Department of Public Enterprises Third Quarter Performance Report briefing

PUBLIC ENTERPRISES PORTFOLIO COMMITTEE and LABOUR AND PUBLIC ENTERPRISES SELECT COMMITTEE
28 March 2007
DEPARTMENT OF PUBLIC ENTERPRISES’ THIRD QUARTER PERFORMANCE REPORT BRIEFING

Acting Chairperson: Mr P Hendrickse (ANC)

Documents handed out:
Presentation to the Portfolio Committee on Public Enterprises by Portia Molefe Director General on the 3^rd Quarter Performance of DPE 28 March 2007

Audio Recording of the Meeting (Part 1) and (Part 2)

SUMMARY
The Department of Public Enterprises briefed the joint committees on the third quarter report. The overview was followed by presentations by the human resources; administrative; energy, mining and broadband; and legal governance risk secretariat Deputy Directors on the progress of their respective components. Particular issues covered included the approval of the six regional electricity distributors, the processing of the Transnet Pension Fund Amendment Bill, internal skills development programmes, the outputs of the Employment Equity Plan, and adoption of the Department's Shareholder Crisis Plan by the Joint CEO / Chairpersons Forum, and adoption of branding. The Department had spent 66% of its operational budget but noted that it would probably achieve about 98% spending by the end of the year. There were 156 funded and one unfunded posts, and 16 vacancies. The briefing by the energy divisions focused on the role of Eskom, performance monitoring, Alexkor activities and plans for recovery and Infraco in the ICT sector. It was pointed out that despite the spending of R80 million there might still be a loss in Alexkor during the year. The Legal Governance Risk Secretariat detailed its activities in the past year, which included the Transnet Pension Fund Amendment Bill and the SAA legislation. Various agreements had been concluded in relation to Alexkor, Infraco, and guarantees with Denel. The risk matters were highlighted.

Members asked questions on the resignations of staff, the disposal of businesses by Denel, the monitoring, the appointment by the Department of its interns, and filling of the vacancies. Further questions were asked on the creation of jobs at new power plants, the re-commissioning of old plants, alternative energy supplies, and the need to clarify reserve margins. Concerns were raised about the R80 million spent at Alexkor, upliftment of communities, other viable options, and the reasons for the losses. It was agreed that a more comprehensive report was needed. Further questions wee asked on the transfer of funds to Infraco, the West Coast marine study results, directorship appointments and the position with the SAA Board, the fibreoptics technology being used, the affiliations of Board members. It was agreed that there was not sufficient time to address all issues raised. Therefore a further meeting would be scheduled in the next term.

MINUTES
Department of Public Enterprises (DPE): Briefing on Third Quarter Report
Ms Portia Molefe, Director General, Department of Public Enterprises, said that each of the programme managers would be presenting on their programmes, which were divided into Administration; Energy, Mining and Broadband Enterprises; Legal, Governance, Risk and Secretariat; Manufacturing Enterprises; Transport Enterprises; and Joint Project Facilitation. She provided an overview of the third quarter activities, where she highlighted the development of the dashboard for monitoring Eskom and Transnet. Ms Molefe also indicated that Cabinet had approved the establishment of six wall- to-wall regional electricity distributors (REDs) as public entities to be regulated by the National Energy Regulator of South Africa (NERSA). She said the DPE had commenced with processing of the Transnet Pension Fund Amendment (TPFA) Bill.

In regard to the processing of the applications by State Owned Enterprises (SOEs) in terms of section 54(2) of the Public Finance Management Act (PFMA), Ms Molefe stated that nine Transnet applications were approved, eight Eskom applications had been approved, and five Denel applications were approved to date. Five non-core businesses in Denel had been disposed of, realising an income of R400 million. The Cabinet memorandum on the Competitive Supplier Development Programme was finalised and approved, and she noted that this came amidst the increased demand for South African capital goods regarding energy from the west.

