Challenges facing SOEs; Update: SAA & Express; SOEs that have not tabled annual reports & impact of COVID
03 February 2021
In this virtual meeting, the Committee was briefed by the Department of Public Enterprises on the progress that had been made in addressing the challenges faced by state owned enterprises (SOEs). This included an update on the work done by business rescue practitioners (BRPs) for South African Airways (SAA) and South African Express (SA Express), the non-tabling of annual reports by SOEs and the impact of COVID-19.
In light of the relevant recent revelations from the Zondo Commission of Inquiry into State Capture, the Committee called for arrests and the recovery of money that had been stolen at SOEs based on evidence coming from the Commission. The Committee had been told that many of the challenges currently facing SOEs financially and operationally could be attributed to historical factors. Alleviating the challenges would be difficult but the Department and SOEs were working to do so, providing overviews of the progress, challenges and mitigation interventions made at each SOE under the Department’s remit.
The Department was asked if it was tracking the forensic reports coming from the Zondo Commission to ensure that those implicated in wrongdoing did not continue to be in the employ of the Department. The Department did have a unit that tracked the reports, relaying them to the Special Investigations Unit (SIU). Whilst the Committee emphasised that the evidence of corruption coming from the Zondo Commission needed to lead to arrests and the recovery of public funds, the Department said that while it strongly supported this sentiment and would assist in every way it could, it was not able able to conduct prosecutions in place of law enforcement bodies.
The Committee was informed that Eskom continued to be the primary concern due to the continued impact of load shedding on the economy. However, Eskom’s Recovery Road Map was being implemented and progress had been made to improve the financial viability of the utility, as well as improving its ethical conduct through the improvement of good governance. The unbundling of Eskom into the separate entities of Generation, Transmission and Distribution was underway, with unbundling forming the key pillar of Eskom’s turnaround strategy. The Generation unit continued to struggle to curb load shedding to improve performance due to ageing plants, with funds having been historically diverted from maintenance to capital programmes instead. The Committee raised load shedding as a key concern, seeking answers as to how future unplanned load shedding would be addressed in conjunction with the need for continuous plant maintenance. The Minister of Public Enterprises said that this matter would be the most difficult challenge for Eskom. A Head of Generation had been appointed by the Eskom board in order to ensure that a standardised operational conduct was followed, as well as that consequence management would be implemented if standards were not met. Another issue was the recovery of debt owed by municipalities to Eskom, despite recent progress. There had been an unprecedented increase in payments and improvements in collection, attributed to Eskom’s aggressive recent litigation strategy.
SAA was presented as the second most pressing challenge. Progress had been made with recent interventions resulting in the allocation of a R10.5 billion bailout to be handled by SAA’s BRPs. The Committee was told that SAA could exit administration by the end of February 2021, with a decision on a new equity partner being finalised by the end of March 2021 – prerequisites to determining when the airline could become operational again. With R2.8 billion of the allocated R10.5 billion bailout having already been disbursed to the airline, the remainder would be transferred after an Appropriation Act was passed. It was expected that the BRPs would be leaving SAA during February 2021, with a receivership having been agreed and set up to take over the remaining liabilities. However, the plan for SAA to resume operations had not been agreed despite expressions of interest from potential partners in SAA and its subsidiaries.
A new interim board of AA had also been formed, tasked with the appointment of a new executive team at the airline and restructuring the business. It would be in place for the next few months. As long as SAA remained under a state of business rescue, neither its board nor the Department in its capacity as shareholder had control over what happened at the airline, according to the Companies Act.
Discussions were being held with the BRPs by the Department to determine the feasibility of using some of the remaining larger aircraft owned by SAA to deliver vaccines throughout the country and continent.
Outstanding issues still needing to be resolved by the business rescue process included the finalisation of payment of SAA creditors and employees, as well as establishing the receivership to allow the BRPs to exit the airline.
The Department had also collaborated with the Department of Labour and Higher Education to impart business and competency skills to workers who had been retrenched at SAA as part of its social responsibility obligations. These former employees would be presented with initiatives to assist in re-skilling them in order to be able to open their own business or become more employable in other sectors of the economy in the future. Funding still needed to be provided for those employees who had taken voluntary severance packages to leave the airline.
The Committee was told that SA Express would be sold in the near future. The buyers had been identified and a purchase price had been agreed. A new shareholder structure would be in place within the next three months.
Despite the concerns identified at the various SOEs and the Department as a whole, the Committee also pointed to some positive recent developments. The Chairperson drew attention to the R1.56 billion that had been recovered from illegal contracts at Eskom by the Special Investigating Unit (SIU). He said it was an example of the good work that was being done to recover money lost from graft and corruption, urging the success to be replicated more widely at other SOEs.
The Chairperson said this meeting was an opportunity to follow events and developments’ relating to State Owned Enterprises (SOEs) accurately since the Committee was meeting outside the context of media speculation.
The presentation would serve an overview function for the Department. It raised issues that would be dealt with in greater detail by the individual SOEs concerned in future meetings with the Committee.
Members had complained the previous night about not receiving the meeting document timeously. He asked that it in future be provided at least 12 hours before the meeting and appealed to the Department to improve.
He welcomed the new Committee member, Mr N Dlamini (ANC), who occupied the space left by a deceased Committee member.
He had received two apologies: Mr N Kwankwa (UDM) and Mr S Gumede (ANC).
He asked that, when dealing with Alexkor, he be told about Mr Hank Smith. He had received correspondence from Ms M Clarke (DA) on the matter. Mr Smith had been claiming to be a community representative. There was a planned oversight visit to Alexkor. This would provide an opportunity to meet with all stakeholders, including the community.
He asked for an overview from the Minister of Public Enterprises, Mr Pravin Gordhan.
Ms R Komane (EFF) said that Ms O Maotwe (EFF) had sent an apology.
Remarks by Minister
The Minister said it could be seen in the evidence before the Zondo Commission that malfeasance at SOEs had been rife in the years gone by. The previous chairperson on the inquiry into Eskom had given evidence at the Zondo Commission the previous day. She had provided accounts of the intimidation that she and the evidence leader and others had been confronted with at Eskom. It was an unfolding saga. The Department’s responsibility in the context was to put right what had gone wrong in coordination with the staff and boards of various SOEs. Progress had been made in some instances; in others there was much work to be done.
