Department’s Strategic Plan and Financial Overview 2007-10: briefing

PUBLIC ENTERPRISES PORTFOLIO COMMITTEE
3 May 2007
DEPARTMENT’S STRATEGIC PLAN AND FINANCIAL OVERVIEW 2007-10: BRIEFING (DAY 2)

Chairperson: Mr Y Carrim (ANC)

Documents handed out:
2007-2010 Strategic Plan and Financial Overview

Audio Recording of the Meeting Part1 & Part2

SUMMARY
The Minister gave an overview of the importance of State Owned Enterprises in creating a sound infrastructure in the country, highlighting the progress and pitfalls of plans in state owned sectors related to energy, transport, mining, forestry and broadband technology. He addressed each of the SOEs individually, and summarised the developments in relation to Eskom, the proposed pebble bed modular reactor, the need for bigger ports, the developments in relation to South African Airways, the importance of SA Express, broadband telecommunications and its impact on the State’s bid for Square Kilometre Array. Further comments were made on Denel, the decision to sell of the Komatiland Forestry, and Alexcor. The Minister noted that the Department was developing a model on the constitution of boards, and apologised that he had not yet reverted to the Committee on composition and directors of Boards, stating that this had been a complex analysis. He was disappointed that staff grievances and confidential information were leaked to the press. Members asked questions relating to the shareholder compact, and the current position of SAA. Specific questions were asked on how its profitability was assessed, the need for more affordable travel to small towns, whether the Airlink stakeholding could be used as a lever to adjust prices, the reason why no details of the SAA and Mango agreement were made public, and whether Mango was effective, the remuneration paid to senior managers, and SAA’s credibility and use of consultants. Further questions related to the decision to sell off the Forestry and the empowering of the community.

The Department briefed the Committee on Programme 6, Joint Project Facility, which aimed to develop projects that would benefit SOEs and the economy as a whole. The subprogrammes for the Aerostructures Industry, development in Africa, a partnership joint venture agreement with Belarus, the Competitive Supplier Development Programme, projects relating to energy and pipelines and environment protection were raised and discussed. Human resources had begun to train artisans and there was cooperation with the Departments of Education and Science and Technology. The Property Project had not met its deadlines because of discussion on use of the land for housing. The budget and strategic direction were outlined. Questions by Members addressed Departments’ responsibilities for pipelines, the relationship between departments, ownership of the property to be sold, the principles that applied to sale of state land and the credit risks involved.

Members raised questions on the previous day’s briefing on Legal, Governance, Risk and Secretariat Programme 3. The questions addressed the increase in litigation, the principles to be taken into account in approving or declining transactions, the sale of the Ifloma Forest, the consultancy services, and the risk trend.

The Department’s briefing on Programme 4, Manufacturing, highlighted the analysis of State Owned Entities against government’s strategic intent. The three subprogrammes of Denel, Safcol and the Pebble Bed Modular Reactor (PBMR) were highlighted and described. All strategies and structures aimed to ensure delivery on the government’s economic growth objectives. The key indicators for each programme were listed, and it was noted that some capacity must be outsourced to meet targets. Questions by Members addressed the intellectual property rights, the technology offered by the Chinese tender, and the American pebble bed technology, the need to address concerns in the agreements, the need to have a sustainable follow through, particularly in addressing community and constituency concerns, the percentage of the budget allocated to education, and whether the deadlines could be met. The Pebble Bed developments from restructuring of Eskom were set out.
It became clear from the answers that the Department had not in fact taken a full commitment to proceeding with the project as there were still discussions on the way forward.