SOE’s had put in place plans to make optimal use of training facilities for internal skills development programmes. An example of the latter was Denel’s initiative, which recruited learners taking standard grade in science, biology, accounting and physics, and then trained them further so that they could pass at the higher grade in each of these subjects. Some were given bursaries for further studies.

Ms Rashida Issel, Chief Operations Officer, DPE, covered aspects of human resources, corporate services, communications, and finance. She presented an overview of the outputs of the Employment Equity Plan, which spanned five years and showed with key progress in employment equity statistics. The internship programmes had established 20 interns at DPE, who attended various training sessions with different service providers, and in-house training was also organised to enhance their skills in preparation for working. In regard to Corporate Services 400 boxes of documents had been indexed for storage after the Department moved premises. Ms Issel also highlighted the role of the production room where tender processes were followed and a service provider was appointed to enhance efficiency. In the programmes for Communication, there had been adoption of the DPE SOE Shareholder Crisis Plan by the Joint CEO / Chairpersons forum, and there had been a major DPE branding exercise.

Ms Issel then presented on the financial structure of the Department. She indicated that adjustments were approved for additional funds for re-capitalisation of SOEs for the current year, as well as internal movement of funds. DPE had spent R68,7 million of its operational budget made up of Compensation, Goods and Services and Capex, representing 66.6%. Although this reflected an 8.4% under-spending, she argued that large projects were still being completed during the fourth quarter which would ensure 98% expenditure overall on operational expenditure. The 54.6% balance reflected for transfer payments would be paid to the SOE over the next three months.

Ms Molefe said that the bulk of the expenditure went to transfer costs on which Value Added Tax (VAT) was paid. She argued thus that some money had to be sent back to Treasury relating to the VAT that was paid to the Department, and for that reason under expenditure would be about 2% in real terms.

Ms Shireen Crosson, Human Resources Director, DPE, tabled the human resources in the department, and in particular gave the employment equity statistics. She said that of the 157 posts only 1 post was unfunded. There were 16 vacant posts, after 141 posts had been filled. Five interviews were in progress and two offers had been made. Two posts were occupied by people with disabilities, while a third post had just been filled. With regard to the numbers of female employees, she said that because the department staffing was so small the resignation of one female staff member would have a distorting effect on the figures.

Discussion
A member of the committee asked if resignations were due to the staff at the Department being unhappy with their work environment.

Ms Molefe said that virtually everyone at top management was working on contractual terms and when these contracts come to an end the Department must expect to lose staff, so the reasons for losses were varied. She felt that the question of contentment of staff was far too subjective for her to respond to.

Ms Crosson added that DPE was highly specialised and would not fulfill the career ambitions of most of the top staff.

Mr C Wang (ANC) asked what was meant by unfunded posts.

Ms Crosson said that these were defined as posts that did not have funds allocated because the funds had been utilised in another area, but which existed in the sense that if the function was required in the organisation then funds would have to be made available.

Ms N Ntwanambi (ANC) asked, in relation to the five non-core business disposed by Denel, what had been the effect on the staff and how many jobs were lost.

Ms Crosson replied that most of the five non-core businesses were in the property sector, and restructuring had to comply with the Labour Relations Act to comply with certain social needs. However, there were no significant job loses in Denel itself.

Mr van Wyk noted that there were 41 directors and chief directors, whom he assumed would normally monitor the work of the 27 deputy directors. If this was so, then he asked why the number of monitoring staff was double that of the deputy directors.

Ms Crosson argued that there was no clear hierarchy of monitoring as the line functioning was very flat.

Mr Gamede asked if the Department had interns that would eventually fill the vacancies in the Department.

Ms Molefe said that the DPE had a problem in that keeping interns within the Department would block the recruitment of another cohort, but this year DPE managed to find jobs for almost all their interns in the respective SOEs. She said a further 25 would be recruited this year. Ms Molefe emphasised that bringing in interns entailed facilitating jobs for them and ensuring that they were adequately trained.

Ms M Themba (ANC) asked when the five interviews in progress would be finalised. She asked how and where the interns were recruited.