The pandemic of corruption had been reinforced by COVID-19 since March 2020 at different SOEs.
In light of the Transnet presentations made to the Committee in 2020, there had been numerous events taking place at Cape Town and Durban ports. This had now settled down.
In other instances, because of the lack of movement and travel due to COVID-19, SOEs had faced difficulties. COVID-19 had had a major impact on the economy; the President had pointed this out. This impacted on SOEs as well, and this could be seen in the state of electricity supply and the amount of cargo going through rail and port facilities.
This also meant that SOEs were operating in a context where the fiscal constraints faced by the country were acute. There were market constraints and limited finances at SOEs, each individually facing different challenges as well.
The Minister of Finance would present the budget later in February 2021. Every country with a consequential economy would face similar challenges of balancing saving lives and livelihoods. Both SOEs and businesses had to undergo adaptations to business models or were in the process of undergoing adaptations.
He wished to emphasise two elements of the presentation. It was not a detailed account; it was an overview from the Department to kick off the year. As the Department continued working with the Committee, it would get each SOE to present in detail.
There had been much misleading information in the public domain. This had affected the provision of vaccines. Fake vaccinators had taken advantage, spreading misinformation and offering unsafe vaccines.
In this context, the Department was facing very difficult circumstances. Trying to get SOEs right was a thankless task and faced a difficult path. People forgot the history that SOEs were coming from. The evidence was before the Zondo Commission.
The Minister handed over to the Director-General: Public Enterprises, Mr Kgathatso Tlhakudi.
Progress Made in Addressing Challenges Facing State-Owned Companies
Mr Tlhakudi began the presentation.
A major commitment to the road to sustainability was the unbundling of Eskom. Significant progress had been made on the implementation of the Roadmap to bring about unbundling. There had been Ministerial approval for the establishment of the Transmission company.
Cost savings of R10.7 billion had been effected, overachieving on the R7.7 billion target. These had mostly been made in the primary energy space and reduction in operating expenditure.
The commitment to selling off the Eskom Finance Company (EFC) was expected to reach conclusion by the end of the financial year.
Critical executive positions were being filled.
Kusile Unit Two should achieve operation by October 2021.
86 000 electrification connections had been achieved against the 85 000-year-end target.
Eskom targeted a 73 percent Energy Availability factor (EAF) by the end of the financial year. It was currently at 65 percent. The high Unplanned Capacity Loss Factor (UCLF) was due to an ageing fleet, lack of midlife refurbishment and poor maintenance. Eskom was working at addressing unplanned outages due to plant unreliability. Midlife upgrades had not been done. Funds had previously been moved from the maintenance to capital programme.
Generation Performance Challenges
Reliability Maintenance Recovery (RMR) was being implemented to improve generation performance.
Eskom was resolving the Medupi and Kusile plant defects.
The Emissions Reduction Plan was in place to focus on reducing emissions as older power stations were retired.
Procurement of additional capacity from Independent Power Producers (IPPs) to improve EAF was being undertaken.
Network (Distribution and Transmission) Performance
The Transmission system was doing well. A lot of attention was required on the Distribution side by Eskom and especially by municipalities.
Municipalities and Soweto Arrear Debt
Municipalities owed Eskom R35.3 billion Eskom at the start of 2021. Eskom’s resorting to court involvement had led to an uptick in payments.
Soweto owed R13.2 billion to Eskom at the end of December 2020. There were high instances of theft and vandalism in Soweto.
Eskom also faced periodic dangerous protest action against employees involved in the disconnection of illegal connections that overburdened the grid. There was continued resistance to the installation of split meters with anti-vandal kiosks.
Monitoring the Eskom Build Programme
Eskom was addressing the issues of underperformance and defects at Medupi and Kusile. It was hoped that the corrections to the major boiler plant defects at the two would be concluded by 2023. The total costs of correcting the major plant defects at the two stations was R7.2 billion. COVID-19 had presented new challenges to Eskom on building sites and new build projects.
South African Forestry Company Limited (SAFCOL)
SAFCOL’s performance was linked to the economic state of the country as it supplied the construction and mining industries. Leadership stability at SAFCOL had improved its performance regardless of these challenges.
The appointment of a service provider to develop a business plan for the Timbadola re-investment project was positive.
The lack of investment in the processing capacity of the Timbadola sawmill had crippled its prospects of fully exploiting the lumber market and improving its profitability.
There had been delays in the Timbadola upgrade project due to protracted processes of securing the necessary technical skills to execute the project.
Cyclone Chalane in Mozambique had affected the business of the IFLOMA subsidiary.
SAFCOL had outstanding debt on land lease rentals of R250 million.
Outstanding land claims continued to pose a risk to SAFCOL operations due to land communities identifying themselves as claimants and demanding business from SAFCOL. Increasing timber theft caused an unsafe working environment. .
Scarlet Skye Investment had been appointed as a marketing contractor but had been alleged to undervalue diamonds produced by the Pooling and Sharing Joint Venture (PSJV). Alexkor had since terminated the contract and was acquiring its own diamond marketing and sales license.
Year to Date Performance
Alexkor’s financial outlook was not good, with COVID-19 severely impacting mining operations. This was compounded by an ongoing trend of year-on-year financial performance decline, with the PSJV being unable to settle liabilities. There needed to be a plan for business rescue.
Alexkor was looking to restore stability in diamond operations. The management team needed to identify and conclude proper partnerships to do so.
South African Airways (SAA)
Business Rescue Process – Progress to date
The business rescue process was a culmination of many years of mismanagement which had been covered widely at the Zondo Commission. The November 2019 strike had not helped to build confidence.
An interim board had been appointed at the end of 2020 to make progress on restructuring.
