Department of Public Enterprises Budget briefing

Meeting report

Budget Briefing: Briefing by Minister of Public Enterprises
Hon Alec Erwin, Minster of Public Enterprises, briefed the Committee. He said that Denel would remain a Public Owned Enterprise (POE). The role of subsidiaries would have to be explored. The State might retain a golden share, or might retain a minority share to fulfil certain strategic objectives. A shareholder management model would be explored.

Min Erwin said that the next area was that of joint project facility. Collaborative projects would be developed across State Owned Enterprises (SOE). The government would use its strength and synergy to achieve large economic objectives.

He said that progress was being made with the disposal of state property, especially property previously belonging to Transnet and Eskom. The government was able to ensure that a systematic approach was followed. It was also achieving Broad-Based Black Economic Empowerment (BBBEE). Local economies would be encouraged while the preference of the communities involved would be considered. Substantive agreements had been reached in terms of the use of some of these properties for housing and educational institutions. There were areas where development was slower, such as around ports.

He said that one of the key projects was supplier development. Government was using leverage to strengthen and develop capacity performance. This was a sensible approach. The growth of giant economies of the world was related to the conditions of supply. If South Africa was to develop its economy then more security of supply had to be achieved. A competitive supply programme should ensure a maximum competitive supply base. This was a good programme and was being followed by Eskom and Transnet. This had to be approved by other departments such as the Department of Trade and Industry (dti).

Min Erwin said that this was an interesting component. There was an African project to define the role of SOEs in African economies. Previous attempts had proved ineffective. It had been proposed that competitive supply development programmes (CSDP) should be linked to other African economies. The United Nations Industrial Development Organisation (UNIDO) was benchmarking potential suppliers in other African states. This would achieve concrete trade links. The cross-cutting of projects was important.

He said that skills development was an important area. There would be large cooperation with the Department of Minerals and Energy (DME) on the South African power project. Capacity would be increased, which he found an exciting prospect. Detailed proposals would be announced after the Cabinet Lekgotla in July. There was a need for skills and the effect could be quantified.

Min Erwin said that major challenges were to rebuild Denel and to make South African Airways (SAA) profitable again.

He said that there had been a big breakthrough regarding the Richtersveld settlement. Mining in the area would be revived and there would be a joint venture with the community. Land-based mining was reaching the end of its life, but could still be prolonged. One of the challenges for Alexkor was to transfer non-mining activities to the community. These were fascinating opportunities and challenges and economic activity would be developed.

Min Erwin said that the decision for government to exit the forestry industry in respect of Safcol was correct. The strategic objectives could be achieved through the Department of Water Affairs and Forestry (DWAF). An attempt to run an SOE for forestry was not necessary. It was clear that any property transactions depended on the settlement of land claims. The issue of land restoration was a complex one. The opportunity to achieve sustainability was a big challenge.

He said that the challenge with energy was to stabilise the system and to get the energy supply system out of its current emergency situation. Long-term plans had to be brought forward, and this was an additional challenge to Eskom. The Pebble Bed Modular Reactor (PBMR) and pressurised water reactor would bring lots of new work. A solar technology project was in its initial stages of development. An underground coal gasification project at Majuba should start producing results by the middle of 2008.

Min Erwin said the Transnet was busy with a big building project. Government needed to reach agreement on the new Ports Act. There was a new regulatory structure for Transnet. There would be an improvement in the capacity of Transnet’s freight rail component. The passenger transport component had been moved to the Department of Transport, and work was being done on determining where the Shosholoza Express should be located. The restructuring of SAA was going well, but it remained a volatile industry. Capital was needed. The government had provided guarantees rather than money. The airline was undercapitalised, and ways had to be found to inject capital. There was support from National Treasury (NT). Clarity was still needed on the roles of SAA, South African Express Airways (SAX) and Mango.

He said that there was movement with Broad Band Infraco. The impact would be seen in its pricing. There was movement towards the laying of the West Coast cable. This should happen quickly once licensing issues had been addressed.

Min Erwin said that the process with Denel was going well. Consolidation was needed between the land systems of Denel and other companies. An important decision had to be taken on missile systems. Another important decision on the Rooivalk helicopter had to be made by the end of the year. Accurate records had to be provided for the last five years to give the next administration a sound start.

Discussion
Dr S van Dyk (DA) was glad that the Alexkor matter had been settled. The matter of the mining itself was not settled in terms of the cooperation between De Beers and private companies. More clarity was needed on the position of Safcol and the land claims. He asked if any claims were on this land, and if the land belonged to DWAF.  He asked what it was worth for the state to retain possession of Safcol, and what the effect of land claims would be.

He had some confusion about money being budgeted for Eskom’s capital expenditure programme. They had asked for R17 billion in 2007. This request had increased first to R150 billion and then to R 300 billion. He had noted an amount of R 343 billion in the new budget. It seemed that the projected requirement up to the year 2025 would still not be enough. R60 billion was being granted for the next five years, and he asked what else would be given to Eskom. He asked what the prospect of success was in the improvement of capacity.

Mr S Kholwane (ANC) had listened to radio reports on the challenges facing Eskom, particularly with the supply of coal. There was an issue with the generation of electricity, and what other options were available. The question was that after engagement with the mining sector, all parties were upbeat about the 10% saving in this sector. Opportunistic companies were threatening retrenchments, such as Goldfields. Some six hundred jobs were at risk. He asked if there were any plans to mitigate the effects of reduced electricity supply. He asked if this was in fact the real cause, or if the companies already had plans to retrench workers. Regarding Infraco, he asked if the Minister was engaging with the Minister of Communication. He asked if there had been any talks about the roll-out.

Mr P Hendrickse (ANC) had heard a report of recent power failures in the United States of America. These had been ascribed to money not being spent on maintenance and old equipment. These reasons sounded very familiar to him. He asked if there had been a large transfer of capital to SAA. He asked if the R 1.3 billion in June 2007 had been a transfer of funds or just a guarantee. Regarding Alexkor, he asked what the intentions were regarding ownership going forward. At present the state had a 51% share in the company.

The Chairperson said that the Committee, in particular the ANC members, were diametrically opposed to the privatisation of Safcol. It was no longer a strategic player, and no longer had as huge a market share as before. However, it was still a profitable venture. It was a large employer, albeit having fewer employees than in the past. The land claims should not jeopardise a worthwhile state asset. She asked how the State would benefit by the unbundling of Safcol and Komati.

Min Erwin replied that the state would retain ownership of Alexkor. There were mechanisms to transfer land and mining rights. There would be a private and shared joint venture (PSJV). It was a time-consuming process, and he did not expect it to be completed before late 2008 or even early 2009. The PSJV would take over the mining process. The land claim would only affect the land mining operation, and had nothing to do with the marine mining operation. Marine mining activities would be included into the PSJV’s ambit. For the marine mining, Alexkor would remain the rights owner. Mining was getting underway and the PSJV would be introduced. In terms of the law this remained a state asset. Negotiations with De Beers were still under way. There was an agreement on other outstanding issues. There was an offer of 20% of the Namaqualand assets. A total mining strategy was being put into place, but the rights of the community had to be preserved. All these things were covered in the settlement agreement, but this was not yet finalised. Alexkor would remain as an SOE. The government might exit from this arrangement in time, might stay on as a shareholder, or might exercise the golden share option. He stressed the need to protect the community.

He said that there was a distinction between Safcol and Komatiland Forests (KLF). 80% of the land claims were in the KLF area. The claims still had to be finalised. This was a difficult situation. Clarity was needed on the land claimants. There might be a need to have a longer, more detailed discussion on this issue. Government’s view was that it would be best to dispose of this POE. The objective was to help the community’s economy. This was for both the land claimants and the broader community in the area. Lessons would be learnt from previous similar experiences. The land should be kept forested. KLF was only about 9% of the Safcol operation, but made a 30% contribution to the sawing log industry. Stability was needed. Lease and licence agreements would assist with this. Government would not alienate the land. He noted that most successful forestry operations worldwide took place on State owned land. There were empowerment and economic development objectives. There were also forestation objectives. It would only make sense to retain Safcol if market forces would not maintain the operation.