Ms Crosson said that from the five interviews three offers had been made. For the recruitment of interns, she said that posts were advertised widely through the media, and that this had gained a favorable response from many different regions. She said that recruitment from the universities was also being considered.

Continuation of Briefing: Programme 2
Mr James Theledi, Deputy Director General, DPE briefed the Committee on the energy, mining and broadband enterprises of DPE. He focused in particular on the role of Eskom, performance monitoring, the mining sector with special reference to Alexkor, and finally the ICT sector referring to Infraco.

In regard to Eskom and the energy sector, he noted the distribution of electricity where previously mothballed plants were being returned to service. On 25 October 2006 Cabinet approved the establishment of six wall to wall regional electricity distributors (REDs) as public entities to be regulated by the National Energy Regulator of South Africa (NERSA). New generation power would come from Independent Power Producers (IPP’s), and a deal with the Revised Power Purchase Agreement and the fuel issues were being addressed and the DG and Minister updated on the progress. He also spoke briefly on the security of supply and Eskom’s reserve margins, and pointed out that DPE was working with the Department of Minerals and Energy (DME) to integrate planning in NERSA and Eskom. He said issues of transparency and clarity were also being addressed to provide Eskom with the clear standards on security of supply and proper conceptualisations and measurement of reserve margins, as well as ensuring adequate communication with the public. Eskom was doing well with regard to economic growth and product sales and was still in a good profit making phase. There was also significant progress with regard to connection and expenditure, as well as in Black Economic Empowerment where R12 billion was spent in this regard.

Discussion
Ms Ntwanambi asked how many jobs would be created by building and the activation of new power plants. She was also concerned about co-ordinating responsibility across Departments.

Mr Theledi said that the employment figures for new plants were not available at present, but that he said he would retrieve the information from Eskom and make it available to the Committee. He said that skills and operational costs would be additional issues that may confront Eskom.

The Acting Chairperson asked for clarity on the progress of activating the mothballed plants to handle the winter burden.

Mr Theledi said that the process of returning mothballed plants to service had been going well and he anticipated no problems for winter. Apart from these he said that further projects in Atlantis, for example, would also supply additional megawatts for winter.

Mr Z Kotwal(ANC) asked if any alternative energy supply was being pursued. In regard to the generation of power from coal, he asked if empowerment of communities through the supply of coal from their newly acquired land from land reform might be a viable option.

Mr Theledi said that other technologies have been investigated with the revised program making provisions for renewable power.

Members also raised concerns over the use of IPPs for additional power supply as they would be profit driven and would pursue guarantees for profit.

Mr Theledi said that it was necessary to clarify reserve margins and the needs of the country regarding security of supply.

Ms Molefe admitted that the environmental law could be a problem because of the approval did not come soon enough it might hinder the use of labour intensive means and thus job creation. Regarding co-ordination she said policy questions and objectives were being addressed co-operatively, especially with regard to reserve margin definitions. Finally on alternative energy, she said an important programme was the gasification of coal, but that its viability for South Africa’s denser coal had been brought under scrutiny by geologists. Ultimately she said that 10% of power supply had to be based on alternative renewable sources.

Continuation of Briefing: Programme 2: Mining
Mr Theledi focused on mining with special reference to Alexkor. A process of recapitalisation was taking place in Alexkor, where R81.9 million was received from National Treasury through the adjusted estimates process. R80 million was transferred to Alexkor. He also highlighted the conduct performance review of programmes, where monthly reports and reviews for October and November were completed and approved by the Minister. Quarterly reports and reviews were completed and approved by the DG. Finally his presentation highlighted the separation of ABT and Alexkor. He pointed out that the turnaround strategy was becoming unfruitful as the mining sector was losing profit and running at a loss at times, especially with regard to diamond mining. He said DPE expected a loss of R58 million this year.

Discussion
Mr Bekker said that if there could not be a viable turnaround for Alexkor, then he would assume that the current expenditure would be fruitless.