The briefing on the Department’s Transport programme dealt with the two main sub-programmes of Transnet and Aviation. The indicators and milestones for the transfer of Shosholoza Meyl were described, and it was noted that the rollout had been delayed as a result of short supply of assets, and a baseline study on the impact of Transnet on the economy would be done by November 2007. Port and rail Master Plans were being refined. A new operator was being brought into the Coega Project and under utilised rail branch lines presented opportunities for local economic development. The developments in aviation were highlighted and the turnaround and recapitalisation of SAA was detailed, which was an inter-department project. It was necessary for DPE to understand the major cost drivers in the dynamic but risky aviation industry. The budget was outlined. Members’ questions addressed the need for a cost analysis on the previous years, the need for consultants, the need for the Committee to get a clearer understanding of SA Express, the increases in budget, whether the deadlines were realistic, and the details of the goods and services charges

MINUTES
Ministerial Briefing on State Owned Enterprises
The Minister of Public Enterprises, The Hon Alec Erwin (ANC), stressed the importance of the Committee’s work in the budgeting process. The challenge for the Department was to maintain the coherence of public enterprises in relation to building the country’s infrastructure, which was imperative in building the economy. The South African economy was in the midst of a new boom and this was the ideal situation to create massive development and address poverty and unemployment issues.

The current strategy embarked upon by the Department of Public Enterprises (DPE) to utilise State Owned Enterprises (SOEs) in building infrastructure was unique to the history of the country, as this was the first time SOEs were accessing international markets for finance rather than relying on state coffers. The SOEs were fully-fledged businesses operating in a carefully structured framework, and the targets for 2010-11 had to be met on time to build the infrastructure. If this was not achieved the economic problems of poverty and unemployment would only be exacerbated.

He addressed each of the SOEs individually. In relation to Energy, everyone had seen the strain on the national grid over the past few years resulting in blackouts. It was therefore necessary to change the composition of the energy source from coal, to at least half nuclear power, over the next 20 years. This would include the light and proposed Pebble-bed Modular Reactor (PBMR). The Department had revised its strategy for Eskom and wanted to create a separate nuclear agency dealing with the PBMR.

SOEs needed support and the private sector could not fund programmes to large enterprises like Transnet and South African Airways (SAA). He said the country needed bigger ports, as container freight traffic at present was at an all-time high. Government did not wish to replace South African Airways (SAA) with another company and South Africa should operate as an end point and not a hub. He also commented on the importance of air access through SA Express, especially in light of the growth of tourism and the 2010 plans. However, these flights to smaller centres were too expensive and had to be made more affordable, but still profitable.

In regard to broadband telecommunications, he said this was not only invaluable to allow businesses to operate, but was also a key to the State’s bid for Square Kilometre Array (SKA), which would transport information in the galaxy, in a short period of time. He said that the maintenance of the system should remain in state hands.

Denel was an advanced stable company with a capacity to contribute to the defence industry and the aim of government was to build partnerships to develop this further.

He said that the decision to sell off the Safcol Komatiland Forestry (KLF) was based on the fact that it was not large enough to contribute to the budget. A previous deal to sell it off had been rejected by the Competition Board, and the Department decided to break it up into smaller entities and sell it off, while at the same time maintaining the asset. This asset should fall under the ambit of the Department of Water and Forestry (DWAF) and DPE was working to facilitate the move.

The State recognised that Alexcor’s mining was important to the economy, but, by the same token, it had to recognise the mining rights of the community. The Minister was confident that the deal struck with the community was excellent, and that community leaders had been very proactive and had taken a brave step. He hoped that there would be no legal intervention as this deal had to be resolved in two months or Alexcor’s asset would have to be sold off, with no benefit to the community.

The Department was also developing an overall model on the constitution of the board members of the various SOEs. The Minister explained this as more of an art than a science. He said it was important to get the legislation on this matter passed this year and the delineation between the role of Parliament and the relationship of the Ministry and the Board had to be defined.

The Minister apologised for missing the deadline for analysis of the Boards and the memberships of the various SOEs to the Committee, stating that this process had been more complicated than anticipated. The registers made it difficult to ascertain which were subsidiary or main boards. Other problems included ascertaining whether a person was still a member of the board and whether there were dormant companies. Other important issues were to consider in how many boards an individual was a member, and whether the individual was making a contribution. The efficacy of the contribution would be measured by the minutes of meetings and comments of the Chairperson. Peer reviews would also be taken into consideration. The process in appointing boards was to give tenure of three years, subject to the DPE being able to remove any under-performing member at an AGM. He said that the Department would present the constituency of the boards once it had absolutely accurate data.

