Special Adjustments Appropriation Draft Bill [B37-2008]: Informal briefing

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Finance Standing Committee

06 September 2007
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Meeting Summary

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Meeting report

FINANCE PORTFOLIO AND SELECT COMMITTEES AND JOINT BUDGET COMMITTEE
7 September 2007
SPECIAL ADJUSTMENTS APPROPRIATION DRAFT BILL: INFORMAL BRIEFING

Chairperson:
Mr N Nene (ANC)

Documents handed out:
Special Adjustments Appropriation briefing
Special Adjustments Appropriation Bill (2007/08 Financial Year) [B 37-2007]
Memorandum on the Object of Special Adjustments Appropriation Bill, 2007
Presentation by Department of Sport and Recreation

Audio recording of meeting

SUMMARY

Various funds had been conditionally placed in the contingency reserve. The Pebble Bed Modular reactor required a special appropriation of R1 823 million as the Department of Public Enterprises could not fund them. Alexkor need R44.7 million to cover costs. The settlement of the Richtersveld land claim was also an issue. Denel needed R222 million to cover a guarantee that had been called in, although this claim was subject to audit. The Land Bank needed R700 million for development as it had lost a lot of money in writing off loans. Sentech needed R500 million to stay competitive in the broadband telecommunication network. The Department of Sport and Recreation needed R1 905 million to cover building costs of stadiums for the 2010 event. The projects were on or ahead of schedule and the Department wished to avoid cash flow constraints which might hamper future progress.

Members generally questioned why each entity could not wait until the normal Additional Appropriation Bill at the end of October. Questions were asked about the acceptance of business plans by most of the entities, and were perturbed that money was needed for operational as well as capital expenses.

The Pebble Bed Modular Reactor (Pty) Ltd explained that money was needed urgently to finance its operation until the end of 2007. It was not yet in a position to produce revenue, and funding from overseas partners would only be available once a partnership agreement had been concluded. Progress with the different components of the project was good. Treasury had set aside money in the contingency fund to finance 51 percent of the capital requirements of the PBMR project, subject to acceptable business plans. Those plans had been submitted but Treasury wanted a shareholder agreement to be signed for the remaining 49%. A desire to protect South African intellectual property in the design and management of the reactor had complicated negotiations with the other stakeholders and had delayed signing the agreement.

Alexkor was subject to a court judgement on the Richtersveld settlement claim. It was struggling to maintain both land and sea operations, and had only recently recommenced selling diamonds on the open market. Maintenance on equipment had not been done, and the company had been making a loss for some time. It had insufficient reserves to maintain operations for more than a month.

Denel needed to pay a guarantee which had been called after delays with a major contract. The government was liable for the payment of this claim, which had still to be audited. It was admitted that the entity had been making a loss for some time, and would still for some years. Poor contract management was one of the factors in this.

The Land Bank had suffered due to the writing off of under-performing loans. It needed money to re-establish its development programme. Government’s contribution would be supplemented by the private sector. However, at present, investors were sceptical of the Land Bank’s ability to finance its risks.

Sentech was facing challenges from other competitors in the Information Communication and Technology market. It was losing qualified people at an alarming rate and needed to boost its staff retention programme.

Progress on the building of stadiums was good and ahead of schedule. Money was needed to improve the cash flow situation, and was in fact being requested from amounts already budgeted for future years. By purchasing materials now there would be a saving against future increases due to inflation and currency fluctuations. The Department of Sport and Recreation was criticised for the absence of its Director-General, who is the accounting officer for the Department and was compelled by law to be in attendance.

MINUTES

The Chairperson said that in the interests of time there would be no specific briefings by the departments. However, officials were present from the Department of Communications (DoC), Department of Public Enterprises (DPE) and Department of Sport and Recreation (SRSA). He introduced the members of the Departments as well as the entities present.

Briefing by National Treasury

Dr Kay Brown (Chief Director, Expenditure Planning, Medium Term Expenditure Committee (MTEC), National Treasury) said that the Minister of Finance had indicated in his budget speech that money had been set aside in the contingency reserve for Alexkor, Sentech and the Pebble Bed Modular Reactor (PBMR). Payment would be subject to certain conditions. These entities, together with the Land Bank, Denel and the 2010 FIFA World Cup Development programme had pressing needs that could not wait for the normal yearly Adjustments Appropriation Bill.

The DPE did not have enough money in its baseline to assist the State Owned Enterprises (SOEs). There was a commitment to finance 51% of the PBMR’s capital requirements. These funds were put into contingency pending the production of acceptable business plans. An amount of R1 823.573 million was needed for the entity’s obligations until the end of the year.

She said that Alexkor was affected by the Richtersveld land claim, which had been approved by Cabinet after the budget. A contingency had been announced to cover this. An amount of R44.7 million was needed to cover expenses until March 2008 unless the entity was to go into debt. Recapitalisation of the Joint Venture with the community would be finalised by that date.