There would be active management of the funds provided by the Minister of Finance in the Medium-Term Budget Policy Statement (MTBPS) at the end of October 2020 amounting to R10.4 billion. An amount of R3.5 billion had been made immediately available. The Second Adjustments Appropriation Act had been passed on 20 January 2021, meaning the remaining balance could be transferred to SAA.
Resumption of Operations
SAA was in a difficult space as a result of COVID-19 and the impact on the aviation market, which had been hit harder than other industries. The South African variant of COVID-19 had resulted in further cut-offs from markets.
There had been a focus on the emergence of cargo opportunities such as transport of pharmaceuticals. SAA needed to focus on this sphere and the Department expected SAA to produce a better product in this regard, with the current approach not being satisfactory.
An unaffordable and unsustainable agreement had been entered into between pilots and SAA in 1995. A settlement needed to be reached.
Social Plan – Strategic Objective
Work was being done to initiate the reskilling and empowering of displaced employees from SAA to find new employment or start their own businesses.
Payments Due to Staff
Three months’ unpaid salaries amounted to R600 million from June to August 2020 when SAA had been operational. Some unions were demanding full arrear salary payments. This was unaffordable due to the limited available funding and would place the business rescue at risk.
Voluntary severance packages (VSPs) had been agreed with employees as a means of righting the organisation. A total of 3250 employees had opted for VSPs, with the first tranche payment for non-management staff due on 12 February 2021 and the second tranche payment for management on 19 February 2021.
Strategic Equity Partner (SEP)
A decision had been made that the new airline would be injected with new skills, technology, and capital. A decision was expected by the end of the financial year.
The process was being managed by the liquidators. There were regular engagements with the creditors, in line with the legislation. A buyer for the business had been identified and the purchase price agreed. A bank guarantee facility would be put in place.
Sale of Assets
The public auction for the sale of the airline assets had closed on 18 November 2020. The total value of these assets sold was R24 748 700. The remaining assets would be auctioned off at a reduced rate. The R25 million would be recovered once the bank guarantee was in place.
Section 417 and 418 Inquiry
Section 417 dealt with the powers of a court or master in conducting an insolvency inquiry. Section 418 empowered the court or the master to delegate these powers to a Commissioner, with the Commissioner running the inquiry in practice.
The High Court had appointed Advocate Mawande Seti-Baza as the Commissioner who would report to the Master of the High Court regarding the inquiry into the airline.
The inquiry had commenced on 25 September 2020.
Liquidation had led to employees at SA Express approaching the South African Human Rights Commission (SAHRC). A total of 691 SA Express employees had their contracts of service suspended since 29 April 2020 due to liquidation. The Department awaited the conclusion of the process.
SA Express Licences
Due to the airline’s ceasing of operations, its Civil Aviation Licences had expired on 31 July 2020. Engagements in conjunction with the preferred bidder – Fly Sax Proprietary Ltd – were ongoing with the International Air Services Council in order to reserve the rights to international routes.
Denel continued to be a troubled business. The lack of liquidity did not help this state.
A recapitalisation of R576 million had been allocated to assist Denel with dealing with its debt obligations.
There had been improvements in stakeholder perceptions of the business. This would improve stakeholder engagement.
Financial and Operational Performance to Date
As of the second quarter of the 2020/21 financial year, Denel was operating at 30 percent capacity. Revenue was 67 percent behind the Corporate Plan budget. All business units were not meeting their budgets as a result of the reduced operational activities. Contractual obligations to clients were not being honoured due to this lack of working capital. Employees had last been paid full salaries in April 2020, resulting in unions taking Denel to court.
Denel was burdened with a high cost of capital - R240 million in interest payments was projected for 2021.
Revenues for the 2021 financial years were forecast to be 26 percent behind the 2020 performance.
Overall, the low level of operations not only eroded the balance sheet but the reputation and capabilities of Denel, which had lost over 200 employees, the majority possessing critical skills.
Transnet was the epitome of what could be achieved with board and leadership stability.
There was improved stakeholder engagement, particularly with the users of the freight system.
There had been investment in critical equipment capital such as straddle carriers and an automated truck booking system to reduce congestion at the ports.
There was collaboration with State organs and other companies to deal with the challenges of cable and petroleum theft. Cable theft continued to be a risk to the business.
Challenges in Operations of Transnet
Transnet had been heavily affected by COVID-19. There had been losses of lives of Transnet workers at ports who had been assisting with critical supplies coming into the country.
Rail volumes were a significant contributor to revenue and were projected to record lower volumes across the main critical categories of general freight, coal, and iron ore haulage.
The tailwinds of the initial lockdown and overall sluggish global economic recovery would continue to affect performance. The second wave of the pandemic was likely to have an impact.
Increasing incidences of theft and vandalism to the Transnet network posed additional risks to projections.
Impact of Covid on the Department
A steering committee for managing the departmental response to COVID-19 had been appointed. A R1 million budget had been set aside for the Department’s COVID-19 response, 30 percent of which had been spent to date.
The Department had effected two total work closures since 1 June 2020 due to COVID-19 outbreaks or infections. Despite this, there had been a mostly low impact on Departmental operation. Employees were reporting to work on a rotational basis. The Department had recorded 22 positive COVID-19 cases. This was 13 percent of staff. There had been no fatalities.
The Chairperson opened the meeting for discussion.
Ms J Mkhwanazi (ANC) said to the Minister that she hoped one day there would be enough time for the Committee to be taken through the economic environment in which the SOEs were operating. The Committee and the public needed to appreciate the work being done currently compared to previous eras at SOEs. She hoped to hear something on this in the Minister’s summary and in more detail at a later meeting. This would assist to restore confidence and allay negativities surrounding the SOEs and Department.
To Mr Tlhakudi, she asked for a plan to be presented by the Department to address the issues raised by the Auditor General (AG) in 2020/21 on irregular expenditure.
Minister Gordhan had indicated there would be a time when the SOEs would come before the Committee to present on detailed work.
She asked if Mr Tlhakudi could speak to Eskom’s revenue loss vis a vis the reduction in demand for electricity. Many businesses were currently open for business. Was there any hope of reducing that revenue loss?