The Minister commented that he was extremely proud of his department and its substantial work. He expressed his disappointment with staff grievances and confidential information being leaked to the press. He explained there were grievance processes and, in cases of financial inaccuracies, whistle-blowing policies in place. He warned that the release of sensitive matter of the commercial deals revealed outside the normal framework would be severally dealt with.

He added that there was much legislation to be processed in the coming year.

Discussion on Minister’s briefing
The Chairperson noted that most of the issues raised by the Committee from the 2006 report back had been addressed, but the shareholder compact needed to be discussed.

The Minister replied that on the open market, ratings were important and dramatically affected the cost of capital. Shareholder compact ratios were important to meeting these criteria. He praised his team and SOEs for meeting these.

Several members asked questions on the situation with SAA.

Mr P Hendrickse (ANC) reminded the Chairperson that the recent questions by the Standing Committee on Public Accounts (SCOPA) had highlighted the number of boards that individuals took directorships in, particularly in regard to SAA.

The Chairperson stated that SAA was in dire straits, and the roles of Parliament, the Department and the Board had to be defined in reporting systems, as some SOEs submitted reports directly to the Committee. He suggested that a workshop, at which the Minister should be present, should be set up to discuss these issues.

The Minister replied that all SOE reports should be submitted to the Committee as that was the only way it could judge the Department’s performance

The Minister replied that the SAA Board had originally been a subsidiary board of Transnet and needed to be separated when the airline became an independent entity. He was confident that the Board was experienced enough to implement the proposed changes to make the airline viable. He added that the Board also incorporated some relatively young new members, other Africans and some international members. This experiment had worked well.

Mr Hendrickse said that the Department’s strategy for SAA seemed to restructure every year and asked how did the Minister define the airline as being profitable. He agreed that travelling to small towns should be made more affordable. He questioned whether the discount airline Mango was operating effectively, and why it operated on major routes and did not service the smaller routes.

Dr M van Dyk (DA) queried why the agreement between SAA and Mango was not made public.

Mr E Kholwane (ANC) stated that the SAA strategy presented last year seemed to have been aborted and a new one implemented. He queried why SAA’s 10% stakeholding in Airlink, which dominated some of the routes to smaller domestic destinations, could not be leveraged to adjust prices.

Ms N Kondlo (ANC) said that most of her questions had been addressed by other members, but raised issues around who would implement the SAA strategy. She also asked about the large remuneration packages paid to senior management of SOEs, including SAA.

The Chairperson remarked that the Committee had heard a number of presentations by SAA, but that a shadow of doubt had been cast on the credibility of the CEO. In regard to the new proposal, he asked why a consultancy was needed to turn the airline around.

The Minister explained that in turning around the airline’s former parent company, a hedge book had been set up to stabilise Transnet’s balance sheet, and this took a lot of capital. The plan for SAA was to implement cost cutting, but on the positive side passenger levels were growing. The previous plans for the airline had not worked and the new strategy involved cost cutting, simplifying the corporate structure, acquiring partners in the freight and technical side of the business and getting rid of non-core businesses. The Board needed guidance. After studying the best strategy forward, it had been concluded that, internationally, routes that were profitable would be maintained and those not profitable would be discontinued. He said that SAA was not a major global carrier, but should be identified as an African airline serving cities on the continent and providing links internationally.

He said the consultants had been appointed as they had just completed a successful turnaround of Air Canada and had brought fresh insight. Although some would be unhappy, it was necessary to the success of the strategy that both SAA employees and the Unions must be on board, and the pilot sector was vital to maintain. If the strategy was not implemented, there would be no SAA. Cost cutting was strategic and although there would be retrenchments these would be negotiated.

With regard to regional routes, the airline would have to adopt certain strategies. He said that there must be competition as it was healthy and would contribute to lowering ticket tariffs. The Competition Board would not allow collusion. In relation to Airlink, the Minister pointed out that the state did not have much say in that airline’s operations, with only a 10% shareholding.

Mango was looking good, but this could only be judged after its first year. He said that the agreement between SAA and Mango was commercially sensitive and could not be made public.