Dr Brown said that Denel was liable for a payment of R222 million because of a claim for damages. Government had been notified of this on 31 July 2007. The entity would be liable for heavier penalties if the claim was not settled in time. An external audit had to be conducted before the claim would be honoured. In terms of the Public Funds Management Act (PFMA), payment under a guarantee was a direct charge against the National Revenue Fund, and had to be defrayed from funds budgeted for that department. It was appropriate that Parliament be appraised of the claim, and DPE did not have funds to cover the direct charge.

She said Cabinet had agreed to recapitalisation of the Land Bank subject to conditions relating to its management. MTEC was working with the Department of Agriculture. R700 million was needed to address the liquidity shortfall and the capital adequacy ratio. A government guarantee was also required. The deteriorating position was due to the writing off of large amounts of loans.

Dr Brown said that Sentech was repositioning itself as a wireless broadband wholesale provider and infrastructure developer. The budget speech had indicated that they would be considered for adjustment funding on approval of a revised business plan. MTEC was able to recommend initial funding of R500 million as a contribution to capital expenses. This allocation was subject to conditions determined by the Minister of Finance and related to the refinement of business plans.

SRSA needed more funds because of the need to procure building materials up front to minimise on cost escalations and exchange rate volatility. In some cases construction was ahead of schedule. There were tight deadlines for the completion of stadiums. An amount of R1 905 million was to be brought forward from the 2008/09. This would ensure that construction would not be constrained by cash flow problems. Funds would be transferred under the 2010 FIFA World Cup Stadiums Development Conditional Grant.

Discussion on Pebble Bed Modular Reactor Request

The Chairperson asked Members to pose questions on each entity in the order they were presented during the briefing. The first entity to be discussed was the PBMR.

Mr K Moloto (ANC) noted that the R6 million was required for capital expenses. He asked what portion of this was for capital and what portion for salaries, and how long this would last. He had studied the Annual Report. Some time would pass before the PBMR would generate revenue. They would soon be back for more.

The Chairperson welcomed members of the Portfolio Committee on Private Enterprises.

Mr D Gibson (DA) said that he was a green person, and believed that nuclear power, if used, should be clean. He asked if the business plan had been produced, and if it had been accepted. He asked what the viability of the project was. Huge costs had already been incurred. He asked what interest there was in private enterprise, and if there was any interest in a public-private partnership (PPP). There should be some funding from someone other than the taxpayer.

Mr S Asiya (ANC) asked a general question regarding the budget. He asked if the departments had the money to finance these requests or not. He agreed that there should be a division between capital and operational expenses. He asked if money had not been put aside for the PBMR to stand alone.

Dr G Woods (NACEDO) added to Mr Gibson’s question. During at least two conferences, experts had said that the PBMR would not be viable. There was unsubstantiated reasoning to support the technology. There had been few successes world-wide. The granting of funds had to be subject to the business plan being approved.

Mr P Hendricks (ANC) said that the PBMR was a special industry. He saw an analogy in the way that the development of the computer had been fuelled by the United States military. He asked if PBMR had submitted regular reports, as these had not been seen by the Joint Budget Committee. He asked how the transfer of funds would be monitored. He asked what percentage of the share belonged to Westinghouse, and if they were also injecting funds into the project.

Mr M Johnson (ANC) said that a special additional appropriation was before the Committee. It was special so guidance was needed. Planning should reveal the sustainability of the project. PBMR and other entities were SOEs, and were expected to be self-funding but it seemed that they were not able to do this. The fundamental question was how to deal with this situation. MTEC was in charge of the budget plans. There had been a surplus, and this should be used to recover national debt. He asked what the impact of the current exercise would be on the surplus. There might be more tax overruns in 2008. A vicious cycle would arise if the surplus were not sustainable.

Mr B Mnguni (ANC) said there was an appraisal phase for every project. The Minister of Finance had plans for every department. He asked if proper scrutiny had been done on this project.

Ms J Fubbs (ANC) referred to the Estimate of National Expenditure (ENE). She could not understand the urgency being shown now for two of the items. If the business plan was not yet accepted, the special adjustment had been made pending approval. Government could not work like this. If the Committee allowed departments to act like this, a free-for-all situation would develop. All of MTEC’s good work would be wasted and South Africa would be heading towards becoming a banana republic. There was a problem with PBMR. She also supported the provision of clean power, but not at the expense of proper governance. Government could not be held to ransom. The business plan was a poor excuse. All the money must be put into the contingency reserve.