Min Erwin said that the position of Eskom had been completely jumbled in the media. It was an SOE with its own balance sheet. It had never been capitalised since its formation in 1928. In terms of revenue it was the seventh largest electricity supplier in the world. It had a strong balance sheet and enjoyed a high international rating. Electricity prices were regulated. There was a model of calculating the rate of returns on assets. Eskom’s profits were within reason. A creditable formula was used to determine prices. Eskom used its balance sheet to borrow money. The gearing ratio of cash in hand to borrowing should be 50:50. Money was not being given from NT, and so Eskom had to find its own way to strengthen its balance sheet.

He said that the problem with Eskom’s revenue was that retained earnings were dropping, which meant more money had to be borrowed to finance capital expenditure. This meant that the gearing ration increased. This situation made lenders nervous. In order to correct this tendency, prices would have to be increased and customers would be forced to use electricity more efficiently. State capital might have to be injected as well.

The Minister foresaw a tight period for Eskom over the next two years. R60 billion could be made available through cash guarantees or loans. The figures mentioned by Dr van Dyk were the cost of building new power stations. There were other important ratios to consider, such as the ratio of revenue to interest payments. If the formula was to be corrected, then prices must increase. This would help Eskom to remain strong.

Min Erwin said that the coal market was tight. International prices for the mineral had increased as well as equipment costs, and it was becoming harder to procure sufficient supplies. It was expensive for Eskom to maintain a stockpile of coal. The mining sector was unhappy, and there was an agreement to have discussions. The Minister of Minerals and Energy would meet with the Chamber of Mines, although there had already been detailed discussions at other levels. Protocols had been agreed. He wanted to accommodate the mines, but there was pressure on other areas of the economy to save electricity. A meeting would be held the following day. The mines must try to avoid retrenchments, and he felt that some of them would use any excuse to lay off staff.

He said that there was a complementary strategy for INFRACO and SENTECH. INFRACO dealt with fibre optic cable networks and SENTECH with wireless networks. These were completely different but complementary systems. There was a project in KwaZulu-Natal where they were working together to provide broadband accessibility. He supported the state funding being provided.

Min Erwin found it remarkable how quickly the energy situation could change. A White Paper in 1998 had summarised the world view at the time. Dire shortages had not been predicted. During the 1990’s people had thought that the market would solve any problems. By 2001 a wake-up call came in the form of massive outages in California. Investment had been too light, and there was a swing back to the role of the State. Increased investment in nuclear energy was inevitable. The problem with using renewable energy was that it could not guarantee base load. Virtually all countries had been caught out. There were problems with old equipment. He knew that from 2003/2004 mixed systems had been used and regulations had been tighter. Changes would happen in less than ten years.

He said that the R1.3 billion for SAA had been in the form of a guarantee. Some cash had been input for the restructuring process. Guarantees were not useable capital. There were incorrect impressions about the funding of SAA, but it was a worldwide trend for governments to support even privately owned airlines.

Mr C Gololo (ANC) asked what the state of affairs was with SA Airlink. They had acquired a new fleet with bigger aircraft. He appreciated this. The aircraft looked new, and he thought they were British Aerospace models. He asked if they were leased or bought. They had new seats, but had a problem with the doors.

Dr Van Dyk said there were elaborate moves with Eskom on the question of generation. New nuclear capacity would only be online in 2016 or 2017. This was a little late for the current crisis. There was a need for another basis power station. He assumed this would be over and above the Hitachi contract. He asked what the situation was with coal supply. He thought that growth might exceed the expected 4%.

Mr C Wang (ANC) referred to the Minister's quip about problems caused by bolts falling in the wrong places. However, he had a problem with a missing screw. He had recently flown on SAA, and noticed that a screw was missing. He had taken pictures and posted these on his website. He asked if a problem like this was related to a decrease in the maintenance budget. He asked if profit was being put ahead of maintenance.

The Chairperson asked if cash was the only deficiency with SAA. She asked what was being done to address the airline’s financial problems. She asked if it was just a case of throwing money at the problem, or if it was a more involved issue.

Min Erwin said that SAA had a passive holding in SA Airlink. There was no government control. His guess was that the new aircraft were leased. They sounded like excellent aircraft. There was merit in considering the future relationship between the airlines. There was merit in considering this, as the airlines could play complementary roles. Each operated in a different niche market.

With regard to Eskom, the Minister said that it would be wiser to establish another base load station. The savings campaign might not achieve enough, and some economists predicted that the economy would grow by up to 7%. An additional generating capacity would be a good insurance policy. It was likely that this would be a coal-fired plant producing about 3000MW. They would see what proposals were made. The current low reserves had led to the emergency situation. It would make some sense even to overbuild. Nuclear power stations were complicated, and there were delays in the process.

He said that he welcomed the actions taken by Mr Wang regarding the missing screw. SAA had an excellent technical reputation. The two aircraft types operated by the airline on domestic routes, the Boeing 737-800 and Airbus A319, were excellent aircraft. In terms of maintenance, SAA took a very cautious approach.

Min Erwin said that Eskom had an excellent maintenance record. There was an annual international competition for electricity providers, and Eskom had always done well in this. International consultants had been brought in to advise on maintenance processes, and government was awaiting reports on this consultation. Any incident went through an audit process, and the situation was watched closely.

He said that it would be a mistake to throw money at SAA. The restructuring process had been costly. Capacity would be affected by the process. There had been a capital injection to assist with the process. There were problems with costs and other areas. The route network had been limited, but more emphasis was being placed on serving destinations in Africa. There was a reduced footprint in South Africa. The process was going well. There was now improved revenue per seat, and good progress had been made during the year.

Mr Wang said the missing screw incident would not be dismissed so easily if there was an accident. He asked if there had been a decrease in the maintenance budget and staff skills. It was difficult to zoom into the affairs of an SOE. He asked if there were risks. SAA had a good record with its technical services. The missing screw had been on the wing of the aircraft and it was a serious concern. It seemed it had not been detected during the pre-flight inspection.

Mr Gololo asked what progress was being made with Mango.

Dr van Dyk had read a report the previous week about two SAA flights from Johannesburg being delayed. One was an international flight and the other a domestic flight to Durban. In one case the aircraft had been evacuated without any explanation. He knew the pilots were very careful, but if he asked if the delays were due to improper maintenance.

The Chairperson asked the Minister to expand on the challenges in the Ports Act.

Min Erwin said that the maintenance record of SAA could be assessed. Maintenance was a problem at Transnet. Some maintenance must be capitalised. Some R8 billion or R9 billion had been spent the previous year. The experiences with Transnet had led to a recommendation to review maintenance procedures.

He said that Mango was reasonably stable. There was a high occupancy rate on their flights. The situation would be reviewed at the end of the financial year. He was not aware of the delays quoted by Dr van Dyk, but would check on them. There was no evidence of reduced maintenance budgets impacting on technical standards or causing the delays.

The Minister said that the Ports Act envisaged the National Ports Authority being implemented in two phases. The first was of being incorporated into the Department.

He said that the composition of SAA was a matter that still had to be grappled with. There was a concern with Transnet. Alternate revenue streams and assets had to be found. These had to be explored in detail. It was essential that a framework be established for partnership arrangements. He estimated that the framework would be ready by November 2008. There were technical implications regarding the new harbour at Coega. Some legislation and regulation was required. There would be an impact on Transnet.

The Chairperson asked the Minister to talk broadly on the Department’s perspective. She asked what the areas of strength were, and where DPE faced its biggest challenges and weaknesses. She asked about the high attrition rate in DPE.

Min Erwin was pleased that the DPE was now settled. There had been a business plan in place for the previous three years, which had been applied consistently. One of the challenges was that nothing remained static for long. The DPE had to act more like a shareholder. There was an impact from the market, and often immediate responses were needed. The DPE operated much like a major merchant bank. He was pleased that this young Department was developing the skills to deal with the challenges.