The Minister summarised that SAA must return to stability and profitability and that capital would be forthcoming provided the strategy was implemented. He said that if the airline was sold off, it would be bought by a large institution and this would not give any certainty on its future. If, for instance, it was bought by a bank, the focus would be on profit, and if it was bought by a global carrier the focus would be routes. The most profitable routes were transatlantic, but it would be a bad time to enter this market due to strong competition. Therefore it was considered the best move for the State to own the airline, and turn it around, which he was confident could be done. It would however be a difficult job and there would be unhappiness.

The Minister said, in relation to the large pay packages to senior management, that the Department was working with all the SOEs to develop a common strategy. The strategy had to happen now to maintain credibility. He was worried about SAA, as the airline industry was a difficult one, but was confident that the right board and management were in place.

Mr R Nogumla (ANC) asked whether the decision to sell off KFL was influenced by privatised companies. He thought that forestry was important and was regarded as a strategic asset.

Mr Z Kotwal (ANC) commented that the forests supported communities with land rights and in selling off assets of this type DPE should work with the Department of Land Affairs. In addition he felt that there should be a strong empowerment element to these deals.

Mr Kholwane said he had complaints from constituents that the quotas of wood from a harvest had been removed by the new owners. In the past a percentage of logs had been allocated to locals, but now this was all going to the international market and this was leading to retrenchments.

The Chairperson said it was important for the Committee to understand the path the Department had taken with Safcol. Environmental and other issues also had to be addressed. He suggested a discussion at the Autumn School on this.

The Minister responded that with KLF it was important not to repeat the mistakes of the past and DPE would look at lease and licensing agreements related to exports. He said that in a regulated industry, the State did have some power to manage it and this was better suited to DWAF than DPE. The Department would work closely with Land Affairs to secure communities’ rights.

Department of Public Enterprises: Briefing on Programme 6: Joint Project Facility
Ms Katherine Venier, Co-ordinator, Joint Project Facility, DPE explained that the primary function of this unit was to develop projects that would benefit SOEs and the economy as a whole.

The sub programme for the Aerostructures Industry had been identified this as a possible source of income for the economy, although it was a relatively new project and the Department was currently involved in a pre-feasibility study and would report back on the progress later on in the year.

The Department was also looking at accessing development areas with the rest of Africa, but had found that some ideas were not as easily fulfilled as anticipated. She stated that, in order to go forward, the Department would need to learn the lessons from the past.

Another development programme underway was a partnership with Belarus for defence deals relating to Denel, as well as providing capital goods items, particularly earth-moving equipment, while providing opportunities for SA firms in Balarus. The project aimed to sign a two to four joint venture agreements by 2009. There had been a meeting in March and this would be followed by another meeting later in the year. A report back would be made in the third quarter.

The Competitive Supplier Development Programme (CSDP) aimed to meet the procurement needs by developing local world class manufacturing capabilities to supply the country’s SOEs with capital goods. Industry support measures would be coordinated. The Department had launched a Procurement Officer Training Campaign and a first boot camp for officers had been completed, with a second due later this year.

Projects relating to energy and pipelines were aimed at co-ordinating liquid fuels, natural gas and slurry paths to ensure economic growth.

Environmental protection required the development of growth balanced against the need for environmental conservation. DPE was working closely with the Department of Environmental Affairs and Tourism (DEAT) to carry this out. In addition a leaflet would be published explaining to all entities how environmental issues should be addressed.

The human resources and capacity building programme started training artisans last year, and SOEs should be providing on-the-job-experience. The Department was working closely with the Department of Education (DOE) to supply broadband facilities, the Information Communications Technology programme in this system, for their basic call centre Further Education and Training (FET) facilities in certain areas. The Department had also approached the Department of Science and Technology for co-operation.

The deadlines for the Property Project were not met as a result of the selling off of land owned by Transnet and Eskom after negotiations with the Cabinet about utilising this land for housing projects and integrating Key Integrated Areas, such as the expansion of facilities in ports and rail networks.

The strategic direction from 2007 to 2010 was outlined and the budget was tabled, and it was indicated that the majority of this increase was put to employing more staff as permanent employees and long-term contract workers.

Discussion on Programme 6
Mr Hendrickse asked about the pipelines and which department was responsible for them.

Ms Venier replied that this was a question for the Department of Minerals and Energy (DME), but DPE did have a role as one of the SOEs owned a pipeline.