Ms L Mabe (ANC) said that the Committee had celebrated the surplus, but it had been expected that this would be used to help government deal with emergency situations and cases of real need. She asked why PBMR wanted the approval of a special appropriation for operational expenses. She asked why government should bale out under-performing businesses. This did not comply with the PFMA. If there were contractual obligations, then PBMR should have known about them earlier. She asked why they waited so long to raise the problem.

Mr Y Bhamjee (ANC) asked if this would be setting a precedent. He wanted to know why the normal appropriation vote was too late. He asked who had accepted the entity’s business plan.

Mr J Bici (UDM) noted that funds were needed for operational expenses. If these were only enough to last until the end of December, he asked what would happen in the next quarter, or if the contracts in question would end in December.

Mr Lesetja Kganyago (Director-General) said that unless the situation was dealt with there would be an effect on the surplus. Plans were on the table at the time but were not accepted. There was more time needed to engage with the problems. Government was committed to PBMR. Funds had been diverted to the contingency reserve. There was an indication that these would be dealt with in the normal appropriation. MTEC had been told that there were pressures on PBMR. The original calculations that they would survive until the normal vote were not correct. It was a recent and massive project, and international collaboration had been called in. The technology was complicated. It was the first time a project of this nature had been undertaken. It was an unevaluated project. External experience had been sourced. The Chief Executive of PBMR was present. He asked if the use of an appropriation was valid. He hoped it would not set a precedent.

He pointed out that this was only the second time in the term of the current Minister of Finance that a special adjustment had been called for. The previous one was as a response to disastrous floods. It would not be done if it was felt that the department could allocate funds. The department had spent a lot on bridging finance. Funds would go into the government’s shareholding. A capital injection was needed. The acceptance of the business plan had opened a Pandora’s Box. The question was the standard by which acceptance could be done.

Mr Kganyago said that as the Director-General, he was paid to be sceptical. He had to test assumptions. Ultimately this would come down to a political decision. MTEC had a job to advise the Executive. Parliament had a right to see the business plans. On the question of whether it would be too late for the normal vote on 31 October, he said that that was the reason that MTEC was in front of the Committee. There were other issues too. If there was a guarantee, it had to be honoured. The only consideration should be if the amount was correct. Another question was why the guarantee had been triggered. He felt that PBMR’s plans were acceptable.

Ms Portia Molefe (DPE Director-General) said that requirement 1.3 had anticipated that there would be a revision of the partnership agreement in August or September. Although this was far resolved, there were difficulties. There were two fundamental issues. One was with the work stop order. In other countries, there were separate licences for the different components. Here there had to be a single licence issued at the same time for all the components. There were problems with the documents. The second issue was with state shareholding. There was a need to retain intellectual property at least with the foreign partner.

She said that the DPE had talked to some large South African companies. There was a level of interest, and partnerships could be formed. SASOL was interested in the heat exchange aspect, and was working with PBMR. In terms of viability, Murray & Roberts had also shown interest, and this showed that it was viable. The R6 million was government’s equity contribution. Other partners such as Westinghouse would only make their contributions when agreements had been reached. At this stage funding would not be directed towards shares. Money received would be converted into proportional shareholdings.

Mr Jaco Kriek (Chief Executive Officer: PBMR) said that the business plan had been submitted during March 2007. A Project Information Memorandum covered the next forty years. An annual corporation plan, quarterly reports and the entity’s first Annual Report had all been submitted. The Auditor General’s Audit Report was unqualified, and had been sent to Parliament. He agreed that intellectual property must be protected. It would be a shame if all the money was spent on development only to see the results being lost as had happened recently with solar technology initiatives. There was a stakeholder agreement in place to protect South African interests. Planning had been done, documents submitted and discussions held with DPE in order to unlock funds from national stakeholders. This would be the foundation.

He said that PBMR was a company of 750 employees. Its offices were in Centurion, and there was a full board in place and various sub-committees. It complied with the PFMA. Its auditors were KPMG. Many international experts had been involved with the drafting of the business plan. It had been a major effort. There were three projects involved in the programme. The reactor would be at Koeberg and the fuel plant at Pelindaba.

Mr Kriek described the cash flow situation. It was planned that funding would not stop during August. The stakeholder agreement should be signed, at which point international funding would be released. Toshiba, a major shareholder in Westinghouse, was interested in including PBMR in its technology programme. South Africa must have its rightful stake in the project. It was a long, complex programme. The work stop order would address teething problems. There were environmental considerations. The draft nuclear programme would be a framework.

Ms Molefe said that DPE had been in monthly contact with MTEC. Escalation costs had been based on funds needed for particular items.

Mr Moloto asked what the salary bill was for the 750 employees.

Mr Bhamjee asked what the estimated total cost was for the programme.

Ms Fubbs said that the decision during the budget month was that the funds would go into the contingency reserve. It may require a special budget vote to release them. The timing was bad and there was no indication that a special budget vote was needed. DPE had made an estimate of the cost. This was a sign that progress was being made on a long-term business plan. The report of October 2006 referred to significant progress. She asked how to understand the word ‘significant’ in this context.