On the National Treasury conditions on allocations as per the Special Appropriations Act, was progress being made? Progress had been mentioned in terms of managing municipal debt and undertaking cost containment measures.
Could the Director General or Minister speak to the issue of load shedding? She was unhappy with the programme for dealing with performance challenges.
Mr G Cachalia (DA) referred to Eskom and the divisionalisation into three entities: Would the process be fast tracked? What scope did this provide for private sector involvement? He asked for clarity on the delays in the timeline.
On Kusile, the Committee had been told about the operational improvements. Kusile was at the forefront of the problems being faced. The Committee needed to understand exactly what the issues were and how they would be met.
He understood that R7.2 billion had been allocated to the new build to deal with the issues at Kusile. Where would the money come from and how would it be spent?
On the procurement of additional capacity from IPPs, the country was faced with Eskom asking to separate fixed and variable tariffs. This would impact on IPPs with additional financial burdens. He asked for clarity.
On SAFCOL and the backlog on lease payments, there was a desire to bring this in line with market rates. How would this affect the profitability, sustainability, and solvency of the company going forward?
On Alexkor and the Scarlet Skye malfeasance, what exactly was being done to address the transgressions? The company was in administration. The community had seen no benefit from this. What exactly was required?
On SAA and the funding expected in June 2021, how much would the post R10 billion funding be? Where would it come from and how was it justified? What was the intended purpose?
He asked for clarity on the racial allocations for jobs for pilots and staff.
He asked for clarity on the strategic equity partner and the shortlist which was leading to a decision at the end of 2021.
On SA Express, he asked for clarity on the identity of the buyer. What were the terms of the intended purchase? Who were the people and how would it be funded?
On Denel, he asked for clarity on munitions and other contracts that could alleviate the situation. How far would it go? If Denel remained unable to honour current contractual obligations and was losing staff at a rate of knots, was this not indicative of a debt spiral? The Committee needed to understand what was going on at Denel in terms of a clear financial statement of the current state of affairs and a future scenario.
On Transnet and its stable board and leadership, it was still faced with crumbling infrastructure, poor fuel security, and continued high costs of ports and rails which placed high pressure on roads. These remained trifold issues. How would this be met given reductions in volumes?
He had asked for many issues to be clarified. He had also tabled a Private Member’s Bill addressing the need for annual reports to be timeously presented. Particular measures needed to be put in place to address non presentation of reports. He trusted the Director General, Minister and Committee members would agree with the necessity of the private members’ bill in this regard and asked whether there was support for this.
He reminded Members of the Zondo Commission’s unfavourable remarks on the incompleteness of answers in the Committee and Parliament.
Ms Komane raised a serious concern that the Department had chosen to oppose the court application by employees of SAA. Many employees had lost homes, could not pay fees, and had children faced with the challenge of going to school.
On Denel being unable to honour its obligations, how did the Department anticipate the survival of Denel? How was the Department assisting in that regard? What was the plan by the Department to assist at Denel? Denel was losing scarce skills in the sector. What was being done to assist in this regard? Much was invested in building capacity in SOEs that should not be lost in this manner.
On Eskom, was there a load shedding plan? What was the plan for the unplanned electricity cuts?
Ms P Phiri (ANC) said on SAA that she wanted confidence in the business rescue progress. When exactly was an exit planned for the business rescue practitioners (BRPs)? Money was expected to be paid to them. What was the expenditure report and costs? What was the justification for the money?
On the appointment of the interim SAA board, had the board made a proper plan to identify focal areas in assisting SAA to go where it wanted to? It would be helpful if the interim board appeared before the Committee to present on this.
Denel was losing the capacity and skills required for the entity to work properly. What was the plan to rescue the entity? Was the Department waiting for the entity to go the same way as SAA and SA Express? She knew the Ministry and the Department had been doing oversight. She worried that it had only been raising concerns and talking of them; there needed to be action. Proper implementation of the turnaround plans needed to be done.
On Transnet, it was disappointing to get a report of increases in cable theft and vandalism. Investigations were continuing but there was no plan to avoid the thefts. Was Transnet waiting for all copper cables to be stolen? The situation required a proper plan for implementation.
Ms M Clarke (DA) supported Mr Cachalia regarding the Member’s Bill being passed in Parliament to impose deadlines for submission of annual reports. She found it shocking that all departments of public enterprises lacked reports.
She asked for clarity from the Chairperson on how the Committee would act out its constitutional duty to act against state capture.
On Alexkor, she wished to see a full report on what percentage of diamonds had been mined over time. She was aware of a narrative that said only 10 percent had been mined.
She was happy to hear the Committee would be doing a community oversight visit at Alexkor.
On Denel and the R1.8 billion recapitalisation fund to improve the solvency position, she asked for a full report of what was intended to be done with this.
What programmes would the government put in place to retain critical skills at Denel? What collaborations were to be put in place with the private sector to retain critical skills to prevent departments from declining in the manner that was happening currently at Denel?
Mr N Dlamini (ANC) asked when the plan on load shedding was going forward.
On Denel, was there something to be done to retain the skills at Denel? Such skills were hard to come by.
On Medupi and Kusile, he was not an engineer, but he understood that the issue of design was where engineers either passed or failed their degrees. Construction had begun when there were still design challenges. How had this been approved?
Ms V Malinga (ANC) said she was mostly covered by her colleagues’ questions. She wished to zoom into the municipal debt owed to Eskom. She wanted to check if there were any “bilaterals” between Eskom and the Department of Cooperative Governance and Traditional Affairs (COGTA) in terms of the municipalities defaulting on debt to Eskom without COGTA withholding equitable budget shares allocated to municipalities?
Medupi and Kusile had been built to ensure a stable energy supply in the country. The defects at Kusile were still requiring R7.2 billion to resolve. Would this subsequently resolve the issue of defects and ensure stable energy supply in the country?
She commended Transnet. She asked for clarity on collaboration to prevent cable theft. It was not enough to say that Transnet was working with companies to prevent cable theft.
SAA was all over the news. She knew the National Union of Metalworkers of South Africa (NUMSA) liked to “take chances” and “liked media”. The Committee was not saying it was okay to not pay employees. She needed an indication of how truthful what had been portrayed in the media was.