Mr Hendrickse enquired if there was a cooperative relationship between the various departments.

Ms Venier replied that the departments were complementary, for instance the DPE often had to work closely with Department of Environment and Tourism (DEAT), or with DOE on the call centres. As it was not a policy-making department, the DPE had to work closely with other departments.

Mr Hendrickse enquired whether DPE owned the property that would be sold off, or whether it was owned by Public Works. He suggested that all the available land should be pooled and its sale be handled by a central agency.

Ms Venier said the property owned by Transnet and Eskom was listed on those SOEs’ balance sheets as assets.

Ms Portia Molefe, Director General, DPE added that by far the biggest property owner was Transnet and a portion of its land had been sold to the Department of Housing at a discount. She said if the Department could sell to other departments it would.

Mr Kholwane asked what was stopping a SOE from selling property back to itself at a huge discount.

Ms Coetzee replied that a distinction needed to be drawn between the government department and the company. In terms of the balance sheet, the financial director had a fiduciary duty to get a market related price. If it was sold internally this would damage the SOEs credit ratings and it was important that Government should purchase at market price.

The Chairperson remarked that this was the first time SOEs had been funded by capital markets and not state coffers. He was sceptical at first, but was starting to see the advantages.

Mr Hendrickse asked how much ownership of land added value to the markets. Markets wanted stability and he noted that selling land back to the government could damage credit ratings.

Ms Molefe said this question had been raised within the Department and she had received documentation from international credit risk managers, which indicated that credit risks were quite complex. She offered to provide the document.

Discussion on Department Programme 3: Legal, Governance, Risk and Secretariat (LGRS)
Programme 3 had given a briefing on the previous day.

The Chairperson asked why there had been an increase in litigation and why some of the SOE transactions had been declined by the unit.

Ms Sandra Coetzee, Deputy Director-General: Legal Governance, said the Act required that the Board applied its mind to the transactions and the Department had to assess compliance, value and risk of the transaction. If the transaction was declined it was sent back to the Board for re-evaluation. The unit had set a target of clearing the backlog of litigation and just as the target had been met, the Department received new litigation.

Mr Kotwal asked why the Government was selling the Ifloma forest in Mozambique back to that country’s government and not to a private entity.

Ms P Molefe, Director-General: DPE, replied that the State had offered first option to Mozambique for a government to government transaction, but if it declined it would offer it to a private buyer.

Mr Kholwane wanted clarity on the increase to the budget for consultancy services and risk management.

Ms Coetzee said that the increase in the budget was for governance procedures and was attributed to an increase in staff. The consultancy fee was short-term to formulate a shareholder management model, and would be completed at the end of the quarter.

Ms Kondlo wanted to know what risks the SOEs faced.

Ms Coetzee noted that SOE risk trends had been investigated and the Department would publish and present a risk booklet shortly. The risk forum was also working well.

Ms Kondlo said how the work done on these issues would impact on other departments.

Ms Coetzee said the DPE would codify risk and governance for other departments.

Department of Public Enterprises Programme 4: Manufacturing Briefing
Mr Litha Mcwabeni, Deputy Director General: Manufacturing, DPE, briefed the Committee on the Manufacturing programme. The purpose of this programme was to analyse State Owned Entities (SOEs) against government’s strategic intent and to develop proposals how the SOE could play a role in the development of the associated manufacturing cluster.

There three sub-programmes related to Denel, South African Forestry Company (Ltd) (SAFCOL) and Pebble Bed Modular Reactor (PBMR)

Denel’s key strategic role was to supply South Africa’s armed forces with defence capabilities and DPE would exercise shareholder oversight and add value to the restructuring and contribution to advanced manufacturing.

In regard to SAFCOL, DPE would monitor the company’s activities, which included forestry management, timber processing and harvesting and related activities.

DPE’s role in PBMR was to support the acceleration of pebble bed technology and the production of reactors within Eskom, as well as to facilitate the development of an appropriate shareholder management agreement.

DPE stressed that all strategies and structures aimed to ensure delivery on the government’s economic growth objectives.