Mr Johnson asked if PBMR would survive without funding.

Mr Moloto asked how long the requested funds would last.

Ms Molefe said that R4.2 billion had been spent on the programme. She estimated that the total cost of the project until its expected commissioning in 2014 would be R21 billion.

Mr Kriek said that the R6 billion granted in the budget was part of a three-year submission. Of this, 70% was needed for capital expenses and 30% for operational costs. These operational costs included salaries, contractors’ fees and overheads. R4.2 billion had been spent since 1999. This was tabled in the Annual Report. The R1.8 billion requested in this Bill would have the same 70/30 split between capital and operational costs.

The Chairperson said that if there was no specific answer on the split of funds then the meeting should proceed to the next item while Mr Kriek found the answer.

Mr Kriek said that the split of operational coasts was 22% for salaries, 11% for overheads and 11% for EPCM contracts.

The Chairperson said that this should be in the business plan.

Mr Kganyago said that the surplus had not disappeared, and would still be there. The funds requested were in the contingency reserve.

The Chairperson said that the reserve was worth R3 billion but the funds being requested in this Bill were R5.1 billion.

Ms Fubbs referred to the ENE. She still wanted to know what was meant by ‘significant progress’.

The Chairperson said that the Committee would interact with the Annual Report later.

Mr Kriek said that the Annual Report would contain clear figures. The reactor pressure vessel was being built in the factory and was 70% complete. The casting of the core barrel was expected to be completed in early October in Japan. The manufacture of the turbine blades had started. Work was being done on other major components. A machining facility had been set up in Germany to the value of 7 million Euros. The fuel system was being produced in Russia, and would be tested by the end of the year. All local facilities had been tested. The contract for the fuel plant would be placed soon. Work was progressing in Pelindaba.

The Chairperson said there was a need to focus on specifications. He then invited Members to ask questions on the requested appropriation for Alexkor.

Later in the meeting, Mr Kriek reverted to the Committee with figures. A written list was also provided. Up to July 2007, R150 million had been spent on salaries, R51 million on overheads, R297 million on the reactor, R65 million on the fuel plant and R25 million on research. This was a total of R588 million. This estimated costs to maintain operations until the end of the December were R233 million for salaries, R101 million for overheads, R308 million for the reactor, R103 million for the fuel plant and R122 million for research. This was a total of R867 million, and the total of the two was R1.455 billion. There was an under spending of R275 million on the work stop order and another R100 million was needed for working capital. This made up the total requirement of R1.83 billion.

Discussion on Alexkor Request

Mr Gibson asked what the amount of the Richtersveld settlement was, and what the cost to taxpayers was. The condition was the continued operation of Alexkor, and he presumed that the entity’s operations would be stopped if the matter was not settled. If this was not the case, then he asked why there had been no provision in the budget previously.

Mr Moloto commented that he had read the Annual Report. The spending was R7.7 million. He asked if MTEC had thought of the asset side. Some entities would become a drain on MTEC. The auditors, Price Waterhouse, had the same issue with Alexkor, which seemed to be dependent on continued government financial support.

Ms Fubbs requested a written answer to her previous question. She needed further clarification on Alexkor’s debt together with an estimate of operational expenses and projected expenses. The projection should cover at least one year. Land claims in the Richtersveld were a risk. She asked if no provision had been made for this. She asked why these requests could not be accommodated in the normal Adjustments Appropriation.

Mr Johnson noted that Alexkor was a joint venture with community involvement. He asked what the pressing need was, and why Alexkor could not wait until the next budget in March 2008.

Mr Mnguni asked how the business plan was approved, and what the split was between operational and capital expenses.

Ms Molefe said that the Richtersveld claim was worth a potential R2 billion. The final settlement was R450 million. This included the transfer of business to the community. There was a 49% equity deal for the community. Because of negotiations in the Muisvlakte area the community had launched an interdict which had restricted mining operations. The problem being experienced in the alluvial diamond fields was that Alexkor lacked the capability to operate in deep waters. Alexkor had been unable to sell diamonds on the open market, and this had also restricted its income. It was now selling on the market. Once the Richtersveld settlement was made an order of court it would have to be paid forthwith.

Mr Mzamani Elias Mdaka (CEO, Alexkor) said that the issues were addressed in the Annual Report. The mine had run at a loss for five years. There had been no capital investment or maintenance of equipment. This had led to the current situation. Land mining operations had been stopped due to costs of the current work force. One of the conditions of the settlement would be that land mining must continue. This requirement was to sustain operations for the next six months. R74.7 million was needed to maintain operations until the end of the financial year in March 2008. Then the joint venture with the community would be in place and long term plans could come into effect.