He said that this was the only Department that had not started as a department, but had in fact been set up as an office. All the staff members were contracted. The environment was not the same as a normal public service department, but was very hectic. It operated more like a merchant bank. Some people could not handle the pressure, while on the other hand the environment provided a good training ground for the commercial sector. This therefore resulted in a high staff turnover. The contract process had been sorted out well. A lot of specialists were used. A big achievement was the setting up of teams

He said there was a real improvement in the system. The DPE’s objective was to achieve an unqualified audit. Relations were good with the SOEs despite an inherent tension. The situation had improved. Sometimes quarterly reports were late and not processed in time. The objective here was to make this process happen more regularly. Great progress was being made. There were negotiations between Eskom and the DME.

The Minister said that he was personally pleased with the way the energy situation had been handled. There had been a crisis that had flared up, but it had now settled.

Presentation by the Director General, Department of Public Enterprises
Ms Portia Molefe, Director General (DG), DPE, said that there were individual business plans. She apologised for not sending these plans to the Committee earlier. Her presentation would address three areas, namely the mandate, vision and mission of the DPE, key achievements and challenges, and the various programmes.

The mandate of the DPE was to ensure alignment of the SOE business strategies with DPE policies and regulators whilst ensuring that SOEs were sustainable and benefited the economy of the country. These SOE’s were Alexkor, Broadband INFRACO, Denel, Eskom, PBMR, Safcol, SAA, SAX and Transnet. SAX would report directly to the DPE for the financial year 2008/09. There was a dual oversight responsibility with Transnet. Government was not regarded as a major shareholder if its holding was less than 50%.

She said that the DPE’s vision was to have SOEs that were well managed by international standards, played a role in their respective industries, undertook investment programmes and used these programmes to benefit the South African and African economies. They were making inroads. If the SOEs were to be catalysts to the economy they had to be self-sufficient. They were making inroads to sharpening the focus. The mission of the DPE was to provide clear mandates, performance management and governance systems. Core work elements were the oversight of the SOEs, disposal of non-core assets, leverage of SOE assets for the benefit of the economy and ensuring that procurement policies favoured South African manufacturers.

Ms Molefe said that Transnet was going to Cabinet with its rail plans. It would then go to the private sector and the market.

She said that there were international standards regarding energy reserve margins. There was some sense of excess capacity. There was a cost factor in finding the balance between cost and benefit.

The last area was leveraging the investment programme to benefit the South African and African economies. Experience showed that when a programme stopped, that sector tended to crumble. The DPE needed to target areas where there was a competitive advantage.

Ms Molefe said there were many guidelines applicable to the smaller SOEs. These had been communicated to the boards in writing. A board meeting would be held later that week. Quarterly business reports were being submitted. It seemed that the DPE took longer to review these repeats than the boards. Risk analysis had to be spot-on, and assisted the Department in its oversight role.

She said that decisions were being conveyed and approved. Oversight was a key element of the DPE’s mandate. In particular, the Department played a role in ensuring the total compliance with the BEE code except in terms of equity. Guidelines from the dti were followed in other aspects. There had been no complaints about transactions in the last three years. Approval was often given on the basis of the maximum bid. There was leverage of assets such as with INFRACO. Procurement had to be conducted so as to give the maximum opportunity to South African manufacturers.

Ms Molefe presented a review of the performance of the different SOEs in the previous year. The figures had been audited, and of these only Transnet had presented a half-year report.

Ms Molefe said that Alexkor’s performance was worrisome. There had been a bare minimum of expenditure. Revenue had decreased to R133.7 million compared to R154.8 million the previous year. An operating loss of R27.3 million had been sustained, compared to R209.7 million in the previous year. Diamond production had declined to 33 765 carats as compared to 43 207 carats. Government was fast tracking the work on forming the PSJV. This would benefit the community. Another problem was reduced valuation of diamonds.

She said that Broadband Infraco had yet to invoice its customers. There was still an exclusive agreement with Neotel. Connectivity services were already in place at all twenty core backbone and regional expansion sites. State Information Technology Agency (SITA) had been live on the Infraco network since 18 January 2008. A memorandum of understanding had been reached on the Africa West Coast Cable. Core partners had been identified, and the document would be signed on 29 February 2008. The deadline for completion was 2010. There were concerns over the Uhurunet cable on the east coast.

Regarding Denel, there had been much better order coverage. Decisions were needed on the desired end state. Revenue increased from R2.7 million to R3.3 million. A gross profit of R754 million had been made compared to a loss of R131 million the previous year. Orders were 49.4% of budgeted sales compared to a target of 69%. Operating costs were 115% of revenue.

Ms Molefe said that Eskom’s finances were under pressure due to increased primary energy costs. The National Electricity Regulator had been approached to request a tariff increase. However, profits must not be allowed to get out of sight in a good year. The new build programme would yield another 1 155 MW by the end of 2008. The recovery programme to temper the effects of excessive load shedding was in place.

Ms Molefe said the total funds transferred to the PBMR by the end of the last financial year were R2.1 billion. Contributions in the last year were R1.3 billion. The NNR Stop-Work Order had been lifted conditionally on 22 December 2007. The licence for the Accelerant Cooling Facility had been received on 17 January. The Helium Test Facility had achieved 100 thousand accident free hours.

She said that Safcol had changed its financial year to 31 March, and so the figures only reflected a nine month period. The issue of land claims had to be resolved before closure could be affected, as the length of the lease was affected. During the period of the report, Safcol had generated a revenue of R653 million as compared to R326 in the previous financial year. This had meant a profit of R800 million compared to R168 million the previous year. Operating costs were 72% of revenue.

She said that SAA had sustained a loss of R883 million. Domestic and regional flights were profitable, but the airline was suffering losses on its long haul routes. The Seabury restructuring programme had been agreed to by the board. A retrenchment process was underway. R 1.3 billion guarantee had needed to be rolled over. The airline’s gearing was horrendous. The Seabury strategy was to be implemented. SAX was meeting its profit targets and had showed a profit of R102 million. There were commercial relations between SAX and SAA.

Ms Molefe told the Committee that Transnet was showing an improved freight flow. There was no time to delay in the core area at Coega. The risk needed to be reviewed. There had been tariff increases, but the highest level of efficiency must be achieved. There were growth trends in traffic. Transnet was proceeding with a strategy regarding branch lines and private operators. This should lead to an increase in capacity.

She went on to outline the Competitive Supplier Development Programme (CSDP). The steel sourcing project was complete. There was a difference between the requirements of Eskom and Transnet. Studies were available for both organisations. Several procurement development sessions had been held. A more strategic approach to procurement should be followed rather than once off arrangements. SOEs were expected to deliver on their CSDPs by the end of the year. Discussions would be held with industry including manufacturers. A formal relationship had been established with UNIDO and the government was working with the Rest of Africa project on benchmarking. This should create a database of suppliers.

The DG said that a strategy on the South African Power Project had been presented to Cabinet. Broad talks were being held with the industry. There was an Environmental Impact Assessment support programme in place. The DPE was working closely with the Department of Environmental Affairs and Tourism. A framework had been developed for the identification and treatment of Strategically Important Developments. There was clarity on what processes had to be followed.

Ms Molefe said that revised BBBEE guidelines were being used in the disposal of non-core property. A self-assessment toolkit was available on the Department’s website. This would save on costs of entities considerably, as the exercise could have cost between R20 thousand and R100 thousand previously. The moratorium on the sale of non-core properties had been lifted. Eskom had completed a spatial viability study for Rosherville.

She said that in terms of skills training, a cross-cutting artisan training requirement had been collated and an initiative established. On the previous Monday an audit had been held of DPE to establish an Employment and Skills Development Agency. Application had been made to the Department of Labour. This would facilitate work-place placements for Further Education and Training (FET) college graduates and enable the graduates to obtain trade certificates. An important area of required expertise was in nuclear skills.

Ms Molefe then listed some legislation prepared by the DPE. The Transnet Pension Fund Amendment Act had been promulgated. The SAA, Broadband Infraco and SAX Bills had been processed and promulgated. The DPE had cooperated with the Department of Communications (DOC) regarding amendments to the Electronic Communications Act, which should be ready by the end of the year. The Regional Electricity Distributor Bill had been put on hold. The Richtersveld settlement had been concluded. There had been collaboration with various players on a sector strategy for the defence industry. A revised build programme for Eskom had been submitted to Cabinet. The ports and rail master plan had been drafted. The monitoring capacity of the investment dashboard had been expanded. Procurement training in the CSDP had been rolled out.