The Acting Chairperson asked for a more comprehensive report on Alexkor.

Mr van Wyk said that the R80 million transfer to Alexkor was intended to restore it to profitability, which involved extensive exploration and plant utilisation. He asked for clarity on these two issues.

Mr Gamede asked what the Alexkor loses could be attributed to.

Mr Theledi said a more comprehensive report on Alexkor would be provided to the committee. In regard to the comment that the R80 million could be regarded as fruitless expenditure, he argued that R20 million went into township development, R5 million for rehabilitation of old mines, and R32 million was set aside for working capital. The rest went into the implementation of the remuneration for the community and the workers. He thus argued that the expenditure could be fully accounted for, and that the naming of it as fruitless expenditure was entirely subjective. He noted that a three shift programme had to be implemented in order for the plant to be fully utilised, but the equipment was obsolete. He said that most of the diamond mining profits originated from marine mining and the on-shore mining was under-utilised. Mr Theledi estimated that only 10% was mined and extensive exploration was not made of the rest of the designated area, which had become a financial challenge.

Mr van Wyk reiterated his question on the purpose of the R80 million transfer, and said that R40 million was designated for community development. He asked if this expenditure should be considered unauthorised as it was initially intended for exploration and plant utilisation.

Mr Theledi said that detailed submissions of the utilisation of the R80 million were submitted to National Treasury, who authorised it.

The Acting Chairperson asked if there was any new management.

Ms Molefe said it was the same company. Regarding Alexkor, she said that recruitment was difficult due to the nature of the land claims against the company. She reiterated Mr Theledi’s comments about the transfer and authorisation of the R80 million.

Continuation of briefing: ICT Sector
Mr Theledi said that Infraco was intended as the fibreoptic network of Transtel to sell bandwidth to Neotel. He said the company required R3 billion over five years to be fully operational and self- funding. Mr Theledi argued that the company was intended to bring down broadband cost in the country, and thus meet some of the ASGISA objectives.

DPE Legal Governance Risk Secretariat briefing
Ms Sandra Coetzee, Deputy Director General, DPE, briefed the Committee on the operations of the Legal, Governance, and Risk Secretariat (LGRS) There had been a review of the Pebble Bed Modular Reactor shareholders' agreement and cooperation agreement to ensure a proper balance between equity and the risk and reward. Other legal matters handled during the year included the review and comment on Heads of Agreement relating to guarantees between DPE and Denel functions, the Alexkor Memorandum of Understanding with the Richtersveld community, where the State Attorney and Senior Counsel had managed legal processes and principles, SAA's separation from Transnet, the legislative processing of the Transnet Pension Fund Amendment (TPFA) Bill, including the public hearings and deliberation and adoption of this Bill by the National Assembly. The SAA Bill was in the process of consideration. Further matters being dealt with were the SA Express draft bill and memorandum, issues on Infraco, where legal advisors were appointed to assist in reviewing and drafting various agreements between DPE, Eskom and Transnet and between DPE and Neotel, attendance at negotiations on the agreements, as well as preparation and signature of the sale of shares and loan account agreements. In addition processing of SOE applications had been conducted in terms of section 54(2) of the PFMA, and nine Transnet, eight Eskom, and five Denel applications were approved.

Ms Coetzee highlighted the role of the LGRS in the governance workflow project, director appointments, board remuneration, the review of funding documents, SOE shareholders compacts, the board induction toolkit and training, board performance appraisals, and fin establishing subsidiary boards.

She also presented a review of the risk management plans, the development of a risk management framework, the factors used to determine effectiveness and the appropriateness of risk management in the SOEs, the management and reduction of risk that government was exposed to through the activities of SOEs, and maintaining the DPE SOE risk management structures.

Finally she briefed the Committee on the secretariat functions, highlighting management of top-level SOE staffing and managing the communication of key decisions to stakeholders.