The Chairperson asked if the money was needed now or if it could wait until the October appropriation.

Mr Mdaka said that Alexkor could not meet its current obligations. Salaries and creditors had to be paid and there was not enough in the bank. Alexkor’s current balance was only about R8.5 million.

Mr B Komphela (ANC) asked if the requested R44 million would cover expenses until March.

Mr Mdaka said that the monthly expenses on labour alone were R1.5 million. Total operational expenditure was R10 million per month. Diamond sales were done monthly. There was not enough capacity on the ground for profitable land mining operations.

The Chairperson said that an amount had been placed into the contingency reserve in the budget.

Ms Retha du Randt (Chief Director: Economic Services, MTEC) said that MTEC was not fully aware of the amount needed. They were waiting for the court settlement to be finalised. Sure was sure that Alexkor would not be able to operate without extra funds. The land must be given to the community in an operational state. Alexkor did not have the money to continue operations until December.

Mr Gibson asked if this was the only diamond mine in the world to operate at a loss. Perhaps it should be handed over to Mr Oppenheimer to make it profitable. He asked if the community would be prepared to accept 49% of the losses being incurred.

Mr Asiya said they should be given the figures again. The final judgement should be known by the end of September. He asked what would happen if the amount was more than anticipated. He asked why they could not wait until the end of October.

Ms Fubbs referred to the Minister of Finance’s speech. The issue of the land claim had been raised. Operational costs had to be met. The land claim had not yet been settled, and she understood this. The Committee had not been briefed earlier that the costs of running the mine were R10 million per month. Alexkor should have known about the impending crisis, and she asked who had been alerted. She asked if the Committee would be acknowledging the entity’s right to run at a loss. She asked why MTEC could then not make more money available.

Ms Molefe said that the settlement had been signed by the community and government. The final amount would only be confirmed when the court order was final, but a number was on the table and had been given to MTEC. This was both a public and private process. The final court order was awaited. A final request could then be made. Alexkor was not fully capitalised and was making do with old equipment. It could not hand over a worthless asset to the community. Only 10 to 20% of the land had been explored. It would take two years to survey all this land. There were two options. Alexkor was the only employer in the area. It could retrench all its employees and cease operations, but would still be liable for an environmental rehabilitation fee of R250 million. Care and maintenance was needed. Once the court order was handed down government would be obliged to pay out. Discussions had been held with De Beers, which had diamond mining assets in Namaqualand. Combined operations with community involvement were a possibility.

The Chairperson said that whether members were satisfied with the explanation or not, they must understand the reasons.

Mr Hendrickse said that he had visited the mine and was supportive of the principle of keeping Alexkor running. It was the only source of employment. It also provided services such as water which would normally be a local government issue. It provided water to Port Nolloth. There would be severe socio-economic consequences if it closed down.

Mr Johnson referred to paragraph 1.4 of the memorandum on the Bill. He asked for clarification on what the new liabilities referred to would be.

Ms Molefe could not answer this. The settlement amount had still to be confirmed.

The Chairperson said this fell under the general line of the memorandum.

Mr Kganyago said that some of the liabilities had been announced. New liabilities would arise from the second part of the settlement.

The Chairperson then invited Members to pose questions on the request by Denel.

Discussion on Denel Request

Mr Moloto asked why the guarantee had been called in. He thought it was related to Denel’s contract on the Airbus A400M project. He asked if the entity could not meet its own obligations.

Mr Gibson asked what the purpose was of the external audit, whether it was to determine the amount or the validity of the claim. If it was valid, then he asked why the agreement had been dishonoured, and if the payment could be deferred until November. He suspected that there might be some interest of further damages involved, but the wording of the request was too cryptic.

Dr Woods said that MTEC had asked for an appropriation while the issue seemed to be far from settled. The request was presented at an early stage. Indemnity should not be issued willy nilly. He asked if any risk assessment had been done, and what had gone wrong.

Ms Fubbs said that the appropriation was needed as a result of the decision of an entity to pursue a project. With the amount of money in question a lot more work was needed to solve the problem. The DPE had not carried a provision for this in its budget. Once the risks had been assessed, she asked if a financial value was attached to them. She asked what provisions had been made before agreement had been reached.

Mr Asiya said it that it was strange that the budget had been approved without knowing from where the money would come. This was not the first time this had happened with Denel, and the company should be profit driven.

Mr B Mkhaliphi (ANC) had his question asked already.

Mr Mnguni said that the Committee had requested the guarantees some time previously, but was still waiting for them. He asked how many other similar guarantees were in place.