On voluntary severance packages, people who were volunteering to take severance packages needed to be paid timeously and timelines needed to be met.
Ms J Tshabalala (ANC) said the Committee needed to agree on the importance of public enterprises to the economy of the country.
On the matters emanating from the Zondo Commission, she wanted to hear from the Minister what the plan of the Department was in relation to that. All sectors of government needed to be held accountable and have a level of accountability for what was disclosed in the Zondo Commission in relation to public funds. Was anything being done by the Department to trace where funds went? This included matters of procurement and corruption of any sort, in the SOE entities if not in the Department. Officials involved in the accounting were still in the employ of the Department. Was there any tool being used to track such matters and attend to them? She understood there would be a report from the Zondo Commission, but the Department did not have to wait for a report. Where there were matters of criminality, they needed to be pursued. Had people been deployed to do this?
She said the Committee’s own research capacity needed to be utilised to track matters and align them to the current issues being dealt with. This included oversight as well as the Department being guided to continue with the resolution of matters.
She asked the Department about Eskom. What was the impact of the problems of Eskom on the economy? Had the Department fully braced for it? The impact on the economy became multi-fold. The leading provider of jobs was embattled with labour markets. Domestic industrial and economic growth was dependent on energy resources delivered by the company. How much did the Eskom load shedding impact on the economy? The projection since 2019 of the money that Eskom’s load shedding wiped off the economy was a 0.30 percent or R8.5 billion of real inflation adjusted growth. Had these investigations been done at Eskom for the current financial year?
She had previously asked the Director General a simple question which had been met with a simple answer on why Eskom was doing load shedding: to manage demand for electricity. Load shedding became a serious problem and impacted businesses. Under adjusted level three of the Covid-19 measures, businesses were open and would face a loss of profit during power outages. Power outages led effectively to non-payment of workers. How would this be mitigated?
How would load shedding be mitigated vis a vis maintenance necessities? She said the Department and Eskom could not “move on rhetoric forever”. The Committee needed to invite the CEO of Eskom to appear. It was important that the Department was not the only one to bear the brunt of the Committee’s criticism when such people were so well compensated.
On Alexkor, the Director General had mentioned that a diamond market sales and marketing licence was obtained. When had the licence been obtained?
Regarding the loss of the office for Alexkor in Pretoria, the Committee had made it clear categorically that it was displeased. What was the current status of the office? Had Alexkor relocated? If yes, where was it housed and what was the staff complement? How were they reporting to management? It had been determined that staff needed to be closer to Alexander Bay; what had the human resources (HR) costs of reallocation been? How much was being paid in rental if Alexkor had not relocated? When was the lease coming to an end? She asked for a contractual understanding of the lease to date. How many personnel were reporting for duty?
On the matter of the Private Member’’s Bill from Mr Cachalia, the Committee needed to be clear that it understood the legal issues involved in failures to submit annual reports on time. SAFCOL, Denel and Alexkor had failed to submit reports. The process needed to be clear. If Ministries were unable to do that, the matter rose to the Deputy President who was the Leader of Government Business at Parliament. When a report was not submitted, a letter was written to the Speaker of the House to explain this. This went to the Committee for a response. When this had not happened, it was only fair that the Committee write a letter to the Speaker of the House noting the non-tabling of annual reports and requesting legal advice on the noncompliance, otherwise it would be “jumping the gun”. The members needed to have clarity prior to there being a Private Members Bill. She submitted that the Committee write a letter to the National Assembly to gain understanding.
On COVID-19, the report had not accounted for financial perspectives. The Director General had said many measures had been taken with the Department of Public Services and Administration (DPSA), such as the procurement of sanitisers. An amount of R1 million had been set aside to deal with COVID-19 protocols. She wanted to know how exactly the money had been spent to date. The Committee had seen the misuse of COVID-19 procurement funds. She asked for the expenditure costs of securing important things related to COVID-19 such as sanitiser and PPE.
On the SAA business rescue process and the consultant’s utilisation of funds, how could funding be provided without the Department having some control over the spending of funds? This immediately took the issue to the legislation around the Companies Act. It was scheduled in the programme to engage the Department of Trade and Industry. Public funds could not be allocated without control or oversight and accountability. How much had been provided for BRPs to date and how much had been utilised?
What was the period of appointment for the interim board? What was the cost? When would the permanent board be finalised? What was the relationship of the board with the business rescue process? In terms of operations, how was the interim board operating while the business rescue process was implemented?
On the interim board shortlisting potential equity partners, she asked for transparency.
She welcomed the new Committee member, Mr Dlamini. She looked forward to fruitful engagement.
The Chairperson said he had not provided a time allocation for the Department’s presentation. It was a long and complex report. The presentation had covered many expectations. The Committee had competed with the Department’s time for presenting with its questions. Some members would speak and take their 10 or15 minutes and then say they would be coming back for a second round of questions. Looking at the time and the long questions that had been asked, he doubted if by 13:00 there would be an opportunity for a second round of questions. The members needed to acknowledge the possibility.
He said it had been one of the most comprehensive reports he had received since becoming Chairperson. He appreciated the work that had been done. Many positives had emerged from the presentation. These included Eskom saving costs and beating the target of R7.7 billion, coming up with R10 billion. Challenges remained.
Eskom had not “bragged” about the Special Investigating Unit (SIU). At the end of 2020, the SIU had recovered R1.56 billion from a company that had been awarded a contract at Kusile through corrupt means. The Department had contributed to this through information. This was good money in light of the challenges Eskom had. He said he would like this to be “deepened”. People continued going to the Zondo Commission, but the Department needed some kind of work in terms of people being arrested and companies being held to account. This was a good example of what should be done.
He invited responses.
The Minister thanked the Chairperson for the commendation on the R1.5 billion recovery.
He requested the Director General and Deputy Minister, Mr Phumulo Masualle, to cover matters on Alexkor, SA Express, and SAFCOL. He would cover the rest.
Mr Tlhakudi asked if the Deputy Minister wished to add anything.