Ms Molefe went on to outline some risks and challenges facing the DPE. There had been delays in the finalisation of the Nuclear Policy. A review of maintenance practices across all SOEs was needed. Policies must be made clear to the board. Weakened balance sheets must be balanced against investment needs. Tariffs must be efficient against inflationary effects while considering the impact on the poor. Skills scarcities and supplies could delay capital and build plans. This issue had arisen sharply regarding the project to convert geysers to solar water heating devices. SOEs must have the optimum skills, and training was needed before there was a demand.

Ms Molefe said that a special advisor had been appointed to advise on organisational structure issues, particularly on labour issues. The DPE was busy with the last aspect of the codifying of information. A training manual was to be compiled.

She said that expenditure would decrease over the course of the Medium Term Expenditure Framework (MTEF). The budget for the 2007/08 financial year was R4.6 billion, reducing to R316 million in 2010/11. This was a decrease of 59.1%. Transfers would remain high in the first two years of the MTEF. Much of the decrease was attributable to decreasing financial commitments to the PBMR.

Ms Molefe presented some statistics regarding the DPE. There were 162 staff posts, of which 143 were currently occupied. Of the vacancies, twelve were for positions on Levels 13 to 15. Twenty appointments had been made since April 2007 while 21 people had left the DPE. Of these, eleven had resigned, one contract had expired and nine had been transferred. Some posts had been vacant for long periods. The post for an Aviation & Rail Sector Specialist had been vacant for 540 days. It had been advertised three times and one offer had been declined. Head hunting was in progress. The position was similar for the post of Director: Risk Management, which had been vacant for 480 days. It was difficult to attract top management positions, and the DPE often had to compensate for these vacancies by outsourcing or offering short contracts for specific projects. There was an internship process with 22 interns currently with the Department.

She then outlined the priorities for the DPE’s Programme One (Administration). Five priorities related to performance management of staff. It was a tense environment. There were many pressure shifts and the recent energy crisis had caused a lot of stress. Staff members were given a good grounding in the business world, which made staff retention a challenge. Risk assessment was taken seriously. An audit had been conducted into the DPE’s finances, but transfer payments made the accounting difficult. DPE was conducting various ways of measuring the payments. The DG’s office contained the SOE Investment Dashboard. There was an annual rolling five year review process. The SOEs had been assessed, and most had turnaround and restructuring programmes in place.

Discussion
Mr Hendrickse said that the quarterly reports were important. He asked if the DPE had the expertise to deal with them. It was important that correct information should be provided so that the members of the Board could ask the right questions. This was also the case for the Committee. On the matter of vacancies, he found it worrisome how long these had lasted. He asked if the long timeframes in respect of appointment related to newly created positions. He asked if there was any record of the reason for resignations, and where the transferred members had gone. On the sale of non-core properties, he asked how many of these had been used for education, housing and the private sector. Solar-powered geysers were expensive for home-owners. Eskom wanted to save power consumption, not so much money. He asked if there would be any chance of subsidies for these devices.

Dr van Dyk noted that in 2004 the Department had undertaken a strategic overview, and had indicated that in preparation for the downscaling of restructuring activities it would place more emphasis on performance and risk management. He asked the Department to explain, with specific reference to Eskom, what had happened to risk management since then. The Department had also said that the focus on the energy sector would be on the division and incorporation of Eskom business units, and the introduction of competition in generation of electricity. He asked what had happened in relation to this, because Eskom still operated as a monopoly and there was still little private sector participation.

He said that Eskom and Transnet were key factors to growth. He asked why there had not been an investigation into power sustainability. In the 2006 report there had been no reference to Eskom, and he wondered if they had been forgotten. In 2007 the Department had indicated that it would provide strategic and in-depth analaysis of the performance of Eskom. The question was therefore why the Department was not informed about the power outages, if it had been doing its job properly. It had been left to Eskom and the Minister to react to the crisis. The Department’s programme 2 dealt with energy and broadband enterprises. Eskom’s expansion programme needed to be monitored.

The Chairperson asked that questions relating to Programme 2 be held until that part of the presentation.

Dr van Dyk referred to the speech by President  Mbeki on the opening of Parliament. There were vacancies in all spheres, which would be filled within six months, according to the President. He asked what was being done to comply with this directive.

Mr Kholwane asked about Broadband Infraco. He asked what the challenges were with the cable. He asked about the policy of communication between the Departments, and what the links were between Infraco and Sentech.

The Chairperson referred to the table on page 7 of the presentation. Timelines were a problem. Alexkor was a long term problem. Part of the difficulty was that the longer it took to reach a final solution, the worse the financial position would become, or so it seemed. On the question of attracting partnerships, she asked what would happen if the private sector was no longer interested. Tighter timelines were needed to measure progress. She also asked about the timelines in the Seabury plan to restructure SAA. She asked what the position would be for funding SAA once the objectives had been met. If there had been discussions with NT, a lot more information would have to be tabled. This question would have to be dealt with in more detail.

Ms Molefe replied that quarterly reports had been submitted for some time. The quality had improved, and they could perhaps now be made broader in scope. The Aviation and Rail specialist was a new post. In previous years there had been a programme to bring in outside specialists for specific projects. This post had been vacant for 540 days. It had been advertised, and the DPE was now looking to go out and find someone. She would engage with the DG of the Department of Public Service and Administration to clarify the Public Service rules on filling of vacancies. There was a directive from the Presidency that Deputy DG posts had to be filled. They were watching the situation. This was a core area of focus.

She said that the DPE was working with Eskom and the DME on solar heating. Support would be provided for two years. A lot of finance was needed, and only a subsidy would be given. She said the DPE had been working on its risk management for some time. This was the responsibility of management. There was a systemic risk involved. The output of power stations was monitored. Coal reserves were also monitored. In 2004 investment had been made into the new building programme for Eskom. It was envisaged that 30% of power generation would have come from the private sector. The requirement was 1 000MW. Eskom had been able to improve its output. In 2006 300MW had come on line, 149MW in 2007 and it was expected that capacity of a further 1 155MW would come on stream during 2008. Fixing the cost of electricity was critical.

The Chairperson commented that the extent of the requirement was too vast to be met by the IPP.

The DG said that the DPE’s understanding was that the Minister would be the single point of communication regarding the energy crisis while the Department spent its time looking for solutions. In terms of Broadband Infraco, the NEPAD cable would link up with Uhurunet. The DOC was coordinating efforts with other African operators. Proper working relationships were needed. The West Coast segment of the cable was the responsibility of Infraco. The DPE had a working relationship with the DOC, although there might be some divergence. It was Infraco’s responsibility to bring private companies in to help where needed. There were some agreements in place.

Ms Molefe said that resignations and transfers from the DPE were mostly due to moves to more senior positions in the private sector and other departments. Exit interviews were conducted to determine the reasons for departure. Transfers referred to movements to other public service departments.

Mr Hendrickse took the Chair at this point.

Presentation by Chief Financial Officer, Department of Public Enterprises
Ms Sandy Hutchings, Chief Financial Officer (CFO), DPE, presented a summary of the Estimate of National Expenditure. There were increased transfers. Over the period of the MTEF, expenditure would reduce by 59.1%. The DPE’s budget for 2007/08 was R4.6 billion. It would be reduced to R3 billion for 2008/09, R2.3 billion in 2009/10 and R316 million in 2010/11. Of the budget for 2007/08, R62 million was allocated for compensation of employees, R66.6 million for goods and services, R4.5 billion for transfers and R1.5 million for capital. The figures for the 2008/09 FY were R71.5 million for compensation of employees, R93.3 million for goods and services, R2.8 billion for transfers and R375 thousand for capital. This was a total of R3.0 billion.