Ms Molefe said that the CEO of Denel had apologised for his absence. In terms of the conditions for the guarantee, DPE would provide the Committee with the audited amount when it was known. Denel had wished to use one of the top four accounting firms to conduct their audit, but this was not possible. They were therefore trying to find an auditor from the middle tier of companies. Once a guarantee was called in, payment had to be made by a specified date. If this was not done, then negative interest would be applied. It might be worthwhile to talk about this. In the Canadian defence industry, as in other large capital goods industries, government lent its support for long term tenders. There was a danger of the currency being exposed to fluctuations, especially in South Africa. There were project risks. These sometimes happened in the private sector as well. There was no such scheme in South Africa. Until Denel was profitable it could not get into the international market, but this situation was being turned around. This was not the last legacy contract, and the effects would still be felt for some time.

Ms Arlana Kinley (Group Executive, Denel) said that this guarantee did relate to damages on the Airbus contract. Denel reported monthly on the risks it faced. The situation was being turned around. The Defence industry normally had long-term contracts. Denel would still lose money for a couple of years until the legacy contracts were completed. This was the only guarantee remaining.

Mr Kganyago said that there had been a meeting on 13 August, and information would be given to the Committee on this the following week. The conditions differed depending on the risk involved. In terms of indemnities, the relevant department needed to approach MTEC. There was a guarantees certification committee which would concern them. South Africa was already committed to the legacy contracts. There would be penalty costs if these contracts were broken. It was difficult. This guarantee had been made in December 2005, but had only been process during March 2007. It was not the first time a similar situation had arisen. A sophisticated approach was needed to sovereign risk management. South Africa was one of only two countries where such guarantees were made public. The other country was the United Kingdom, and this had only changed there recently. The public needed to know about all exposures. They were talking in terms of billions of Rand and MTEC must apply its mind to each situation. They would give the Committee an idea of the guarantees.

Mr Komphela said the problems with SOE’s would continue for some time. This entity would not show profit for some time. He asked how long this situation would persist.

Mr Moloto had no problem with the turnaround strategy being put into place. Denel was not following good business practice at present.

Ms Fubbs asked MTEC if their hands were tied regarding the guarantees. Contracts were complex. Denel had been around some time, and should have developed a risk management system. DPE had seen how other defence industries operated, and what international best practice was. It seemed to her mismanagement was the real issue.

Ms Molefe said that the turnaround of Denel might take ten years. There was some calculation of risk exposure. The Department did have a plan. Denel had been making a loss for a very long time. Contract management had not been good. The structure of modern contracts had to be understood. Penalties were imposed for late delivery. The bulk of defence industries in South Africa were in fact in the private sector. They were dependent on exports. The system needed to be integrated. Discussions would be held with the Department of Trade and Industry.

Discussion on Land Bank Request

Mr Moloto asked about the Land Bank’s corporate plan. High level remarks had been made. There was a greater capital requirement. The Bank was only able to 7 cents for each Rand of risk, and private investors were nervous. MTEC had provided a letter of support to the value of R1.5 billion.

Mr Bici said that Cabinet had agreed on a turnaround strategy for the Land Bank. He asked how far the strategy would go. He asked if the current position of the bank was due to the write-off of loans and how it was insured against losses. He asked how much had been written off, and in which financial years these write-offs had occurred. He asked how the R700 million would affect capital levels so that the Bank could continue with its mandate.

Mr Mnguni said the Bank was a commercial operation, and he did not know how it could be losing money. He asked how much was being done to help the small, poor farmer.

Mr Asiya said that he had not looked at the Annual Report. He asked against what the loans would be written off, and who would benefit. He asked if there would be any benefit for emerging farmers.

Ms R Mashigo (ANC) asked if the Bank had any role in the implementation of land redistribution.

Mr D Gumede (ANC) said the Bank was a vehicle to finance established farmers. No performing loans were a problem. He asked if these were the well established or emerging farmers that were responsible. It seemed that the Bank was not helping emerging farmers.

Dr Phil Mohlahlane (Acting CEO, Land Bank) said the turnaround strategy had been introduced two years previously and was ongoing. There were five pillars to it. People and risk were two of them. The systems were not fully geared for risk yet. Some elements of the strategy were still being rolled out. The image of the bank was important. The Bank had higher risks for historical reasons. They needed to deal with the issues now. The model had changed and the R700 million was needed for development. It would be fully ring-fenced.

He said that the Bank was subject to losses. Loans were given, but a drought could follow. The farmer had no produce to sell and lost his money. It took a year to bring in a harvest, and that meant that a year’s payments could be lost. Farms were abandoned and the Bank’s securities were devalued. The Bank therefore lost money. The auditors had refused to sign the financial statements. An amount of R1.5 million given by MTEC had to be seen together with the balance sheet, and had to be seen as part of the Land Bank’s capital. The government was not coming to the party.