Deputy Minister Masualle said the Director General could proceed with responses.
On the status of the headquarters of Alexkor, Mr Tlhakudi said the entity had to cut down on staff at head office due to its constrained financial situation. Getting out of the headquarters lease remained a challenge. Two members of staff remained at the headquarters - the CEO and an administrator. The lease ended in August 2021. It cost R120 000 per month and there was no intention to renew the lease. The business would then be in position to move to a new office.
Since November 2020, the business had been bringing its own diamonds to market using its marketing and sales license.
Diamonds had been taken out at Alexkor since 1928. It had largely depleted the diamonds in the area in terms of land mining operations. Exploration had not produced new deposits. An area remaining with lots of promise was on the marine side. Medium and deep-water areas showed promise of around 10 000 carats per month. This was expected to be an area to receive attention.
On the matter of Henk Smith, a lawyer representing a portion of the community, the structures remained under the administration of the Department of Rural Development and Land Reform. It was a product of the dysfunctionality that had engulfed those structures. This was not a unique problem – SOEs were not working as they should across the country and were prone to factional battles. Resources were not used to the best interests of communities.
On SAFCOL and sustainability, the single product line had not proven to be good for business. There needed to be product diversification. SAFCOL was currently prone to wider economic cycles. The business had not been able to be in a position to recover its costs of operation in the current financial year. This was an area where the new CEO who had been at SAFCOL for two years was putting a lot of effort and attention.
On Scarlet Skye, a report had been tabled at the Zondo Commission. There was a unit in the Department tracking all forensic reports at entities. Where criminal action was required it would be taken, working with the SIU. Action would be taken in due course.
On the SA Express buyer and terms of purchase, it was a Fly SAX consortium of buyers. These included some employees, as well as former operators of a low-cost airline operating locally. Once the matter was concluded, the liquidator should be able to appear to account to the Committee.
On spending on COVID-19, the R1 million was being closely managed. The Department was happy to share how money was being utilised. Deep cleaning had cost R11 000. This was being done through an internal cleaning service to save money. With 180 staff, it was a small department, and the money went a long way.
Deputy Minister Masualle responded to questions on Denel. As the Minister had said in the introduction, the day’s presentation was an overview. There would have to be an extensive overview on each of the entities at a time determined by the Committee. He would comment on Denel with this in mind.
The environment SOEs found themselves in was shared. There were the multiple impacts of state capture, the global economy, and the impact of COVID-19. These were the real environmental factors impacting performance that were being examined.
On Denel specifically, it needed to diversify its client base. It provided strategic capabilities for the South African National Defence Force (SANDF). The SANDF was experiencing budget constraints. This impacted the funding of the capabilities that Denel was required to keep available.
There had been a tendency where Denel committed to orders in the Middle East that was subject to geopolitical impacts. This resulted in country obligations for Denel which were subject to cancellations of orders and which had a dire effect on Denel. This was the reason for the need to diversify the client base. The current repurposing and restructuring were focused on this. In conjunction with the board, the Department was looking at what the Denel of the future needed to do and would look like. The COVID-19 challenges were also a big consideration. Therefore, a holistic review of the current focus of Denel was required given the financial constraints. On how the saving of Denel was anticipated, one area of focus was the loss of skills. The defence industry had a very active international market and Denel was frequently subject to personnel poaching, a reason for it having below 30 percent of operating capacity operational.
On what exactly the R1.8 billion recapitalisation would be used on, a detailed report could be provided to the Committee.
On Eskom and the progress in relation to recovering funds, the Minister said that the R1.5 billion was an important step. The matter involved an international engineering company and a former senior manager at Eskom who still needed to be dealt with by the law enforcement agencies. Law enforcement was not in the hands of the Department, which needed to be kept in mind when members urged legal action. It would be decided whether the Department would lay complaints with the relevant law enforcement authorities to consider pursuing certain charges, because there was a lot of lying going on at that moment.
On divisionalisation and restructuring, good progress was being made. It was, however, a complex process, as it had to factor in the restructuring of the company’s accounting principles, company rules, and IT systems and technical processes. The restructuring was creating the foundations for an independent transmission company under Eskom’s roof in this process. This could be migrated in a different direction in five or ten years.
On Eskom’s plans for a Just Energy Transition, the Minister said interesting work was being done on repurposing old power stations. Viability studies were directed at putting in renewable energy plants in the old power stations that would be closed in the near future. This would contribute to lesser emissions by Eskom and meeting the country’s climate change obligations. There were interesting funding options related to this.
On the load shedding and generation issue, the fact of the matter was that it was the most difficult area at Eskom. There had been engagement with the Eskom board and management for many months, and they had appointed a new Head of Generation. New standards of operational conduct and rigor were to be enforced as far as power station operators were concerned. There was going to be significantly more consequence management if different performance standards were not met.
All agreed that an EAF (Energy Availability Factor) of 65 percent was not what was expected from Eskom. Every attempt was being made to move into the 70s and beyond.
Eskom had required a buffer of sorts, which the Emergency Energy Procurement had been supposed to provide but this was “stuck in its own processes”. These were between the National Energy Regulator of South Africa (NERSA) on the one hand, which had granted some consent, and a process in the Department of Mineral Resources and Energy (DMRE) that was evaluating offers or submissions made by various interested parties. He was in touch with the Minister of Mineral Resources and Energy to try and work out how to speed up some of those issues.
The matter of embedded generation would be more important going forward. There were some proposals under consideration that would be put forward in the following weeks. The Committee would hear more about it. Once those discussions had been concluded, the Committee could hear about them and how the private sector would be able to actually contribute. This was one of the questions that had been raised by Mr Cachalia regarding the generation side of the business.
He wished to compliment the Distribution section of Eskom which had been very responsive to the challenges that had been brought to its attention.
On the question of municipal debt, there were some important discussions going on between Eskom and some of its bigger debtors, particularly the municipalities, and there were some innovative ideas being formulated. The Department would certainly talk to COGTA and be able to make announcements in that regard in the near future. There were plans for the near future which would use the kind of capacity from the Distribution section to more effectively support municipalities that found themselves in difficulty.