She then gave a breakdown of the amounts budgeted for transfers. For the 2007/08 FY, after the adjusted appropriation, an amount of R72.7 million was budgeted for Alexkor. This included an amount of R2.25 million for VAT. There was still no confirmation if this amount would indeed have to be paid. The budget for 2008/09 was R130 million. Nothing had been budgeted for Broadband Infraco in the current FY, but the budgeted amount for 2008/09 was R377 million. For Denel, R1.15 billion had been budgeted for 2007/08 but nothing for the remainder of the MTEF period. The transfer to the PBMR for 2007/08 was R2.5 billion, which was reduced to R1.75 billion for 2008/09. SAA was to receive a transfer of R744.4 million, while nothing was budgeted for the remainder of the MTEF. Once again, this included an amount of R91.4 million set aside for VAT. Rigorous efforts were being made to check with NT and the South African Revenue Services (SARS) to ascertain if this money did indeed have to be paid over, as there were doubts whether the restructuring costs were indeed taxable under VAT. The uncertainty over the VAT payments would impact on the DPE’s expenditure and it might not meet its 2% target. SAX had been budgeted to receive a transfer of R585 million in 2008/09.

Ms Hutchings said that the DPE had requested R160.6 million for operational funding for the 2008/09 FY, and a total of R486.6 million over the MTEF period. The initial allocation in December 2007 was R144.3 million for the current year and R475.9 million for the MTEF period. This left a shortfall of R16.0 million for the current financial year and R10.4 million over the MTEF. This had caused the DPE to reschedule certain projects to the outer years. Subsequently, NT had revised the figures in January 2008 to allow for an inflationary increase. The allocation for 2008/09 was increased to R165.9 million and R517.5 million over the MTEF. This represented an increase of R5.2 million for the current year and R41.6 million for the MTEF. Of the MTEF figure, R2.8 million was for personnel and R38.9 million for non-personnel components of the budget. However, the DPE would have to absorb further increases sure the predicted inflation figures prove to be inaccurate.

The CFO then went on to the detailed budgets for each Programme. Programme 1 was Administration, which covered the expenses of running the DPE. In the 2007/08 Financial Year (FY) the budgeted amount was R29.0 million, which increased to R33.9 million for 2008/09. This catered for an inflationary increase for all employees, including the interns. There were 48 of them, 26 in 2007/08 and 22 in 2008/09. There was a three month overlap between the two groups. Other amounts under this Programme were listed. This was a total budget of R65.9 million (up from R62.6 million).

Programme 2 was Energy & Broadband Enterprises. The budgets for compensation of employees, goods and services and transfers were listed. There was a total of R2.14 billion (R2.51 billion the previous year)...The slight increase in operational expenditure in operational expenditure over the MTEF was due to projects starting in 2009/10. Over the MTEF period, R727 million had been allocated for Broadband Infraco and R3.5 billion for the PBMR. An amount of R60 billion had been set aside as a contingency fund for Eskom over a five year period. Of this, R20 billion was the anticipated requirement. The DPE was still waiting for clarification on this from NT.

Ms Hutchings said that the Department had requested R2.1 billion for Broadband Infraco over the MTEF period, R1.1 billion of this in the 2008/09 FY. R377 million had been allocated for the FY and R727 million over the MTEF. The shortfall in the 2008/09 FY was R754 million, and R1.3 billion over the MTEF. This meant that a significant equity contribution would be critical. The funds requested for investigating and constructing a state initiated undersea cable were not approved by NT. They had major concerns over the extent of public sector participation.

The CFO said that the DPE had requested R3.7 billion for the PBMR during the 2008/09 FY, and a total of R14.7 billion over the MTEF. Of this, NT had allocated R1.75 billion for the 2008/09 FY and just R3.5 billion for the MTEF. This left a shortfall of R2.0 billion in the 2008/09 FY and R11.3 billion over the MTEF. Funding requirements were mainly for design, development, licensing and payments for capital assets. This request was not approved, and the R3.5 billion allocated was the balance of the R6 billion approved by NT in the 2007 MTEF. Additional funding would have to be generated from private investors or other shareholders.

Programme 3 incorporated Legal, Governance, Risk and Transactions. She set out the components of the budget There was a total budget of R158.2 million (R96.8 million). Increases were due to legal costs for Alexkor and Safcol transactions, but these costs would be stable over the remainder of the MTEF. The Alexkor funding had been shifted from Programme 2. The DPE had in fact requested R260 million for Alexkor in the 2008/09 FY, but NT had chosen rather to split the disbursement over a two year period. Of this, R200 million would go to the state’s final contribution to the PSJV between Alexkor and the Richtersveld community. The balance would be used to develop the township. However, the turnaround strategy for the entity would have to be agreed upon and a viable business plan submitted before NT would release funding.

Ms Hutchings went on to Programme 4, which covered manufacturing enterprises. The budgeted amounts for the 2008/09 compared to those for the previous FY were tabled. This was a total of R11.6 million (R1.16 billion). There was no significant increase in the operational budget. The full amount of the transfer payment had gone to Denel and no further transfers were allocated for the remainder of the MTEF. The DPE had requested R79 million for Denel for the 2008/09 FY and a total of R410 million over the MTEF, but nothing had been allocated by NT. These requests were to fund Denel’s consolidation costs at ORTIA (R241 million) and interest costs for the Domestic Medium Term Note (R169 million). The NT had given no reason for dismissing the request. The interest costs related to Denel’s borrowing programme were of grave concern.

The CFO said that Programme 5 dealt with transport enterprises. The budgeted amounts for the 2008/09 compared to those for the previous year were tabled. There was a substantial increase in operational expenditure, but these costs would stabilise in future years. One of the reasons was that the DPE would be responsible for retaining technical expertise. This had previously been funded by the Department for International Development. The National Corridor Performance Management project would also commence during this time period. In the previous year the transfer payment of R744.4 million had gone to SAA, whereas the transfer of R585 million for the next year would go to SAX. The long term capitalisation of SAA would be resolved during the forthcoming FY. The request for SAX was for R104 million for aircraft acquisitions. NT had added to this a further R481 million for re-imbursement of Transnet loans. The airline had been transferred from Transnet to government. Issues relating to ownership had been submitted to NT.

Ms Hutchings said that the final element was Programme 6, which was the Joint Project Facility. The budgeted amounts for the 2008/09 were compared to those for the previous FY The total was R28.8 million (R14.4 million). The increase in this programme was to meet the objectives of the unit. Matters to be considered were the commencement of the SA Power Project, the CSDP to research Eskom and Transnet key commodities, UNIDO benchmarking and participation in international exchange programmes. It would reduce towards the end of the MTEF as projects were completed.

She said that the DPE had achieved an unqualified audit opinion without emphasis of matter in the 2006/07 FY. Four audit committee meetings had been held during the 2007/08 FY, with an average attendance of 90%. The committee comprised five members, but one had resigned during the year.

She said that the DPE had recorded an under expenditure during the previous FY of R280 million. However, this included an amount of R2 million that was set aside for VAT on transfer payments to Denel. It was still to be confirmed whether this tax would indeed be levied. If it was paid over to SARS, then the under expenditure would be R880 thousand only.

Strategic Overview briefing
Ms Hutchings then briefed the Committee on the programme purposes, objectives and measures for the four main programme areas. She outlined the objectives and measures for each programme area highlighting the anticipated expenditure projections for the various activities and sub-activities to the undertaken.

She highlighted that the strategic overview and key policy developments from 2004/05 to 2010/11, noting that the DPE’s mandate was to provide shareholder management of the nine SOEs-Alexkor, Broadband InfraCo, Denel, Eskom, PBMR, South African Forestry Company Limited (SAFCOL), South African Express Airways (SAX) and Transnet- with the aim of achieving economic growth and efficiency in strategically important economic sectors, including transport, energy and communications.