The key objectives, projects and indicators for each of the sub-programmes were listed. The Denel programme hoped to finalise equity partnerships and the consolidation of Denel by 2008/09, and to have finalised the establishment of key clusters by 2009/10.The SAFCOL key projects were the implementation of the Cabinet decision regarding future role of SAFCOL and Komatiland Forests (KLF), detailed structuring and design for requisite disposals, and ensuring that disposals were effectively and competitively executed, and intergovernmental interventions were made successfully in the forestry sector, in line with Department of Water Affairs (DWAF) objectives. The PBMR key projects included the development of PBMR Dashboard, licensing issues with effect from October 2007, and engagement with the Department of Minerals and Energy (DME) to review the expected Nuclear Policy and assess the implications. This would be implemented by May 2007. There would be a need
The budget was set out, showing a small increase to accommodate to outsource capacity to meet the output targets

Discussion
The Chairperson complimented Mr Mcwabeni on addressing the issues raised by the Committee last year.

An ANC member said that last year the Committee had raised issues around safeguarding intellectual property rights in strategic partnerships, and she asked how far this process had gone.

Mr Mcwabeni said that after the discussions last year the DPE went back to Denel to establish what happened when they went into joint ventures. The response was that Denel acknowledged that in forthcoming joint ventures they might lose IP because they had never registered it appropriately.

Mr C Wang (ANC) pointed out that, with regards to PBMR, Westinghouse Consortium had won contracts from US Departments. He said that the Committee was told that foreign companies were strategic partnerships. He asked whether the agreement with the Chinese partner had brought any value to the project, and whether the involvement would be short or long term.

Ms Sandra Coetzee, Deputy Director General: Governance and Risk, DPE, said that the Chinese tender was for generation technology, which was still current technology, whereas the PBMR technology was forward-thinking and brand new technology. The tender DPE was anticipating in the US was towards new technology.

Mr R Nogumla (ANC) stated that most of the Committee’s concerns would be contained in the agreement that the DPE would have. This meant that there was a need to follow-up and regular reports on the progress of these concerns. Even though there was a regulator the Committee did not know how far the Regulator had gone in addressing the issues raised by the Committee.

The Chairperson said that the unhappiness coming from various constituencies would be brought to the attention of the Committee. A major concern expressed by some constituencies was that DPE was perceived as handing over 2% empowerment to the people in the community and then abandoning them, leaving them unable to manage. He noted that, particularly in the area of land reform, that not only must the land be handed over but that the people should be given the necessary skills to maintain it as well. It seemed that Government fell short regularly of meeting its deadlines. He felt that “abstract” deadlines were met so that departments could report to parliament. He said that there was no sustainability or follow through. He also suggested that members feed their constituency experience into Mr Mcwabeni’s work as it would add a different vantage point.

Mr Wang asked what percentage of the budget was being used to increase the media profile of PBMR technology in terms of educating the younger generation as well as the general public.

The Chairperson noted the Estimate of National Expenditure Deadlines. He asked specifically whether deadlines had been or would be met for the new SAFCOL role and mandate (April 2007), the lease to be signed with KFL (September 2007), the PBMR shareholder agreement to be signed (April 2007), and the listing of PBMR as a public enterprise. He also asked if the pilot fuel plant for 2007 was on course.

Mr Mcwabeni responded that most of the deadlines were realistic. However, he mentioned that the lease agreement issue was an ongoing negotiation and DPE thought that it could play a role in facilitating the agreement. The pilot fuel project had drawn the date from a project information document of PBMR that outlined key milestones. There had been shifts in the deadline as to when the pilot fuel plant was going to be implemented. These shifts could not only be accounted for by the entities. Deadlines were set within the implementation plans of the project. Concerns had emerged when the deadlines within the implementation of the project were shifted.

The Chairperson noted that the DPE had spoken about a number of joint ventures, and the fact that both local and international partnerships were to be concluded by November 2007. The Chair said that he realised that it may be sensitive information but asked if it was possible to mention how many partnerships were anticipated.