Dr Mohlahlane said that other commercial banks budgeted on 10% losses. Other banks, however, had different portfolios and better spread of risks. The Land Bank was only involved in land, and agriculture was a very risky business. MTEC had therefore given the R1.5 million to assist with solvency. Only 80 cents in the Rand was covered. There was a moratorium on development clients. Insurance was compulsory for individuals but not for entities. The Land Bank had launched an insurance scheme some years previously. This was only intended to compensate the families of deceased farmers.

He said that the Bank had to deal with loans in a different way, and according to new standards. There was a generally new approach in the industry. Some profits had to be written down. South Africa had also become exposed to international accounting standards. They had to wait for an event like a drought to occur. This was a delaying factor.

Mr Bhamjee asked about the non-performing loans. He asked if the requested funds were for development only. There was another document which reflected a development target of R300 million. The requirement was now R700 million. He asked if programmes were in place. He felt that a large portion of the money would go to remuneration in the form of salaries, cars and other incentives.

Mr Asiya said some loans were on the part of emerging farmers. The loans were part of the Bank’s asset base. He asked if the Bank had budgeted on their loans before the request was made.

Mr Gibson asked what the use would be for the R700 million. Money had been lent for development, but often loans were advanced to persons who had no business plans, and were uneconomic from the word go. There was not adequate advice and assistance for farmers. He asked if the Land Bank was satisfied that it was being careful enough with the taxpayers’ money.

Dr Mohlahlane replied that at the end of March the Land Bank had R17 billion on loan. Of these, loans to the value of R2 billion were underperforming. Development loans were 20% of the capacity of the Bank. R3.5 billion was needed to cover these loans. Of this, the Bank wanted R700 million from government and would get the remaining R2.8 billion from private sources. In general, the write-offs had been in favour of white commercial farmers. A small percentage of the loans were to black farmers. Business plans had changed the way of thinking. Before the Bank had insisted on security, now cash flow was used to judge the merits of a loan.

Ms Fubbs said that 95% of the write offs were in favour of white farmers. She assumed this had occurred over a number of years. Collateral was needed. She asked where the Land Bank stood on the question of access to land.

Dr Mohlahlane replied that there were many loans. The Land Bank was the first bond holder. When property had to be auctioned to recover costs, lower values were realised. The gap between the selling price and the loan value was the portion that was written off.

Mr Asiya was unhappy that the Members were not being addressed with due respect.

The Chairperson said that the discussion was become a dialogue between Members and presenters. All remarks should be routed through the Chair.

Mr Bhamjee felt that there had been some reckless lending. He asked if the Land Bank made any loans for purposes other than agriculture, and if so, how much these were worth.

Dr Mohlahlane said that the Bank had advanced loans on land for non-agricultural purposes, but this had only happened in the last financial year.

Discussion on Sentech Request

Dr Woods said that the Minister of Finance had not made a final decision on Sentech’s funding. He could not understand the logistics of the request. The Committee was being asked to approve their request while the issues were still uncertain.

Mr Kganyago replied that in the actual Bill the conditions were to be determined by the Minister. There had been negotiations on the business plan, which had been going on for more than eighteen months. The business plan had been accepted and submitted in August, and had been passed on to Cabinet.

Mr Lebogang Serithi (Director: Asset Management, MTEC), agreed to a large extent.

The Chairperson asked why the need was so urgent. The normal appropriation would be tabled in one month.

Dr Sebiletso Mokone-Matabane (CEO, Sentech) said that negotiations had been going on for some time. There was not an abundance of skills in the Integrated Communications Technology sector. Individual development took a long time. There were many new entities. The Second National Operator had become a reality, and there were many more players in the sector now. Sentech was losing skilled people every day, and its managers were being poached by the private sector. The role of Sentech in the provision of wireless broadband would impact on education and health facilities. The sooner the roll out happened the better. The provision was most urgent to contribute to staff retention.

Discussion on 2010 FIFA World Cup Development Request

Mr Gibson asked how much of the R1.9 billion would go to each host city.

Mr Komphela said that five new stadiums were being built, and another five were being upgraded. He asked how the allocations would be measured, or if a ‘one size fits all’ approach would be used. Some cities needed more help than others. He asked if this would be considered, or if the money would be distributed evenly between each venue. The exchange rate was volatile. A 10% cap had been set for escalation projections.

Mr Gibson noted that the money being asked for had been budgeted in the 2008/09 cycle. There was therefore no additional expenditure being requested. He asked what would happen if this proved to be not enough. He asked if SRSA would then come back to Parliament, or if the increases would be passed on to municipalities.

Mr Bhamjee asked about the building of stadiums. There was a burden on municipalities and provinces as well as national spending. He asked if any levels of government were reneging on their commitments.

Dr Woods asked if the money would be allocated to specific construction activities.

Mr Komphela said that business plans had been given to avoid the stadiums becoming white elephants. He asked if the DG had received these. There was an ongoing business plan with the stadium in Mpumalanga. They had a compelling business case based on sustainability.