Several members had pointed out the impact of Eskom on the economy. Fortunately, in the COVID-19 period this had not materialised in any serious way. But clearly, getting generation rejuvenated and reducing the unplanned losses, to a much lower figure, even halving the number, was a very important short-term objective that the Eskom management was working on and needed to improve on. This would assist the economy to grow and ensure energy did not act as a constraint, but this would take time. He assured the members that both the Eskom board and management were very occupied with such matters.
In relation to the question of the Special Appropriation Act, there had been bilateral negotiations between Eskom and coal suppliers. Some ground had been made in this regard. Diesel on the other hand, was equally important as far as primary energy was concerned. This was particularly important given the current performance of the plant. This could currently be seen in countries that relied upon oil revenue for their income and for their economies to survive. As oil prices went towards $60 per barrel, it meant that the cost of diesel went up on the South African side. What did worry Eskom was that having concluded some of the discussions, there were challenges of the quality of coal, notwithstanding the assurances from some of the mining companies. Mr Tlhakudi had mentioned the challenges surrounding the quality of coal that ended up in certain power stations. That was an issue that the Department was applying its mind to.
The issue of municipal debt had been explained. It was an issue that had been raised with the Committee in 2020. There was a different compliance climate in South Africa where the general citizenry was concerned. Parliament was joining all other stakeholders in persuading people not to engage in illegal connections to the grid. This resulted in overusing electricity beyond the capacity that meters, substations and transformers would allow and this created excess burdens on the grid.
Some plant maintenance was dependent on contractors. Some maintenance plans were executed well. When the theme of Eskom was dealt with at a future Committee meeting, the Eskom team would appear and be able to take the Committee into much greater detail regarding matters of maintenance. There were particular challenges regarding the quality of work done by contractors, and the consequences on performance and whether some extraordinary measures would need to be taken to improve plant performance.
The two power stations, Medupi and Kusile, were supposed to provide 4 000 megawatts of uninterrupted energy. This had been done “before our time”. Eskom management had decided to become amongst the first in the world to design plants that were not custom made. This had resulted in all sorts of problems. In 2020 Eskom management had negotiated with some of the original equipment suppliers and manufacturers to make adjustments. For example, the nets that had collapsed every six weeks were collapsing much less often There were operational issues where two conveyor belts could both collapse at the same time when they should not have. Appropriate steps were being taken against those responsible for those mishaps.
It needed to be accepted that there had been falsehoods and cost overruns since 2007. These had been in conjunction with time overruns and design problems. The design challenge was a part of the capital expenditure. Eskom would have to engage with the question of spending money on the adjustments needed to be made to the design in order for the units that made up Medupi and Kusile to in fact deliver on what they were supposed to.
There were areas where good progress was being made but this was against a backdrop where the mishaps had already happened over a lengthy period.
One other issue which sometimes impacted on electricity supply was cable theft. This applied to Transnet, the Passenger Rail Agency of South Africa (PRASA) and other entities also. Notwithstanding many years of decisions within government, the law enforcement agencies needed to get on top of it. There were some controls that needed to be placed over the export of scrap metal so that the incentive for cable theft could be reduced in some way. There was legislation on the way in this regard. He and the Department did not think that the country had gotten on top of the matter of cable theft. Interestingly, there were new technologies available which would enable the detection of when and where there was interference with cables or indeed, in the case of Transnet, with the fuel pipeline, in a proactive sense so that thefts could be interrupted, and the culprits caught and dealt with by legal processes.
The SAA interim board would be in place for the next few months and it was important to have a board in place notwithstanding the fact - which needed to be repeated many times over that as long as the entity remained in business rescue, neither the board nor the shareholder Department had any control over what happened at the airline. There had been discussions since late 2020 about collaboration on a transition process so that some matters could be handed over, either to the board or to the Department. The classic case was the transport of vaccines both within South Africa and more importantly from elsewhere in the world to South Africa and throughout Africa. There had been discussions about using SAA’s facilities and the larger aircraft it still owned for that purpose. He was sure the Committee would agree that the brand as a national carrier ought to be utilised for that purpose.
As far as the exit from business rescue was concerned, Mr Tlhakudi had pointed out that it had been raised on several occasions. The Minister said he had just checked with the legal officer whether a list had been supplied of the outstanding issues and there were apparently three or four of them. The first matter was reconciliation both of creditors and employees that needed to be paid. It was a mystery why this needed to wait until 2021, when in fact the same BRPs were being paid fees throughout 2020 to do some of that work from July when the business rescue plan had been adopted by creditors.
It had been the initiative of the Minister and the Department in December 2020 to do as much as possible to ensure that employees of SAA, contrary to some of the narratives put out by NUMSA and others, got money into their pockets so that they could have a festive season with their families and have some money to spend. It had taken a long time to get this going and regrettably some of the money had only flowed out after Christmas. At least by late December many employees had had some money in their pockets. The unions had not been too helpful, in particular NUMSA. The unions could not take any credit for it and had wanted to delay the matter as much as possible. This could be spoken to in greater detail at some stage.
Another issue was setting up a receivership which had been previously mentioned to the Committee. It was a provision which enabled the BRPs to leave SAA’s business rescue. If there were outstanding monies to be paid to a particular entity, those monies were paid by this receivership which had to be approved by the creditors themselves. This was another thing that needed to be agreed upon moving forward.
On the question of fees, the Department did not control this and he considered it valid to raise questions on the matter. However, the Department had given the Committee the answer previously – the BRPs were “their own bosses”. They had, according to the terms of the Companies Act, no one but the court to report to. When their work was concluded and when they signed off, stating that all conditions had been met for the business to exit business rescue, then it would return to the Department.
He and the Department agreed with Ms Tshabalala and were in discussion with the Department of Trade and Industry (DTI) that the Companies Act needed to be amended as far as SOEs and perhaps commercial businesses as well were concerned. This was to ensure that BRPs needed to have some accountability for what monies were taken and how that money was spent and accounted for. Currently they were free agents with total autonomy.