Mr James Teledi, Deputy Director General: Minerals and Energy, DPE, said that the issue of PBMR had been under discussion within the context of the restructuring at Eskom, and also within the nuclear strategy the DPE was expecting from Department of Minerals and Energy (DME). DPE already had a draft of the DME strategy that was circulated for discussion to other departments, and it should be possible to look at the future of PBMR within the nuclear programme of Eskom. The DPE was envisaging a situation where PBMR as likely to be a part of Eskom instead of being a separate entity. This was discussed by the Boards of Eskom and PBMR in February 2007.

The issue of PBMR and Eskom took place in February 2007, when the board of Eskom and PBMR discussed it.

Mr Nogumla said that he understood there was going to be a private sector capital investment in PBMR and enquired as to the percentage of PBMR that would be going to the private sector.

Mr Teledi said that PBMR already had the key investors Eskom, IDC, Westinghouse and government, who were the current shareholders. They had been contributing their part in funding for research, design, and safety. They also worked on the fuel and demonstration power plant. The shareholders agreement was supposed to be finalised but it could not take place because of issues around government’s intention for PBMR and Eskom. Thus the shareholders agreement had been delayed a while. Although a corporate agreement had been mooted, no further funding could be put into PBMR pending government finalising its future. DPE was envisaging a situation where PBMR was a subsidiary of Eskom and over time there might be an area where private funding could be brought in. Intellectual property would still remain with Eskom.

Mr Mcwabeni mentioned that during the morning session there was a question raised on the dealings with communities. The DPE had suggested it should formulate a transaction guideline, to be forwarded to the Board of Safcol, which would take into account all the issues raised by communities in past transactions, so that if the issues were brought to the attention of the Board it would need to act in a certain way.

Mr Teledi added that a further point had been made in the morning session on the concerns about PBMR. The question whether funding should continue still needed to be decided. DPE and other investors had already spent up to R4 billion on PBMR. Originally part of the Eskom project focused on how Eskom could get more energy through PBMR, but as PBMR evolved further new opportunities became apparent, and the costs had increased, which was the reason for a decision needing to be made on funding and its future. He pointed out that the money that was allocated to PBMR in April 2007, of R1,3 billion, was emergency funding. The four ministers from DPE, DME, Department of Science and Technology and National Treasury still had to resolve the issue and advise Cabinet on the way forward.

The Chairperson said that he felt Mr Teledi’s comment relating to the necessity to decide whether to move forward with PBMR caused uncertainty. He was under the impression that the government was committed to PBMR. Although many members had reservations about cost and outcomes , the criticisms had abated a little over the past 18 months as a result of the public discussion on nuclear energy and the realization that they lacked the technical capacity to offer a critique. The public would have to live with the decision and would have to answer for it to future generations if anything were to go wrong. Now it seemed that Government was still undecided on the issue, and in particular if the costs warranted the effort. He asked if that was the official DPE position.

Mr Teledi confirmed that this was correct.

Department of Public Enterprises Programme 5: Transport: Briefing
Mr Andrew Shaw, Deputy Director General: Transport, DPE, noted that this programme was divided into the two sub-programmes of Transnet and Aviation. He explained that the Transnet subprogramme aimed to provide oversight over the capital expansion programme and the transformation of Transnet into a fully focused freight transport company, and the effective operation of its business units. The second subprogramme aimed to monitor the transformation of SAA into a commercially viable national carrier and to oversee the establishment of SA Express as a stand alone entity.

The indicators and milestones for the transfer of Shosholoza Meyl to S A Rail Commuter Corporation were described, with a target date of 31 March 2008. DPE would monitor and review the Transnet funding and finance plans with quarterly reviews, linked to the capital expenditure rollout programme. This programme of rollout had been delayed as a result of procurement of assets that were in scarce supply. A baseline study on the current impact of Transnet on the economy, both in the local and broad sense, would be done by November 2007.

Mr Shaw noted that DPE was continuously refining the port and rail Master Plans, and was in the process of preparing a memorandum to Cabinet. Transnet has provided significant detail on its proposal for port and rail that were useful, although some shortcomings had been identified. This document described how port and rail would tie in to the rest of the transport sector and where the focus of investment was. Two major factors underlay the investment, which were the bringing in of a new operator or private player into Coega, through the Private Sector Participation process, which had been carried over from the previous financial year; and the enhanced involvement of multiple operators in the rail environment. Many under-utilised branch lines presented an opportunity for local economic development around freight and tourism, particularly in Kwazulu Natal. The DPE would also be initiating a project entitled “Customer Experience of Rail and Port” to highlight challenges in Transnet’s delivery of services. DPE was working with Transnet on Competitive Supply Development programme.