Mr Johnson said that the amounts were not to cover shortfalls. There was a price escalation on building materials. Construction companies were exploiting the situation, especially in Cape Town.

Mr M Matlala (Chief Financial Officer (CFO), SRSA) apologised for the absence of the Director General.

Mr Asiya said that the PFMA required that the DG be present. The DG was held accountable.

Mr Matlala presented figures on the allocations for each venue. Nelson Mandela Bay had requested R552 million, Manguang R110 million, Ellis Park R24 million, Soccer City R583 million, eThekwini R490 million, Polokwane R280 million, Mbombela R240 million and Cape Town R443 million. This made up the total of R1 905 million. Tshwane and Rustenburg did not need any additional funds.

Ms Mashigo said that the DGs had known about the meeting.

Mr Komphela said this was a valid point. All other DGs involved were present at the meeting.

Mr Gibson felt that his colleagues were being unreasonable. The meeting had been called at short notice. The Members should not assume disrespect. They were being discourteous to the delegated officials.

The Chairperson said that the CFO should be allowed to proceed. The Committee was going to write to the DG for a written explanation. The Special Adjustment Appropriation Bill would be debated the following week. The Committee would need to be convinced of the merits of the request.

The CFO said that the invitation had only been received at 16h00 the previous day.

The Chairperson said that all the Departments had been invited at that time. Some had shown more urgency to attend.

Mr Matlala said that if the allocations were not enough according to projections then a new mandate would have to be sought. However it seemed that these amounts would be enough. The initial funding indications had been done without the benefit of professional engineers, and a new cash flow calculation had had to be made. As regards the three spheres of government, SRSA did hot have control over host cities and provinces. The funds would cover the entire project, not just specific activities. As regards business plans and the possibility of the stadiums becoming white elephants, there were legal issues. The multi purpose concept was being followed with most of the stadiums.

Mr Kganyago said that this was a good news adjustment. There were good business plans in place. Execution was ahead of schedule. There were potential cost savings by spending now before increases were generated by inflation and exchange rate fluctuations. The municipalities would finance the extra bells and whistles at the stadiums.

Mr Bhamjee was of the impression that this was pre-emptive stadium, whereas the CFO was talking about shortfalls.

Mr Asiya returned to Chapter 5 of the PFMA. On financial matters the DG was the accounting officer. It was not a question of disrespect but one of law.

Mr Gibson was listening to the CFO. He had said that there was sufficient money until 31 March 2008. They would need more then. If there was only enough money to last until the end of March, then more would be needed.

Mr Kganyago said that this was only an in-year shortfall. There would be a new vote in the new year. There were no cost overruns, and in fact the projects were ahead of schedule.

Mr Malcolm Simpson (Deputy DG 2010 Soccer World Cup, MTEC) said that five stadiums were being revamped. The target dates for the completion of these as well as the new build projects were all within 2009. It was a fast-tracked project. Contractual management was tight. A key function was procurement. Funds were to be brought forward so that materials could be bought and kept in stock. The expenditure curves were accurate, both in terms of upper and lower limits of expenditure. The cash was over the upper limit. They had engaged with the projects, and had seen what the cash flow situation was.

He said that they were now taking R1.9 billion of R3.8 billion which had been budgeted for the next two financial years. The cash flow would be adjusted. The position was good and cities would be able to proceed without cash flow constraints. The contribution of MTEC to the different projects varied. MTEC was paying 72% of the costs for Durban, 69% for Cape Town, 73% for Soccer City, 77% for Polokwane, 89% for Mbombela, 76% for Nelson Mandela Bay, 100% for Ellis Park and 100% for Loftus Versveld. The position in Manguang was unclear, as a new dispensation was being negotiated, and in Rustenberg His Royal Highness of the Royal Bafokeng nation had indicated he would make a contribution.

Mr Simpson said the money was being channelled into ring-fenced bank accounts dedicated to the construction programme. The business cases had been subjected to rigorous analysis.
MTEC was very concerned about the viability of the stadiums post 2010. This strategy would be left up to SRSA. They would have R10 billion in assets, and would have to decide how to utilise them. Provision had been made for escalation, and a model was in place. The impact of escalation on the pot had to be considered. There was a percentage included in the allocation of R8.4 billion, and there had also been contingency provisions.

The Chairperson thanked all for their presence. The Committee would meet on 12 September to apply their minds.

Mr Moloto said that a Denel representative must be present. There was a contractual issue. He recalled the heated discussions that had occurred with Statistics SA and the South African Revenue Services (SRSA) had had positive outcomes. Answers were needed on the Denel question.

The Chairperson said the Bill would be debated the same day.

Mr Kganyago thanked the Committee for their assistance. It was not just Statistics SA and SRSA that had been taken to task by the Committee.

The meeting was adjourned.

 

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