She said the strategic objectives and measures for energy and broadband enterprises included the thrust to ensure energy and broadband sector SOEs achieve their targets, to expand South Africa’s ICT infrastructure to enhance ICT capacity and to lower ICT costs, to monitor Eskom’s capacity expansion programme to ensure timeous delivery of new capacity, and to monitor Eskom’s generation adequacy by examining maintenance and operational practices as well as the reserve margin. It would contribute to improving the electricity distribution infrastructure in South Africa by monitoring the restructuring of Eskom’s current electricity distribution to align with 6 wall-to-wall regional electricity distributors (REDs) by June 2008, and support the ongoing developments in nuclear power to secure long term environmentally sustainable electricity for South Africa by ensuring that PBMR’s environmental impact assessment of demonstration power plant from the Department of Environmental Affairs and Tourism received a positive record of decision (RoD) by June 2008. Fuel  for early irradiation testing was to be delivered by July 2008 and construction of leasehold improvements for the pilot fuel plants must start by June 2008.

The key priorities for 2008/09 included process automation, training and development, performance management of staff, annual risk assessment and audits of DPE and energy efficiency campaign throughout DPE offices. In the DG’s office it was envisaged that significant progress would be made in SOE investment dashboard, capitalisation and dividend policy, annual rolling (5 year) review, assessment of SOE restructuring and shareholder transactions.

Ms Hutchings said that currently the DPE had an important role in monitoring the planning, delivery and financing of the infrastructure expansion programme for Eskom and Transnet, the turnaround programmes of Denel and SAA, the establishment of Broadband InfraCo, the growth strategies of Alexkor and the design and development of PBMR. She emphasised that the primary focus of the department was shareholder management, which the DPE did through its monitoring role over SOE’s performance, including financial and operational sustainability and SOE infrastructure investment. She highlighted that the recent disruption to both households and business by load shedding was the result of a combination of factors, including demand pressures derived from the acceleration in economic growth, unplanned maintenance work, coal shortages and underlying electricity generation capacity issues that had eroded reserve margins. She further said that, from a strategic perspective, the DPE, as a shareholder of Eskom, had a crucial role in monitoring, evaluating and facilitating the SOE’s response to these current, and any future, difficulties with electricity provision.

She noted that there had been key policy developments within the DPE with the establishment of an intergovernmental task team, comprising the Departments of Public Enterprises, Minerals and Energy and Provincial and Local Government, and National Treasury, culminating in the Electricity Distribution Industries Limited (EDI) Restructuring Bill (2002), the promulgation of the Transnet Pension Fund Amendment Act (2007), the Broadband InfraCo Bill (2007), the South African Airways Bill (2006) and the South African Express Bill (2007). On achievements, she said shareholder compacts, which established SOEs performance targets, were signed with Eskom, Denel, Transnet, SAA and Alexkor. Quarterly performance reports, which enabled risk monitoring, were provided by all SOEs and assessed by the Department, a framework was developed to improve the disposal of non-core assets and BEE guidelines were formulated. Ten non-core disposals were concluded in 2007/08, the DPE had finally settled the Richtersveld community land claim in April 2007, Eskom finalised an integrated electricity plan, which was awaiting Cabinet Approval and had completed a reserve margin study. The Broad band InfraCo Bill had been enacted, a number of PFMA section 54 applications were assessed and also the DPE arranged the emergency recapitalisation of SAA (R1.3 billion) to provide SAA with enough equity to fund its restructuring and guided the development of the turnaround strategy, which was approved in June 2007.

Expenditure increased from R678.7 million in 2004/05 to R4.6 billion in 2007/08, at an average annual rate of 89.3% as a result of transfer payments (including VAT) to state owned enterprises (SOEs). Combined transfer payments to SOEs grew at an average rate of 95.2%, from R602 million to R4.5 billion in 2007/08. Between 2004/05 and 2007/08 Denel received R3.7 billion, Alexkor received R170.2 million, Pebble Bed Modular Reactor (PBMR) received R4.9 billion, South African Airways (SAA) received R744 million and R627 million was provided for the establishment of broadband InfraCo. The joint project facility was also funded from the vote for the first time, receiving R25.8 million between 2006/07 and 2007/08.

Under the MTEF period, expenditure was expected to decrease at an average annual rate of 59.1%, from R4.6 billion in 2007/08 to R316 million in 2010/11. Transfers to SOEs remained high in 2008/09 and 2009/10. Combined they amounted to R4.9 billion, of which R3.5 billion was allocated to the PBMR. The significant decline in 2010/11 indicates the ending of transfer payments to SOEs, with the only ongoing funding of R140 million allocated to Broadband.

Some spending trends had been affected by the department’s restructuring of some functions and subprogrammes. For example, Alexkor has been shifted from the Energy and Broadband Enterprises programme, where it had been under the Mining subprogramme, to the legal, governance, risk and transactions programme, a shift motivated by the fact that a settlement that was reached with Richtersveld Community would involve numerous legal transactions. This as also the reason for the Alexkor transfer payment shifting to the legal, governance, risk and transactions programme. The nuclear sector subprogramme (PBMR) has been shifted from the manufacturing enterprises programme to energy and broadband enterprises, to be aligned with the energy sector. These changes had resulted in significant movements in expenditure items over the period, including transfer payments. She highlighted that the department had identified efficiency savings of R3 million in each of the three years over the medium term in goods and services, mainly under travel and subsistence, venues and facilities and audit fees.

In 2004/05, dividends of R569 million were received from Eskom and R30 million from South African Forestry Company Limited (SAFCOL). In 2005/06, dividends of R1.6 billion were received from Eskom. No dividends from Eskom were received in either 2006/07 or 2007/08 but would rather be reinvested into the planned infrastructure expansion projects for creating more generation capacity. This had resulted in the reduction in expected receipts over the MTEF period to an average of R71 000 per year.

Discussion
Ms F Chohan (ANC) expressed concern at the complicated nature of the strategic plan, which was not reader-friendly. She advised the DPE in future to make sure that under each programme area, there should be highlighting of the main areas. For instance, Administration should highlight the salaries of office bearers, and break down of salary grades. She also asked for details on a substantial amount of money paid in terms of transfers and why depreciation costs were not factored into the budget.

Ms Hutchings responded that it was possible to come up with a reader friendly copy for the convenience of the members. On the definition of transfers, she said in accounting terms this meant goods and services that are transferable. These included outsourced work such as communication, audit fees payable to the AG, advertising, and consultancy. On the question of depreciation, she said that in government circles assets did not depreciate

Ms Chohan referred to the R14 763 100 billion, which the Department had requested to fund operational expenses for payments to contractors for design, development and licensing which was noted as approved by Treasury. She said failure to approve must not be mistaken as lack of confidence in some of its Departments. She said sometimes delays and failure to approve were signals that the Department should furnish Treasury with adequate information. She advised the DPE to make use of the Committee to lobby the Treasury. She however expressed concern at the huge amounts of money appropriated by transfers in the legal, governance, risk and transaction programme and a substantial amount appropriated by the administration unit. She sought clarity on whether compensation of employees included consultancy. On the issue of salaries of office bearers within the DPE she said it was supposed to made public because it was funded by taxpayers’ money.

Mr J Louw (ANC) wanted clarity on whether the centralisation of telephones and stationery budget estimates meant that the budget was no longer centralised.

Ms Hutchings responded that a decision was taken to centralise main expenditure mentioned under administration. On transfers, she said again in accounting terms it meant households, which comprised items such as sponsorships and donations.

Dr Van Dyk suggested that the DPE in future must categorise their specific programme expenditure with detailed information as supplementary notes to enhance comprehension.

Ms Chohan requested information on the R744 400 transfers made to South African Express Airways (SAX).

Ms Molefe noted that the amount was transferred to cater for voluntary severance packages (VSP).

Legal, Governance, Risk and Transactions Briefing
Ms Ursula Fikelepi, the Acting Director General: Legal, Governance, Risk and Transactions, pointed out that the purpose of the unit was to provide effective legal services and corporate governance risk management systems and implement legal aspects of strategically important transactions. She noted that the functions of the unit included management, legal and litigation, governance, risk management and transactions. Over most of the period under review, expenditure was dominated by transfer payments to Alexkor.

She outlined the key priority areas for 2008/09 as including ensuring the implementation of the South African government shareholder management plan legislation, Alexkor deed of settlement, Aventura closure, KFL disposal, SOE and shareholder risk assessments, general legal counsel of the department and provision of legal support for shareholder transactions.

