories that had been previously marginalised; this was high on the Company’s transformation agenda. The Company was taking steps to ensure that the work environment was adapted as far as possible to allow the participation of people with disabilities.

Mr Breed said that top management, compared to the lower grades, was indeed predominantly white. Environmentalists had made forestry appear unattractive as a career, while the privatisation process had curtailed growth of job opportunities. With a new mandate it would be high on the agenda. Meanwhile, the Company was now endeavouring to recruit and promote black people by means of bursaries and was confident of being able to present to the Committee by this time next year substantial progress in this regard.

Mr Coetzer said that KLF was 100% owned by SAFCOL.

Mr Z Kotwal (ANC) asked about the mechanism for awarding contracts to the 79 independent subcontractors and monitoring the treatment of the workers, financial viability of the contractors and safeguarding their workers from bankruptcies amongst contracting companies, making sure services (such as water) were maintained on their property, about SAFCOL’ s relationship with the Agricultural Research Council (ARC), about interests in charcoal which was a means of utilising timber waste products, and progress on the land claims case against Shannon Properties owned by SAFCOL and leased to Mondi Forests.

Mr Mudimeli responded that a committee, which decided on the awarding of contracts, awarded contracts in accordance with a procurement policy. He was confident that the Company’s procurement policy and procedures for awarding contracts were sound. Contractors who paid low wages were not accepted for the award of contracts.

Mr Coetzer added that contractors were expected to present themselves as transformed companies if they were to compete for contracts.

Mr Breed said that job creation was a main focus of SAFCOL, but mechanisation unfortunately had a negative effect on creating jobs. SAFCOL conducted quarterly site visits to Shannon Properties. There was a responsibility on the part of the lessor to maintain services, such as supply of drinking water on leased land.

The Chairperson asked for a written submission about Shannon Properties.

Mr Breed agreed. He added that members of local communities could take away waste timber products, from a central collection point to reduce the risk of fire.

Mr Mudimeli said that waste products were free of charge to local communities if carried away by hand, but had to be paid for if transported by vehicles.

Prof Chang asked what the Company’s direct costs were, and if turnover comprised only of products sold or did it include the proceeds of sales of interests in subsidiaries. It was necessary for auditing purposes to refer to the actual cost of raw materials. Net profit as represented in the report seemed to be very high.

Mr Coetzer responded that the proceeds of the sale of the two subsidiaries were not included in turnover. He agreed that the fair value adjustments to plantations should have been included on a separate line in the report. Increases in timber values, concurrent with a boom in the economy, had created a distorted view of the profitability of the Company. He admitted that the figures as they were presented were somewhat confusing.

Mr Breed said that the turnover of KLF and IFLOMA was fully included in SAFCOL turnover figures.

The Chairperson requested that in future the Committee be given a one page statement from the Ministry that the figures presented were correct to facilitate the Committee’s work. He asked about small industries’ access to forest products. He appealed to the company to continue educational projects in schools. He said that the company should emphasise job creation and be innovative in creating export opportunities. He asked for comparative figures, for example, with regard to expenditure on research, to make them more meaningful.

Mr Breed said that export of saw logs had stopped completely. Demand far exceeded what SAFCOL could produce. There was a complaint from the Competition Commission regarding refusal to supply and price discrimination in favour of long-term buyers to the detriment of open market buyers. SAFCOL would continue to support schools, and was taking the initiative with vocational schools and providing facilities for the surrounding communities where their children could be accommodated whilst both parents were working. Employment creation was high on the list of priorities.

Mr Mutshinya said that the Company realised the necessity urgently to expedite transformation.

Mr Breed assured the Committee that all the figures presented were complete, correct and had satisfied the auditors, but the presentation was probably confusing.

The Chairperson thanked Mr Breed and his colleagues for their presentation and urged them to continue supporting schools and creating employment.

The meeting was adjourned.