Mr Cachalia had raised a question about the R10.5 billion plus the R3.5 billion over the next few years for payoffs. These would be normal applications to the Treasury budget processes. He also wished to assure the Committee that even in respect to the R10.5 billion, he had given instruction that as much money as possible was to be saved so that the money could be redirected to a better cause if actually required.
On the question of the SEPs and the shortlist, those were commercial processes. It was similar to commercial processes with coal suppliers to Eskom. Details could not be given at that point in time because the state then lost its competitive advantage in terms of negotiations that it may want to enter with one or more of the SEPs. There was a transaction advisor that had been appointed in 2020, as the Committee was aware, to process all the offers that had been received. A shortlist had been produced which the board would be provided with. A meeting was due in the next 24 to 48 hours to conclude how to process those issues.
The final numbers of the cost of the BRPs would be made available to the Committee. He was sure the Committee would want to call the BRPs to ask them to account for the period they had been in charge of SAA. The Department would provide its version at that particular point in time.
With reference to the voluntary severance packages being paid on time, they should have been paid much earlier. The Department’s view was that the money had been there to begin the payments so that employees were not left in the positions they had eventually found themselves in. It was definitely not the intention of the government to place additional hardships on employees. He and Mr Tlhakudi had pointed out repeatedly in this regard that the government only had so much leverage. It was regrettable that when it suited NUMSA they were willing to negotiate, for example in the labour forum that had been created in 2020 that the Committee had had reports on. When it suited NUMSA they went on public tirades whilst they knew the truth. NUMSA did not mind that they were twisting the truth in order to suit whatever political intent they had. The Department would continue to do what could be done in both the best interests of the country and SAA on the one hand whilst being as humane as possible on the other, as demonstrated by the fact that the social plan had been put in place for employees.
On the question of Transnet, Mr Tlhakudi had pointed out very well that there was a stable situation as far as it was concerned. Some of the difficulties faced during the COVID-19 period had been overcome, such as the port congestion. That had been experienced at Durban port and had been overcome as a result of reorganising. Importantly, good lines of communication had been created between different stakeholders and the Department, as well as different stakeholders and the Transnet management. The CEO of Transnet had been on record the previous day in a webinar giving that commitment as well.
There was a new perspective and strategy being developed which the Committee would be briefed on as soon as the process was concluded. It was very exciting and detailed how Transnet would become the hub of ports in South Africa at the Durban port, as well as how exports and imports could be expedited in a way which was supportive of the economy. It was still the policy of the Government that Transnet had to do more to take haulage from the roads and transfer freight to trains as it was definitely cheaper than travelling by road. Once those efficiencies were attained as far as Transnet freight was concerned, movement in that direction could begin.
The Minister said he did not think there was any crumbling infrastructure. There were certainly infrastructure issues that needed to be resolved, particularly on the Durban-Johannesburg line. The Committee would be updated when Transnet appeared before the members. The pipeline issues had become more secure than they had been in the past. He hoped the Chairperson agreed that as much cargo traffic as possible needed to be moved from the roads and onto rail in 2021. It would be critical that the switch be made that year.
For example, the previous day there had been an announcement of a R16 billion investment by Ford Motors in a plant on the eastern side of Pretoria. Transnet was very much a part of that project. He would be meeting a senior stakeholder from Ford the following day to have further discussions on how Transnet could be of assistance. Once those logistics were in place, Ford would become a major export manufacturer in South Africa and export certain types of vehicles to both Africa and the world.
Transnet had a critical role to play to support the key industries in South Africa such as mining and automotive. Once the strategy was organised, Transnet would go from strength to strength.
There were also intentions to enter into partnerships with the private sector on particular rails, ports or terminal parts. In the next few months, it would become clear what direction would be moved in.
Overall, whilst there were difficulties with some of the entities concerned, as pointed out by Deputy Minister Masualle, there was a new road being travelled at Denel. Some of the changes that the Denel board wanted to make had been indicated and the Department wanted to support those serious changes and it required strong leadership to lead that particular process.
SAFCOL was relatively stable and needed to grow from strength to strength.
Alexkor was an entity that required a complete re-examination to determine how what it had to offer could be best utilised and the kind of mining rights that it actually had at that particular point in time. Some private sector partnerships might have to be considered in that regard.
Eskom was on a new road, both in terms of restructuring and in terms of its operations.
Transnet had an exciting future both in relation to bringing in private sector participants in some of the infrastructure projects and operations and in terms of the kind of new direction it wanted to embark on.
He thanked the Committee for the questions and interactions. The Department would continue to go into more detailed presentations throughout the rest of the year.
The Chairperson thanked the Minister.
He said he had received a “strong hand” from Ms Tshabalala to speak, despite the meeting time being over.
Ms Tshabalala wished to return to the issue raised by Mr Cachalia on the non-tabling of annual reports.
Mr Cachalia explained that the Committee and Speakers had been sending many letters and requests over the years. He had submitted a motivation for a non-controversial Private Members Bill on the need for SOEs to table their annual reports timeously.
Ms Tshabalala said she did not want the Committee not to have oversight but the members were now in the Sixth Administration and needed to give another chance to following processes.
Ms Komane said it was insufficient for the Committee to simply be rubber stamping. There needed to be a legal opinion on the matter.
The Minister asked to be excused from the meeting as Committee matters were being dealt with.
The Chairperson thanked and excused the delegation.
Ms Mkhwanazi said she understood Ms Tshabalala and fully supported her. She needed to be advised on the matter and asked for assistance with the PMFA (Public Finance Management Act) processes.
The Committee Secretary brought to the attention of the Committee the relevant sections in the PFMA.
The Chairperson said there was a suggestion by Ms Tshabalala that legal advice should be sought from the Speaker.
Mr Cachalia read the proposed amendment. After a written explanation for the delay in submission of a report, it would require entities to table their reports within 60 days. He said it would go a long way to helping the Committee discuss and debate.
The Chairperson said it seemed not to be in conflict with the proposal to write to the Speaker. He would be writing to the Speaker to seek advice based on these issues.
The Committee adjourned after adopting the minutes of the previous meeting.