Expenditure increased at an average annual rate of 63.5% between 2004/05 and 2007/06, from R22 million to R96.8 million, due to the R82.1 million that was transferred to Alexkor in 2006/07 to initiate an exploration programme and to pay for operational expenses. A further transfer of R72.7 million was made in 2007/08 for operating costs, restructuring and the payment of VAT on previous government transfers. The average annual increase in expenditure of 52.8 % in legal and litigation between 2004/05 and 2007/08 was due to the legal costs incurred as a result of the Alexkor-Richtersveld community settlement. Over the MTEF period, expenditure covered the anticipated legal costs associated with a number of transactions, including the disposal of the Komatiland Forest by SAFCOL.

Expenditure was expected to decrease over the MTEF period from R96.8 million in 2007/08 to R29 million in 2010/11, at an average annual rate of 33%, due to the finalisation of the Alexkor settlement.

Discussion
Ms Chohan wanted to know whether the DPE had put in place any risk management strategy to evaluate the energy crisis since the commencement of power outages by Eskom. She also sought clarity on the DPE’s claim that the Cabinet had approved its policy on remuneration. She also asked for the names of SOEs that were reporting monthly and those reporting quarterly. She also requested the DPE to make available substantive reports on bursaries detailing the extent of the problem, amount recovered to date and institutional measures put in place to arrest the situation.

Ms Fikelepi replied saying on the debt repayment the Department would compile a comprehensive report highlighting the progress to date by bursary beneficiaries. On the names of SOEs that were reporting monthly, she said those that were currently undergoing massive restructuring, such as Eskom and Denel, were reporting monthly whereas PBMR, South African Airways and Transnet were reporting quarterly. She further clarified that Cabinet had approved board remuneration guidelines. On mitigatory risk measures by DPE in line with the energy crisis, she said Eskom had since engaged international experts to assist it in its operations while internally they had advised the power utility to report monthly instead of quarterly. However, she noted that the risk unit had problems of capacity at the moment and was currently looking at the option of outsourcing to enhance efficiency and effectiveness of the unit.

Ms Sandra Coetzee, Deputy Director General: CIPM unit, DPE, highlighted that the risk team specifically focused on assessing the likelihood of certain events happening, addressing systemic risks and proffering risk mitigatory solutions. She added that the DPE had identified a weakness with contract management processes across SOEs.

Mr Hendrikse queried the efficacy of board appointments and remuneration, if salary increases were dependent on subordinates’ recommendations to the Treasury.

Ms Fikelepi responded that the DPE had since drafted guidelines on remuneration and motivational strategies that could be used within SOEs. She added that staff usually recommended board reviews of salaries to the Minister.

Ms Coetzee added that the DPE required supporting documents for salary reviews and these could be from subordinates and other functionaries within the SOE. She said the DPE evaluation of board of directors was in line with the key performance areas and set targets and priorities. She noted that independent experts also evaluated SOE boards of directors as part of peer review evaluation.

Mr Hendrickse expressed concern at the thoroughness of the evaluation by the DPE and asked how the Committee could trust such internal evaluations.

Ms Coetzee responded that external auditors evaluated based on set targets by each SOE and key performance areas. She added that board attendance registers were also used to monitor board performance.

The Chairperson sought clarity on whether the current board evaluation practices were the best to ensure efficiency and effectiveness of SOEs.

Ms Chohan concurred with The Chairperson on the need to make boards of SOEs more accountable to parliament through enacting legislation.

Ms Coetzee said there was no separate budget for the administration programme as this was covered under the DG’s presentation.

The Chairperson asked for details in respect to the vacancies and massive resignations within the DPE and the positions of those who resigned. He also wanted to know whether board induction could be synchronised to include members of the Committee to enhance common understanding.

Ms Chohan referred to the pending disciplinary matters and wanted to know the number of the cases, nature of the cases and how old the cases were. She also wanted to know the number of people who had been trained and developed by the DPE, their skills and budget, and the training and development given.

Ms Coetzee noted that it was possible for a synchronised induction to be pencilled during the autumn school.

Ms Chohan supported Ms Coetzee’s suggestion and added that a synchronised induction would be welcome especially in the second and third quarters.

In regard to the resignations, Ms Coetzee reminded members that the report was presented to the Committee some time back detailing the reasons for leaving. She however, promised that another report would be available soon. She also said that the DPE had records of all disciplinary cases and would make sure that the Committee had copies of monthly reports. She added that the training and development report would likewise be made available.

The Chairperson reminded the DPE to make sure that all relevant documents requested by the committee be made available within a week’s time.

Energy and Broadband Enterprises (EBE) Briefing
Mr Chris Forlee, Acting Director General: EBE, DPE,  also noted that the purpose of the unit was to align the corporate strategies of Eskom, the PBMR and Broadband InfraCo with government’s strategic intent and monitor their financial and operational performance. He noted that the functions of the unit included management, ICT sector broadband, energy sector oversight, nuclear sector oversight and initial public offering including transfers to the Diabo Trust and the Khulisa Trust where Telkom shares were housed.

He said the strategic objectives and measures for energy and broadband enterprises included the thrust to ensure energy and broadband sector SOEs achieved their targets, to expand South Africa’s ICT infrastructure to enhance ICT capacity and to lower ICT costs, to monitor Eskom’s capacity expansion programme to ensure timeous delivery of new capacity, to monitor Eskom’s generation adequacy by examining maintenance and operational practices as well as the reserve margin, and to contribute to improving the electricity distribution infrastructure in South Africa by monitoring the restructuring of Eskom’s current electricity distribution, to align with 6 wall-to-wall regional electricity distributors (REDs) by June 2008. It would also support the ongoing developments in nuclear power to secure long term environmentally sustainable electricity for South Africa, by ensuring that PBMR’s environmental impact assessment of demonstration power plant from the Department of Environmental Affairs and Tourism received a positive record of decision (RoD) by June 2008. It would ensure that fuel for early irradiation testing was delivered by July 2008 and construction of leasehold improvements for the pilot fuel plants started by June 2008.

He pointed out that priorities for 2008/09 included portfolio management, implementation of the national electricity emergency response plan, fast track geyser replacement programme, capacity expansion programme implementation (generation and transmission), generation adequacy monitoring, implementation of single buyer model (monitor Co-gen and IPP implementation, generation, transmission and distribution infrastructure maintenance and refurbishment, monitoring of Eskom nuclear build programme and monitoring of progress of international submarine cable rollout.

Transfers to SOEs dominated expenditure. Expenditure increased between 2004/05 and 2007/06, from R608.9 million to R2.5 billion, at an average annual rate of 60.4 percent. Large increases in spending reflected transfer payments of R627 million to establish Broadband InfraCo, including the purchase of the full service network from Eskom/Transtel and R1, 2 billion to the PBMR to pay essential contracts for the demonstration plant. The significant transfer in 2007/08 was accounted for by a R2.5 billion allocation to the PBMR. Expenditure remained high in 2008/09 and 2009/10, at R2.1 billion and R2 billion respectively, as Broadband InfraCo and PBMR would continue to receive substantial transfer payments. It was expected that a total of R727 million of capital would be injected into Broadband InfraCo to expand South Africa’s ICT infrastructure and R3.5 billion into the PBMR for designing, building and prototyping the PBMR technology over the MTEF period.

Expenditure was expected to decrease from R2 billion in 2009/10 to R153 million in 2010/11, a decline of 92.2%, due to the ending of transfer payments to the SOEs as they became self financing.

Discussion
Ms Chohan wanted to know whether risk management for Eskom and PBMR was housed under the legal, governance, risk and transaction programme or the energy and broadband enterprises budget. She asked whether this was inbuilt or compartmentalised.

Mr Hendrickse asked whether the DPE’s oversight role was limited to reviewing reports submitted by SOEs or also included physical visits. He also requested information on the contingency plans to carry out emergency evacuations around nuclear plants. He asked on the incentives that the energy and broadband unit had earmarked to attract interest in nuclear plant development.