Discussion
Mr Wang asked if the transfer of funds to Infraco had been halted by DPE or used by them. He also asked how Infraco would be assisting new companies in the ICT sector, especially regarding the transfer of skills to black economic empowerment (BEE) companies.

Ms Molefe replied that a more detailed briefing would be provided when the whole matter had been approved. She said that the media reports on licensing issues for Infraco were untrue, and the real issue concerned the sale of assets, where it had been decided not to sell. Had the sale taken place of the assets, new competitors would not be able to compete with Telkom, and exclusivity had been granted to Neotel as its marketing arm. She said that the money intended for Infraco would not be used for any other functions.

Mr Wang asked if the West Coast marine study could be made available to the Committee for review.

Ms Molefe maintained that the West coast study was internal and once it was completed the findings could be made available.

Mr van Wyk asked about director appointments.

Ms Coetzee said that appointments were based on vacancies being filled and on the expanding of the board, such as in SAA. She said that the remuneration guidelines related to both non-executive members and executive members. In some cases some adjustments would be made but in most cases the existing frameworks did not need to be adjusted to fit the guidelines as they followed them aptly. She said that the benchmark used related to the top twenty companies, but the guidelines were properly correlated to a correct match with the size of enterprise.

Mr van Wyk believed that his question on performance bonuses was not answered.

Ms Coetzee says that these would be housed under issues of long-term performance schemes that she addressed. She said that long term and short-term incentives were essentially performance based.

Ms Temba felt that the presentation marginalised the Select Committee and was aimed mainly at the Portfolio committee.

Ms Molefe apologised, and claimed that she was unaware that it was a joint sitting of Portfolio and Select Committees.

A committee member asked how new the fibreoptics technology was, because this would affect the maintenance of these lines. Secondly he asked what the relationship was between the DPE and Department of Communications and questioned the bias against rural areas in the establishment of Infraco.

Ms Coetzee said that the fibreoptics were four years old and maintenance was performed with transmission networks of Eskom and Transnet. She said that essentially it was not primarily commissioned as a telecommunications network for broadband.

The Acting Chairperson requested the criteria and remuneration for directorship, as well as the network of director names and their affiliations, because he was concerned about their ability to apply themselves equally to the multiple platforms. A presentation on board induction was also requested to establish the functions of the board. He said that he was concerned about the confusion created in the media about Alexkor's relations with companies such as De Beers, as the Committee would be concerned about the welfare of the community, and the interests of de Beers might be in conflict with community interests. He requested more information on Alexkor.

Ms Coetzee acknowledged Mr Hendrickse concerns, but said that there was no presentation in relation to Infraco due to the delay in intradepartmental negotiations. She thanked the respective committees for their expedient processing of bills proposed. In regard to Alexkor she said that a consensus with the community had been reached regarding the implementation of the MOU but subsequently a request for clarification had been made regarding commitments in the MOU. A response to these requests had been provided and she was confident in the implementation of the MOU. She said the one of the Board’s functions was to resolve non-core entities. Regarding the De Beers transaction, she said that the DPE was not a main signatory to the agreement but that the agreement did recognise the commitment of government to the land restitution claim.

Ms Molefe added that the DPE was not party to the agreements between De Beers and DME and it was only when the MOU was received by the department that some gaps regarding Alexkor were identified. She said that DPE was now engaging with DME and De Beers but she could not comment further at this stage.

Ms van Wyk asked if the SAA board would be expanded and what would be the purpose of this expansion if it was expected that the work would be less for SAA top officials.

Ms Coetzee said that the board was expanded with two new members and three members whose terms had expired were replaced with new members in an effort to strengthen the board, rather than just to expand it. She said it should not have any negative impact on the future of SAA.

Ms Ntwanambi requested timeframes to supplement the presentation on the governance function of the DPE.

The Acting Chairperson anticipated that there was not sufficient time to address all issues raised in the current meeting and proposed that a further meeting be scheduled in the next term to discuss these issues and the remaining programme.

He requested a more comprehensive report on the MOU with Richtersveld for the next meeting.

The meeting was adjourned.