Mr Shaw said that there had been substantial discussion around aviation and that the Minister of Public Enterprises had given substantial insight into the SAA issues. Aviation was high priority, particularly in the turnaround and recapitalisation of SAA. It was necessary for DPE to work closely with National Treasury, Department of Environmental Affairs and Tourism and Department of Transport. It was necessary to ensure Treasury buy-in, in respect of the recapitalisation, and presently there was a critique of the turnaround approach of Seabury. DPE was in the process of creating a sustainable integrated aviation strategy for South Africa. This process may span more than one financial year but would be focused on understanding the major cost drivers in the aviation industry, which was both dynamic and high risk, so that all implications must be fully understood.

Mr Shaw said that DPE was given R10 million for the 2007/08 financial year. Goods and services, which comprised largely consulting services, made up R4,4 million of this amount. Consulting focused on the Africa Aviation Strategy and some of the initiatives in respect of Transnet. Compensation of employees amounted to R5,6 million, a large increase on the previous budget, but included some previously vacant posts.

Discussion
Mr M van Dyk (DA) requested a cost benefit analysis of the previous financial years’ undertakings, to assess the benefits against the costs.

Mr Shaw responded that many programmes were ongoing with other units, such as Transnet. Many of the budget items with respect to Transnet were small. One item larger than in previous years was the long-term aviation strategy and he felt that the cost benefit of this was very clear. The cost of turnaround of SAA was very substantial, and it had already been re-capitalised to R1.3 billion. If DPE did not a clear idea of where the sector was headed, and the role of SAA or other SOEs in that sector, then the right kind of insight could not be applied. SAA could surely come up with a turnaround strategy, but in the longer term there was a need to plan for the airline to be able to play a commercial role within a two-year period. The potential cost of this was R3 million, although the re-capitalisation costs of SAA were much higher. Global expert consultants could give a clear sense of what was happening in the global market.

Mr Hendrickse stated that the Committee knew little about SA Express, and it was important for the Committee to get a better sense of it.

Mr Shaw agreed. He said that the history of SA Express had been embedded in SAA for so long that they had been sidelined. DPE had failed, because of the challenges around SAA, to see the opportunities in SA Express. He was impressed with the capabilities of SA Express. Its flying of narrow-body aircraft differentiated it from SAA, and it also looked for low volume routes in Sub-Saharan and the rest of Africa. He suggested that it would be useful to provide an opportunity for SA Express to air their plans and reasoning.

The Chairperson pointed out that the economic characteristics of the Estimates of National Expenditure reflected that DPE had current payments rising from R4,6 million in one year to R10,1 million the next, and there were massive increases in travel and subsistence from R46 to R508 million. He asked for clarification.

Mr Shaw said he could not comment on the budget issues in the Estimates of National Expenditure, but had been surprised by the difference in the budget from 2006/07 to 2007/08. It might be that there was an undercount in 2006, and during restructuring it was difficult to pinpoint every rand to a specific area.

Ms Rashieda Issel, Chief Operating Officer, DPE, concurred that this was the main reason for the increase.

Ms Coetzee added that there was many cost cutting functions in the units last year and DPE had aggregated expenditure as far as it could.

The Chairperson noted the objectives set by the DPE for the Transport programme, such as the intention to sign the shareholders agreement in aviation sub programmes by June 2007. He asked if the deadlines were realistic.

Mr Shaw replied that it was necessary to be ambitious in order to reach objectives. He felt that these created the pressure needed to deliver, and that some processes were under way already.

The Chairperson asked what “other” represented in goods and services in programme 6?

Ms Fourie answered that this incorporated attendance fees at workshops, training, bursaries, development, venues and facilities, and in-house catering.

Concluding remarks
Mr Teledi thanked the Committee for its critical input, which had been helpful and hoped that the Minister’s and Director General’s input would assist the Committee.

The meeting was adjourned.