Mr Chris Forlee responded that risks with regard to Eskom and PBMR had been identified although most of the risk initiatives were the preserve of the risk management team. He commented that programme units relied on baseline information from SOEs, which was further corroborated by physical visits to ensure validity and reliability of the data. On test runs on emergency nuclear evacuations, he said that this had already been done to assess emergency preparedness. He added that the issue of attracting interest in nuclear development plants near residential areas remained a crucial step and the unit was looking at various options to incentivise the project. He pointed out that the unit hoped that the Nuclear Bill would catalyse the development of the nuclear industry.

Ms Coetzee added that safety plans would be updated every year to enhance security around nuclear plants. She highlighted that the DPE was looking at the South Korean experience where the nuclear plant development balanced issues of social and economic development with environmental concerns in the long run to ensure sustainability.

Ms Chohan expressed concern at the continued funding of Broadband InfraCo and PBMR despite the sensitivity of the industry. She requested the DPE to provide the Committee with projected funding requirements needed before the projects become self-financing.

Ms Coetzee replied that it was difficult to give the committee the specific figure of the anticipated funding requirements, given the fluctuations in prices and other related costs. She said the DPE had prepared a project implementation manual, however, their progress was being held back by a two-year delay in the manufacturing pipeline. However, she noted that the DPE always relied on business plans before transferring any money to SOEs. She added that InfraCo had a business plan for a 3 to 5 year cycle and it was hoped that after this cycle it would have reached the self-financing stage, hence cessation of capitalisation. On the PBMR case, she said it was still a work in progress. She pointed out that the Department was looking at options of encouraging strategic private business partners with equity and innovative technology to invest in PBMR, so as relieve burden on the National Treasury.

Ms Chohan concurred that delays indeed contributed to cost escalation but urged the Department to ensure that these entities generated equity for the government instead of milking the national coffers.

Ms Coetzee commented that on funding projections her Department had always liased with the National Treasury in monitoring the spending patterns. She assured the members that due diligence was underway to ensure that the project costs did not balloon out of proportion.

Manufacturing Enterprises Briefing
Mr John Morris, Deputy Director General: Manufacturing, DPE, highlighted that the purpose of the unit was to analyse SOE strategies (Denel and Safcol) against government’s strategic intent, develop proposals around how SOEs could play a catalytic role in the development of the manufacturing cluster, and monitor and advise on SOE financial and operational performance.

He said the unit’s strategic key performance areas included management of the forestry sector (overseeing SAFCOL) and defence sector (overseeing Denel).He pointed out that priorities for 2008/09 included portfolio management, developing Denel in partnership with the Department of Defence (DoD), NT and Denel, and reviewing of acquisition policy in 2008/09 (facilitating the achievement of the 60%-70% local defence procurement target over the next 3 years. It would be establishing a DoD/Industry supplier by the end of July 2008 to enhance communication and alignment between the industry, Armscor and the DoD in defence acquisitions, and assist in the establishment of the defence evaluation and research institute (DERI) in 2008/09. There would be development of a missiles export strategy in 2008/09 to leverage technology and increase access to markets, establishment of a defence export council by the end of September 2008 to facilitate export marketing support and provide sector support in KFL disposal.

Expenditure was dominated by transfer payments to Denel. Expenditure increased substantially from R6.4 million in 2004/05 to R1.2 billion in 2007/08. Denel received R2 billion for capitalisation in 2005/06 and R567 million in 2006/07 to further support the entity’s turnaround strategy. However, it was subsequently established that the R2 billion would not attract VAT and the department did not draw the VAT funds. In 2007/08, Denel received an allocation of R1.2 billion that consisted of R222 million for the payment of an indemnity granted to the Denel/Saab Aerostructures and R933 million as a final capital investment.

Programme expenditure was expected to decrease at an annual rate of 77.9%, from R1.2 billion in 2007/08 to R12, 6 million in 2010/11. This left R36 million for management and oversight functions by the Department in the manufacturing enterprises sector.

Discussion
Ms Chohan wanted to know whether transfers made to Denel were in the form of cash. She also wanted to know whether Denel had ever declared a profit. She requested the Department to furnish the Committee with the details on whether it had concrete timelines for turnaround strategies. She expressed concern at the continued recycling of turnaround strategies by many SOEs without any tangible results.

Mr John Morris indicated that transfers to Denel were in the form of cash and Denel had indeed previously declared a profit. He assured members that viability of Denel had remained top of their priority. He reminded the Committee that Denel was an important strategic entity in terms of ensuring self-sufficiency in military hardware, thereby safeguarding national sovereignty. He conceded that the defence industry was technology-intensive and would take long to show a profit. However, he pointed out that Denel had since ring-fenced their core operations, although some remained very risky. He added that the DPE was optimistic that by 2010/11 Denel would be a financially sufficient and self-sustaining entity. He warned members that relying on foreign suppliers for military equipment would put the country in danger and hence the need to continue resuscitating the operations of Denel.

The Chairperson reminded members that Denel was an inherited entity of the apartheid era and was always subsidised, hence there was no need to expect change now. He proposed that the Department should look at options of cross-subsidisation.

Ms Chohan queried the cross-subsidisation issue, arguing that Denel was a burden to the DPE budget. She added that rather it should be transferred to the Ministry of Defence. She also queried the importation of military technology when Denel had the capacity to produce sufficient stocks for the country. She implored the Department to ensure that Denel became a competitive world player so that it could be self-sustaining. She noted that continued funding of under-performing SOEs was breeding a dangerous subsidy mindset. She asked the Department to advise the Committee on the best way to unbundle Safcol without tampering with staff morale and revenue generating capacity.

Mr Morris commented that the issue of culture was important and the unit had, since last September, introduced changes meant to address the subsidy mindset across the entity. He said there had been a remarkably positive attitude as a result of the exercise. He agreed with the Chairperson that the government inherited risk exposure associated with Denel hence the problem in cleaning up the entity. He said the R1.2 billion was for the working capital while R222 million was for paying legacy costs. In regard to SAFCOL, he said the SOE was still relevant as a regional and national player. He, however, noted that SAFCOL was not as big as Eskom but the Department would continue to monitor it closely to safeguard shareholder value and employee welfare. He added that SAFCOL last year lost at least 10% of its forestry due to veld fires, hence the recurrent problems bedevilling the entity.

The Chairperson noted that there was need to engage other portfolio committees and to assess the impact on the forests. He also warned against selling off the Komatiland Forests.

He asked whether it was possible for the DPE to safeguard the likely unbundling of SAFCOL, given its depth of expertise and technical know how.

Ms Coetzee commented that SAFCOL was a harvesting company of forestry hence did not own pockets of land. This further complicated its position within the industry, as it could not determine land usage. She added that there was a need to craft a regulatory regime to safeguard forestry life cycles and ensure sustainability for SAFCOL to survive. She said at the moment SAFCOL had limited authority to ensure security of forests. She added that interests of employees and compliance with statutory regulations had to be prioritised before disposal. She pointed out that benefits of corporatisation in the case of SAFCOL included the ring-fenced strategy, which ensured transparency and efficiency.

Mr C Wang (ANC) wanted to know the fate of board members in the event of SAFCOL unbundling.

Ms Coetzee assured the Committee that sensitivity to the plight of employees remained one of DPE’s  top priorities. She pointed out that the two last bids to sell off SAFCOL were unsuccessful hence this time the DPE was very careful in handling the transaction to ensure that it was not aborted again. At the moment the issue had not reached the transaction design stage but guidelines were in place and were clear on the way forward. She added that the Department had since instructed SAFCOL to conduct a financial, legal, environmental and sector audit, pending the transaction roll out. She bemoaned the delays as breeding unnecessary anxiety amongst employees but noted that land claims cases had to be addressed first to avert possible court battles. She assured members that the DPE was not in the business of retrenching staff.

Mr Z Kotwal (ANC) said he was finding it difficult to address land dispute in his constituency despite inviting DWAF and provincial government officials to address the issue. He wanted to know whether the DPE would be willing to be part of the discussions.

Mr R Nogumla (ANC) advised the Committee to stand by its earlier resolution to invite DWAF and Safcol to a negotiation forum on the way forward. He also noted that it was essential for the Committee to assess ownership and control by communities before going ahead with the transaction.

The meeting was adjourned.